The U.S. Economic Outlook Nigel Gault Chief U.S. Economist, IHS Global Insight Jackson, Mississippi September 14, 2010

Copyright © 2010 IHS Global Insight. All Rights Reserved. 2 The U.S. Recovery: Uneven and Subpar Growth boost from fiscal stimulus and inventories is fading Headwinds are blowing from consumer and business caution No underlying housing improvement Non-residential construction remains a drag; stimulus is propping up state and local spending Exports, business spending on equipment and software remain the main growth areas Inflation is a long way off; deflation is the immediate threat

Copyright © 2010 IHS Global Insight. All Rights Reserved. 3 (Real GDP compared with recession trough) Deeper Recession, Slower Recovery: The Damage from the Financial Crisis Lingers * Assumes 2009Q2 trough

Still Growing, Just Slowly

Copyright © 2010 IHS Global Insight. All Rights Reserved. 5 ISM Indicators Off Their Highs, But Show Growth: Small Business Still Lagging Behind (ISM Diffusion Indexes, 50 = breakeven)(NFIB Optimism Index,1986=100)

Copyright © 2010 IHS Global Insight. All Rights Reserved. 6 Employment Is Turning, But Not Rapidly *Thousands, monthly change, SA; **Percent; ***Hours, SA Private Payroll Employment* Unemployment Rate** Length of Workweek*** Temporary Employment*

Copyright © 2010 IHS Global Insight. All Rights Reserved. 7 (Annualized real rate of growth, Q/Q, percent) Inventory Cycle Support For Growth Has Peaked

Copyright © 2010 IHS Global Insight. All Rights Reserved. 8 (Percent change unless otherwise noted) U.S. Economic Growth by Sector Real GDP Final Sales Consumption Light Vehicle Sales (Millions) Residential Investment Housing Starts (Millions) Business Fixed Investment Federal Government State and Local Government Exports Imports

Copyright © 2010 IHS Global Insight. All Rights Reserved. 9 (Percent unless otherwise noted) Other Key Indicators Industrial Production (% growth) Employment (% growth) Unemployment Rate CPI Inflation Oil Prices (WTI, US$/bbl) Core PCE Price Inflation Federal Funds Rate year Government Bond Yield Dollar (Major Currencies, 2005=1)

The Housing Cycle: Still At The Bottom

Copyright © 2010 IHS Global Insight. All Rights Reserved. 11 (FHFA house price index* divided by average labor compensation, 2000 = 1.0) House Price Adjustment Has Gone a Long Way: Probably Not Complete * Purchase-only index from 1991 onwards

Copyright © 2010 IHS Global Insight. All Rights Reserved. 12 (Proportion of homeowner inventory vacant and for sale, percent) Housing Supply Overhang Still Severe Source: Census Bureau

Copyright © 2010 IHS Global Insight. All Rights Reserved. 13 Key Single-Family Housing Indicators: No Underlying Improvement Yet *Millions, SA; **Single-Family Homes for sale divided by monthly selling rate Existing Home Sales* New Home Sales* Months’ Supply of Homes** Housing Starts*

Copyright © 2010 IHS Global Insight. All Rights Reserved. 14 (Million units) Housing Starts Have Hit Bottom: Prices Not Quite There Yet (Purchase-only index, 1991Q1 = 100)

The Consumer : Reviving, But Without Vigor

Copyright © 2010 IHS Global Insight. All Rights Reserved. 16 The Personal Saving Rate Has Risen (Personal savings rate, percent of disposable income) Microsoft Dividend 9/11 Post 9/11 vehicle incentives StimulusPayments EconomicRecoveryPayments

Copyright © 2010 IHS Global Insight. All Rights Reserved. 17 Consumer Sentiment Off the Floor But Still Weak (Reuters/University of Michigan Index, 1966=100)

Copyright © 2010 IHS Global Insight. All Rights Reserved. 18 (Annualized rate of growth) Consumer Spending Stabilizing, But Not a Strong Driver of Recovery

Business Investment: A Mixed Picture

Copyright © 2010 IHS Global Insight. All Rights Reserved. 20 Business Equipment Demand Recovering (Non-defense capital goods ex-aircraft, 3-mo moving average, US$ billions)

Copyright © 2010 IHS Global Insight. All Rights Reserved. 21 Nonresidential Construction: Architects’ Billings Still Soft, But Off the Floor (Diffusion Index) * Source: American Institute of Architects

Copyright © 2010 IHS Global Insight. All Rights Reserved. 22 (Percent change annualized rate, real spending) Business Capital Spending Cycle: Construction Lags

Foreign Trade: A Drag Now, A Plus Later

Copyright © 2010 IHS Global Insight. All Rights Reserved. 24 (Percent growth, merchandise exports, YTD, as of June 2010) Export Growth By Destination: All Strong Except for Europe Export shares are in parentheses. Latin America includes Mexico.

Copyright © 2010 IHS Global Insight. All Rights Reserved. 25 (Percent change annualized rate, volumes) We Expect Exports to Outpace Imports

Copyright © 2010 IHS Global Insight. All Rights Reserved. 26 (2005=1.0, inflation-adjusted) The U.S. Dollar: Secular Weakness Against EMG Currencies

Inflation and Interest Rates

Copyright © 2010 IHS Global Insight. All Rights Reserved. 28 (Percent change from a year earlier) Headline CPI Inflation Is Positive Again; But Core Inflation Is Still Easing

Copyright © 2010 IHS Global Insight. All Rights Reserved. 29 (Percent) Federal Funds Rate to Stay Near Zero Until 2012: More Quantitative Easing Is Probable

Federal Government Budget: Harsh Realities

Copyright © 2010 IHS Global Insight. All Rights Reserved. 31 Federal Fiscal Policy Assumptions Long-run tightening essential......but immediate tightening risky...and markets are not demanding it We assume –Bush tax cuts extended for one more year (1.1% of GDP in CY 2011) –Making Work Pay tax credit extended one more year (0.3% of GDP in CY 2011) Upper-income tax cuts (0.3% of GDP) and Making Work Pay tax credit (0.3% of GDP) assumed to expire in 2012 Further income-tax increases in 2013 and beyond

Copyright © 2010 IHS Global Insight. All Rights Reserved. 32 The Federal Budget Gap (Percent of GDP)

Copyright © 2010 IHS Global Insight. All Rights Reserved. 33 (percent of GDP) Federal Spending Shares in GDP

Copyright © 2010 IHS Global Insight. All Rights Reserved. 34 Taxes Must Rise For Everybody (Effective federal personal income tax rate, percent)

Copyright © 2010 IHS Global Insight. All Rights Reserved. 35 Implications Growth boost from the inventory cycle and stimulus is fading Employment and consumption improving, but slowly Exports, business equipment spending moving higher Nonresidential construction still declining; no sustainable residential construction recovery yet Inflation trend is down; Fed to stay loose “Double-dip” risk: 25% The question is not whether taxes will rise but when and how A deficit reduction plan is needed—but not yet action

Thank you! Nigel Gault Chief U.S. Economist