CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Copyright (c) 2006 Standard & Poor’s, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. The Economic Outlook: Growth Rotates David Wyss Chief Economist Standard & Poor’s November 2006

2. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. The U.S. Recovery Is Slowing After a strong 2004 and 2005 Growth has slowed to below trend. The economy is rotating from consumer- and housing-led growth to investment-led growth. The Fed is through hiking interest rates, and will probably have to reverse next year. The housing market peaked last summer, but is more stalling than plunging. Starts are expected to drop 25%. Oil prices are coming down from record highs, restoring some purchasing power. Katrina rebuilding has been slow. Stronger European growth and a weaker dollar should mean less drag from the trade deficit.

3. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Oil Prices Hit New Highs ($/barrel, WTI and deflated by CPI; household energy purchases as percent of disposable income) Source: BEA

4. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. The World Is More Energy Efficient (Tonnes of oil equivalent per $1000 dollars (2000 dollars) of real GDP) Source: OECD

5. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. The World Is More Energy Efficient (Tonnes of oil equivalent per capita) Source: OECD

6. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Oil Use Is Lower (Percent of world energy production) Source: OECD

7. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. (Percent) The Fed Is Moving Toward Neutral Source: Federal Reserve

8. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Interest Rates Had Converged (Long-term government bonds) Source: Bloomberg

9. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Quality Spreads Grind Tighter (Spread over Treasury yields, basis points) Source: S&P

10. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Financial Risk Is Greater Source: S&P

11. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. World Growth Is Steady (Real GDP, % change) Source: Global Insight and S&P

12. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. And Comes Mostly From Asia (IMF purchasing power weights, 2005) Percent of World GDP Percent of World Growth Source: IMF

13. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Different Economic Performances (Unemployment rate, %) Source: BLS

14. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Fiscal Deficits Almost Everywhere (Government balance as percent of GDP, 2004) Source: IMF

15. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. The Future Looks Bleak (Government debt as % of GDP) Source: S&P

16. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Aging Populations Will Boost Government Spending (Ratio of over 65 population to labor force) Source: OECD

17. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. US Trade Deficit Balances Surpluses Overseas (Trade balance as percent of GDP, 2005) Source: Global Insight

18. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. (Percent of GDP) US Borrows From Abroad to Offset Weak Savings Source: BEA

19. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. European Productivity Growth Trails (Output per hour, percent change, ) Source: BLS

20. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. (Percentage of tertiary degrees by age group, 2003) Other Countries Are Catching Up Source: OECD

21. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Educated Workers Earn More (Ratio of income of tertiary graduate to high school graduate, men 30-44) Source: OECD

22. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Can the Consumer Keep Spending? Consumer spending has led the expansion The tax cuts provided extra income Lower mortgage rates freed up funds Confidence is up But the saving rate is negative Tax cuts are over Interest rates are up Home prices are dropping Net result will be a slowdown, not a retreat Helped by lower energy prices The saving rate will remain low

23. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. But Wealth Continues Strong, Helped By Housing Markets (Percent of after-tax income) Source; Federal Reserve

24. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Debt Service Now Above 1986 Record (Household obligations as percent of after-tax income) Source: Federal Reserve

25. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Debt Repayments Are Evenly Distributed (Average debt repayment as percent of income by income percentile) Source: SCF

26. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Household Debt By Country (Percent of income, 2005) Source: IMF

27. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. US Is Actually Low-Debt (Assets as percent of GDP, 2004) Source: IMF

28. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. A Housing Bubble? Housing remains affordable Thanks to low mortgage rates But what happens when rates go up? Home prices have outpaced incomes Ratio of home price to income is at a record high There are big local bubbles – E.g., New York, California, Boston, Florida And higher mortgage rates will cause starts and sales to drop Housing looks less overvalued than other assets

29. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Home Prices Are High Relative to Household Income (Ratio of average home price to average household disposable income) Source: BEA

30. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Bubbles Are Everywhere (Percent increase in home prices, ) Source: The Economist and S&P

31. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. The Stock Market Will Recover, But Slowly Market rose over 20%/year from But dropped from March 2000 through June 2003 Biggest drop since Double-digit earning gains for a record 17 quarters; profits are a record high relative to GDP Earnings must slow Share prices cannot continue to outpace earnings As interest rates rise Stocks will thus yield less in the future than in the recent past. But the current rally is being spurred by strong earnings and dividend tax cuts

32. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Largest Stock Markets Remain Below 2000 Peaks (Change in S&P stock indexes since March 2000 peak) Source: S&P

33. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Most US Sectors Have Recovered From The Bear Market (Change in S&P 500 sectors since March 24, 2000 peak) Source: S&P

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35. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process.