Copyright © 2008 Global Insight, Inc. The U.S. Economic Outlook Nigel Gault Chief U.S. Economist Raleigh, North Carolina October 15, 2008

Copyright © 2008 Global Insight, Inc.2 09/2008 The Worst Is Yet to Come For The Economy Financial crisis has deepened, $ trillions in wealth obliterated Credit markets frozen Households, businesses, state and local governments all face tighter – or shut-off – credit Rest-of-the-world is being dragged down too, undermining exports Lower oil prices offer little comfort Risks are rising of recession comparable to worst since WWII

Copyright © 2008 Global Insight, Inc. Financial Crisis Reaches A New Level

Copyright © 2008 Global Insight, Inc.4 09/2008 A Key Sign of Extreme Risk Aversion (3-month LIBOR less 3-month Treasury bill rate, % points)

Copyright © 2008 Global Insight, Inc.5 09/2008 T-Bill Yield Near Zero as Investors Flee to Safety

Copyright © 2008 Global Insight, Inc.6 09/2008 Latest Steps: Good News Direct capital injections into banks ($250 billion) Guarantees on all non-interest-bearing bank deposits Bank debt guarantees Commercial paper lending facility soon in place More fiscal stimulus coming?

Copyright © 2008 Global Insight, Inc.7 09/2008 (Percent of nominal GDP) Sources: IMF, Global Insight Fiscal Costs of Major Post-War Banking Crises U.S. Crisis 2007-Present U.S. S&L Crisis Sweden 1991 Norway Finland Spain Japan 1991-Present The Big Five Financial Crises ?

Copyright © 2008 Global Insight, Inc.8 09/2008 Stock Market Decline Comparable With The Worst Seen Since The Depression Peak-to-Trough Percent Change in Dow Jones Industrial Average To Oct 10, 2008

Copyright © 2008 Global Insight, Inc.9 09/2008 GDP Declines in Post-War Recessions Peak-to-Trough Percent Change in Real GDP Dated by Year of the Peak Pessimistic Baseline

Copyright © 2008 Global Insight, Inc.10 09/2008 Historical Comparisons of Outcomes of Post-War Banking Crises in Industrial Nations AVERAGE DROP IN REAL PER CAPITA GDP GROWTH (peak growth year to trough growth year) Past Crises: Actual Outcome Eighteen Post-War Financial Crises over 2% Big Five Financial Crises over 5% Current Crisis: GI Projections U.S. Baseline Scenario3.5% (2004: 2.7%; 2009: -0.8%) U.S. Pessimistic Scenario5.6% (2004: 2.7%; 2009: -2.9%) Source for data on past crises: Reinhart and Rogoff (2008)

Copyright © 2008 Global Insight, Inc. The Economy is Already in Recession

Copyright © 2008 Global Insight, Inc.12 09/2008 NBERs Key Monthly Recession Indicators *Billions of 2000 dollars, SAAR; **Billions of 2000 dollars, SAAR; ***Millions, SA; ****Index, 2002=100, SA Real Manuf. & Trade Sales* Real Pers. Income (ex transfers)** Employment*** Industrial Production**** Peak: Oct 07 Peak: Dec 07 Peak: Jan 08

Copyright © 2008 Global Insight, Inc.13 09/2008 ISM Manufacturing PMI now in the Recession Zone (PMI, Manufacturing, Diffusion index)

Copyright © 2008 Global Insight, Inc.14 09/2008 (Annualized rate of growth) The Downside Risk to GDP Growth

Copyright © 2008 Global Insight, Inc.15 09/2008 (Percent) Unemployment Outlook

Copyright © 2008 Global Insight, Inc.16 09/2008 (Loss of jobs from peak, millions) Employment Outlook

Copyright © 2008 Global Insight, Inc.17 09/2008 (Percent change unless otherwise noted) U.S. Economic Growth by Sector: Baseline Scenario Real GDP Domestic Demand Consumption Light Vehicle Sales (Millions) Residential Investment Housing Starts (Millions) Business Fixed Investment Government Exports Imports

Copyright © 2008 Global Insight, Inc.18 09/2008 (Percent unless otherwise noted) Other Key Indicators: Baseline Scenario 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, 2000=1)

Copyright © 2008 Global Insight, Inc.19 09/2008 (Percent change unless otherwise noted) U.S. Economic Growth by Sector: Pessimistic Scenario Real GDP Domestic Demand Consumption Light Vehicle Sales (Millions) Residential Investment Housing Starts (Millions) Business Fixed Investment Government Exports Imports

Copyright © 2008 Global Insight, Inc.20 09/2008 (Percent unless otherwise noted) Other Key Indicators: Pessimistic Scenario 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, 2000=1)

Copyright © 2008 Global Insight, Inc. The Housing Downturn

Copyright © 2008 Global Insight, Inc.22 09/2008 House Prices: Overvaluations Becoming Less Extreme Source: National City Q Valuations

Copyright © 2008 Global Insight, Inc.23 09/2008 (OFHEO house price index divided by average labor compensation, 2000 = 1.0) House Prices Will Probably Overshoot on The Downside

Copyright © 2008 Global Insight, Inc.24 09/2008 (Million units) Housing Starts Dip Further

Copyright © 2008 Global Insight, Inc. A Severe Consumer Retrenchment

Copyright © 2008 Global Insight, Inc.26 09/2008 Bad News Everywhere For Consumer Finances Positive Forces Gasoline is below its peak Negative Forces Falling Employment Falling Real Wages Declining Housing Wealth Declining Stock Market Tightening Credit Conditions Mounting Debt Burdens Low Saving Rate

Copyright © 2008 Global Insight, Inc.27 09/2008 (Net percent tightening standards) Consumer Loan Standards Tightening Source: Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices

Copyright © 2008 Global Insight, Inc.28 09/2008 Household Net Worth Has Plunged End-Q to end-Q3 2008: down $4.3 trillion* End-Q to October 10, 2008: down $2.8 trillion* Total loss: $7.1 trillion* (down 12%) If wealth effect on consumption is 5 cents on the dollar, that means a $350 billion hit to consumer spending Thats 3.5% off consumer spending * Wealth figures are Global Insight estimates

Copyright © 2008 Global Insight, Inc.29 09/2008 (Annualized rate of growth) Consumer Spending: Turning Negative

Copyright © 2008 Global Insight, Inc. Business Investment Softening

Copyright © 2008 Global Insight, Inc.31 09/2008 Architecture Billings Lead Nonresidential Construction * Source: American Institute of Architects

Copyright © 2008 Global Insight, Inc.32 09/2008 (Percent change from a year earlier, real spending) The Business Construction Spending Cycle

Copyright © 2008 Global Insight, Inc.33 09/2008 (Percent change from a year earlier, real spending) The Business Equipment Spending Cycle

Copyright © 2008 Global Insight, Inc. Foreign Trade: Export-Led Growth At Risk

Copyright © 2008 Global Insight, Inc.35 09/2008 (Percent change from a year earlier, volumes) Export Growth Is Peaking

Copyright © 2008 Global Insight, Inc.36 09/2008 (2000=1.0, inflation-adjusted) The U.S. Dollar: Has Hit Bottom Against Some Currencies

Copyright © 2008 Global Insight, Inc. Inflation and Interest Rates

Copyright © 2008 Global Insight, Inc.38 09/2008 (Percent change from a year earlier) Headline Inflation Will Fall Sharply

Copyright © 2008 Global Insight, Inc.39 09/2008 (Percent) Fed to Cut to 1% Or Below

Copyright © 2008 Global Insight, Inc. State and Local Finances In Trouble

Copyright © 2008 Global Insight, Inc.41 09/2008 (NIPA Operating Deficit, Billions of dollars, annual rate) State and Local Finances in Trouble

Copyright © 2008 Global Insight, Inc.42 09/2008 (Percent growth, current spending, nominal, year-on-year) State and Local Spending Growth Must Slow

Copyright © 2008 Global Insight, Inc. The Economy and the Presidential Election Outcome

Copyright © 2008 Global Insight, Inc.44 09/2008 The Economy Is a Huge Negative for the Republicans (Percent growth year-on-year) Q calculation excludes economic stimulus payments. Including stimulus payments, real PDI growth per capita would be -0.3% in Q instead of -0.9%.

Copyright © 2008 Global Insight, Inc.45 09/2008 GII Election Model Points to the Democrats GII Election Model Points to the Democrats (Percentage of 2-party presidential vote for incumbent party)

Copyright © 2008 Global Insight, Inc.46 09/2008 Whoever Wins The Election Will Be Constrained by the Federal Deficit (Percent of GDP)

Copyright © 2008 Global Insight, Inc.47 09/2008 Bottom Line Economy tumbling into recession – severity uncertain but risks are rising that it will be deep More fiscal action on the way – public capital injections into financial institutions, bank guarantees, and a stimulus package (states, localities need help) Fed will cut rates further – may not help much, though Upside Risk: Government intervention stabilizes credit markets Downside Risk: Vicious spiral between economy and credit markets worsens Election: Economy favors Obama; whoever wins will have trouble translating fiscal objectives into action

Copyright © 2008 Global Insight, Inc.48 09/2008 Thank You! Visit our Web site at