1. Presented by © 2003 Economy.com Slide 1 Economic Outlook Mark Zandi Economy.com, Inc.

2. © 2003 Economy.com Slide 2 Demand Output Labor hours % change year ago Sources: BEA, BLS An Improving Economy Potential GDP Growth

3. © 2003 Economy.com Slide 3 States in Recession October 2003

4. © 2003 Economy.com Slide 4 Real GDP growth % change year ago Sources: BEA, Economy.com Actual Without stimulus Enormous Policy Stimulus

5. © 2003 Economy.com Slide 5 Surging Mortgage Borrowing Cash raised via mortgage borrowing $ bil Source: Economy.com $103 $178 $118 Home equity Refinance Home sales

6. © 2003 Economy.com Slide 6 Plunging Tax Payments Cash raised from lower tax payments $ bil Source: Economy.com - $6 $180 $98

7. © 2003 Economy.com Slide 7 Real federal government spending % change year ago Source: BEA Soaring Government Outlays

8. © 2003 Economy.com Slide 8 Metro areas where defense procurement contracts are ≥ 1% of gross product, 2002 Norfolk (8.8%) Washington DC (5.9%) Fort Worth (5.8%) St. Louis (4.8%) San Diego (3.9%) San Antonio (3.8%) Orlando (3.1%) Phoenix (2.7%) Los Angeles (2.6%) Baltimore (2.5%) Atlanta (2.2%) Salt Lake City (2.2%) San Jose (1.9%) Boston (1.8%) Dallas (1.7%) Philadelphia (1.6%) New Orleans (1.5%) Cincinnati (1.5%) New Haven (1.3%) Austin (1.2%) Tampa (1.2%) Denver (1.1%) Riverside (1.0%) Seattle (1.0%) Defense Spending Boost Sacramento (3.2%) Orange County (1.0%) (Red indicates greater than 3% of gross product)

9. © 2003 Economy.com Slide 9 Nonfinancial businesses % change year ago, 4-qtr MA Source: BLS Amazing Productivity Growth...

10. © 2003 Economy.com Slide 10 Nonfinancial businesses Source: BEA Profits $ bil (L) Profit margin (R)...Lifts Profitability...

11. © 2003 Economy.com Slide 11 Business spending on information technology $ bil Source: BEA...Which Prompts Business to Invest...

12. © 2003 Economy.com Slide 12 Jobs, mil Source: BLS...and Finally to Hire?

13. © 2003 Economy.com Slide 13 Profits growth 1 year lead (L) Employment growth (R) Sources: BEA, BLS Higher Profits...More Jobs

14. © 2003 Economy.com Slide 14 Near-Term Outlook % change year ago Real GDP Employment

15. © 2003 Economy.com Slide 15 Vehicle Spent-Up Demand Trend Actual Vehicle sales, mil, 12 mo MA Sources: Census, Economy.com

16. © 2003 Economy.com Slide 16 Portland Boston San Francisco San Jose Orange County San Diego Las Vegas Miami Ft. Lauderdale Ft. Myers Naples Tampa Baltimore Washington DC Monmouth Jersey City Bergen-Passaic Nassau Newark Potential Housing Market Problems Los Angeles Potential Bubbles Potentially Overbuilt Salt Lake/Provo El Paso Corpus Christi New Orleans Tulsa St. Louis Milwaukee Louisville Indiannapolis Detroit Columbus Cleveland Buffalo Pittsburgh Syracuse

17. © 2003 Economy.com Slide 17 Households Are Under Stress Sources: MBA, U.S. District Courts Bankruptcy rate per 1,000 households (L) Mortgage foreclosure rate (R)

18. © 2003 Economy.com Slide 18 China (R) Ballooning Trade Deficit Total excluding OPEC (L) Trade deficit $ bil, 12 mo moving sum Source: Census

19. © 2003 Economy.com Slide 19 State and local government deficit Source: BEA $ bil (L) Share of GDP (R) Ongoing State Budget Woes

20. © 2003 Economy.com Slide 20 % change year ago Source: Economy.com What if Jobs Fail to Rebound? Real cashflow Real wages and salaries Real cashflow less wages

21. © 2003 Economy.com Slide 21 Outlook Summary There is substantial optimism regarding the economy's prospects. Demand, production, and even the job market are improving. Massive monetary and fiscal stimulus are the principal catalysts for the economic revival. The economy is also benefiting as the principal excesses of the late 1990s have been largely worked off and productivity growth remains robust. While the economy will come back, it will not coming roaring back. Vehicle and housing demand are spent and household leverage is high. Also weighing on the economy are a struggling global economy and fiscally stressed state governments. The recovery will evolve into a self-sustaining rebound only if the recent revival in jobs continues.