1. Realistic Optimism for the U.S. Economy: An Update and Consensus Forecast CPA Workshop Luncheon September 29, 2004 Thomas H. Payne, Ph.D. Dunagan Chair of Excellence in Banking The University of Tennessee at Martin

2. September 2004 Views on the Economy…. "The outlook remains poor, production cutbacks at Ford and GM, mediocre personal income growth and record trade deficits all bode poorly for economic growth and jobs creation." - University of Maryland Business School Professor Peter Morici "The Fed is in a very enviable position right now, the economy is growing, competition is keeping prices down, wages are not under pressure and commodity price rises will fade.” - William Hummer of Hummer Investments

3. More September 2004 Views…. "Overall, we've added about 1.7 million new jobs since August of 2003 ….. The unemployment rate of 5.4 percent was nearly a full point below the rate last summer and below the average of the 1970s, 1980s and 1990s” – George Bush (September 3, 2004) "I don't think this is something to celebrate. I think it's something to get to work on ….. this is the first president in 60 years who is absolutely certain to be running for re-election on Election Day by having lost jobs in America…" - John Kerry (September 3, 2004)

4. Job Growth is Good..…. Nationally, in Tennessee, and in our Region

5. And is Continuing …. Based on the first two weeks of September data, the U.S. economy is anticipated to Add approximately 200,000 new jobs this month.

6. And, Income & Consumer Spending Remain Strong ………..So Far Latest Conference Board survey shows unexpected dip in September. September 28, 2004: 10:51 AM EDT

7. And, Despite Talk of “Bubbles” - No Jitters are Evident in the Housing Market

8. But Some Economic Uncertainty Does Exist - Oil Prices, Presidential “Dead Heat”, War on Terror, and Interest Rates

9. And, What About Those Oil Prices!? ….$50/barrel!! But how bad is it in comparison with other oil price increases? The 1979 oil shock began as unrest in Iran led to the toppling of the Shah …. Oil went from $15 a barrel to almost $35. That would be like going from $30 last year to $70 per barrel (instead of $50) today. Rules of Thumb: 1 cent increase → $1 billion off consumer spending 25% increase in oil prices →.25% off GDP While increases in oil prices increase both inflation and unemployment, the Federal Reserve is maintaining a strong anti-inflationary approach. A trader shouts orders during activity in the oil trading section of the New York Mercantile Exchange And we’re back near $2.00/gallon……

10. And, (Related) Growth in Corporate Profits.... Have Led to Recent Declines in Stock Prices

11. Bottom Line - Despite “Rational Non-Exuberance” and Structural Changes in the Workforce – Our Overall Economy Remains Strong…..

12. So, Here is the Consensus Forecast…… Note: Results from a USA TODAY economic survey conducted Aug. 13-18, 2004. Sixty-one public and private sector economists took part.

13. Notwithstanding the Run-up in Energy Prices…..Inflation Should Remain Low

14. And, Even with Continued Outsourcing, Unemployment Should Continue to Decline

15. Consistent with GDP and Job Growth, Interest Rates are Expected to Increase

16. Despite Relatively Flat Growth in Consumer Spending

17. How is the Fed Doing? The Consensus is ….. Very Good

18. What to Expect Next Year  Continuing Job Growth – Strong service growth along with a modest rebound in manufacturing.  Outsourcing will continue and commodity prices (oil, steel, etc.) will remain high as China and other countries continue to boom. Political pressure will build as consumption will lag production and China to dislodge the Yuan from the $.  Continuing increases in short term interest rates – The Fed will continue to cautiously raise the Fed Funds rate target (25 basis points/meeting maximum).  GDP will trend back toward natural rates of growth and productivity gains will decline with decreases in unemployment.

19. What to Expect Next Year  Flattening of the Yield Curve - long term rates will remain at or near current levels due to increased demand being offset by decreased inflationary expectations. Fixed mortgage rates may, however, increase early next year as a result of changes in the secondary markets.  Consumer spending will level off due to the combined effects of structural shifts in employment, consumer debt saturation, and increased interest rates.  However, look for 10-15% gains in the S&P 500 as uncertainty dissipates following the election and the economy continues to gain traction.