1. Presented by © 2004 Economy.com Slide 1 The Economic Outlook Mark Zandi Chief Economist

2. © 2004 Economy.com Slide 2 Demand Output Labor hours % chg year ago Sources: BEA, BLS An Improved Economy...

3. © 2004 Economy.com Slide 3 % of industries adding to payrolls over 3 month period Source: BLS...Across Industries...

4. © 2004 Economy.com Slide 4...and Across the Country Based on employment and IP data as of July 2004 Recession (none) Flat Expanding

5. © 2004 Economy.com Slide 5 But Incomes Have Not Kept Up... Real Median Household Income 2000$, Source: BEA, Economy.com

6. © 2004 Economy.com Slide 6...Nor Has Wealth Real Average Household Net Worth 2000$, Sources: FRB, Economy.com

7. © 2004 Economy.com Slide 7 Contribution to GDP growth % chg year ago Source: Economy.com Fading Policy Stimulus

8. © 2004 Economy.com Slide 8 West Texas Intermediate % Change Year Ago Higher Energy Prices are a Growing Weight...

9. © 2004 Economy.com Slide 9...Particularly on the Northeast and Midwest...

10. © 2004 Economy.com Slide 10...But They Should Not Derail the Expansion Thousands of BTUs per 1996$ of GDP Source: Energy Department Petroleum Total Energy

11. © 2004 Economy.com Slide 11 Fundamental Reason For Optimism Productivity Growth Nonfarm Business Average Annual Growth Sources: BLS, Economy.com

12. © 2004 Economy.com Slide 12 After-Tax corporate profit margin Source: BEA Productivity Gains Have Lifted Profits...

13. © 2004 Economy.com Slide 13 Profits growth 1 year lead (L) Employment growth (R) Sources: BEA, BLS...Which Will Induce More Hiring

14. © 2004 Economy.com Slide 14 % chg year ago annualized % change Argentina Canada Belgium Australia Brazil U.S. China France Germany India Japan Korea Mexico U.K. Denmark Netherlands Chile Real GDP Growth through 2004Q2 Expansion Recession Recovery Struggling Euro Area Finland Indonesia Israel Italy New Zealand Norway Russia Spain Taiwan Hong Kong Strong Global Economy

15. © 2004 Economy.com Slide 15 Sanguine Near-Term Economic Outlook Real GDP Employment % change year ago

16. © 2004 Economy.com Slide 16 Regional Recoveries Year when new employment peak is projected 2006 2004 2005 2007 and after

17. © 2004 Economy.com Slide 17 State Tax Revenue Growth Sources: Census, Economy.com Tax Revenue Growth Back on Track

18. © 2004 Economy.com Slide 18 Source: Economy.com Tax Revenue Growth Back on Track Avg Annual Growth FY '04–'06, U.S. = 4.5%

19. © 2004 Economy.com Slide 19 China (R) Withering Global Competition Total excluding OPEC (L) Trade deficit $ bil, 12 mo moving sum Source: Census

20. © 2004 Economy.com Slide 20 Growth in Federal Debt Sources: Treasury, Economy.com Long-Term Rates are Set to Rise...

21. © 2004 Economy.com Slide 21 Share of Treasury Debt Owned by Foreigners Sources: FRB, Economy.com...Particularly if Foreign Investors Become Skittish

22. © 2004 Economy.com Slide 22 Boston San Francisco San Jose Orange County San Diego Las Vegas Miami Ft. Lauderdale Sarasota Washington DC Monmout h Bergen-Passaic Nassau Newark Highly Overpriced > 2 SD from historic average Overpriced > 1 SD from historic average Higher Rates Pose a Threat to the Housing Market Tampa Middlesex Naples Sacramento Source: Economy.com West Palm Beach Lansing Riverside New York Oakland Los Angeles Modesto Santa Rosa Santa Barbara Vallejo Phoenix Stockton Trenton Ventura Based on the aggregate CSW house price index

23. © 2004 Economy.com Slide 23 Weighty Household Financial Obligations Financial obligation ratio Source: Federal Reserve Homeowners (R) Renters (L)

24. © 2004 Economy.com Slide 24 Darkening Federal Fiscal Outlook 10-Year Cumulative Budget Deficit, FY '05-14 Source: Congressional Budget Office

25. © 2004 Economy.com Slide 25 Outlook Summary The economy is much improved. Demand and output are expanding and profits have never been stronger. The recovery has been disappointing. The job market continues to lag as do real incomes and net worth. Growth has slowed recently due to fading policy stimulus and higher energy prices. The expansion will remain in tact as strong productivity and profit gains induce business to invest and hire. The global economy is stronger and combined with a softer dollar should support U.S. growth. The expansion will struggle with fierce global competition and higher interest rates. Higher rates will be particularly hard on the vehicle and housing markets. High household leverage and ballooning federal budget and current account deficits are longer-term threats.