1. 1 1 Presented by: Sara L. Johnson Managing Director Global Macroeconomics Group DRI-WEFA August 7, 2001 The U.S. Economic Outlook: Turbulent Times

2. 2 2 1991-2000 Was a Great Decade q The unemployment rate fell from 7% to 4%. q Core inflation subsided from 5.5% to 2.5%. q Productivity and real wage growth accelerated. q Household net worth doubled. q The federal budget shifted from deficit to surplus. q Potential real GDP growth surged to 4%, its fastest pace since the mid-1960s.

3. 3 3 The U.S. Economys Potential Growth Rate Doubled in the 1990s (Percent change)

4. 4 4 Business Investments Share of GDP (Nominal investment as a percent of GDP)

5. 5 5 Productivity Growth Reached Unsustainable Rates (Year-over-year percent change)

6. 6 6 The Good Times Are Over--for Awhile q The stock market is down. q Energy prices are up. q Household debt is at a record high, while saving is at a record low. q Internet companies are crashing. q Business investment is falling. q The U.S. has a huge trade deficit.

7. 7 7 A U. S. Rebound Will Take Time q Monetary and fiscal stimulus is in place. q But lower interest rates wont eliminate the excess capacity that is depressing business investment. q A strong dollar and weakening global economy are reducing exports. q Yet, consumers refuse to become discouraged. q An end to inventory decumulation will help to revive economic growth.

8. 8 8 The U.S. Economys Growth Has Stalled and Unemployment Is Rising (Percent change, 1996$) (Percent )

9. 9 9 Manufacturing Production Is in Recession (Percent change, annual rate)

10. 10 U.S. Inflation Will Subside as Unemployment Rises (Year-over-year percent change)

11. 11 Crude Oil Prices Will Decline (Refiners acquisition cost, dollars per barrel)

12. 12 The Federal Reserve Has Lowered Rates Quickly (Percent )

13. 13 The Technology Bubble Has Burst: Nasdaq and S&P 500 Indexes

14. 14 From Bull Market to Bear Market: Returns on S&P 500 Stocks and Treasury Bonds (Percent)

15. 15 (Percent of disposable income) The Personal Saving Rate Plummeted as Household Net Worth Soared (Ratio)

16. 16 (Thousands of persons) The Rising Household Debt Service Burden (Percent of disposable income)

17. 17 Consumer Spending Outpaced Disposable Income Growth in 1999-2000 (Percent change, chained 1996 dollars)

18. 18 A Mild Downturn in Sales of Light Vehicles (Millions of units)

19. 19 (Housing starts, millions of units) Falling Interest Rates Support Home-Building

20. 20 Computers and Electronics Lead the Decline in Capital Goods Orders (Billions of dollars, annual rates)

21. 21 A Retrenchment in Business Fixed Investment (Percent change, current dollars)

22. 22 Venture Capital Investments Have Retreated (Billions of dollars) * First half, annual rate

23. 23 Most U.S. Venture Capital Still Goes to Information and Communications Industries (Percent of total, first half of 2001) Source: National Venture Capital Association and Venture Economics

24. 24 Which States Are at Risk as Communications and Information Technologies Consolidate? (Percent of employment in communications and IT, 2000)

25. 25 Global Uncertainties in 2001 q U.S. - A pause in growth or a recession? q Latin America - What if Argentina devalues? q Europe - Part of the problem or part of the solution? q Japan - Another decade of stagnation? q Asia - After initial progress, is Asia relapsing?

26. 26 The World Economys Growth Is Weakening (Percent change in real GDP)

27. 27 Real U.S. Exports and Imports Are Cyclical (Year-over-year percent change)

28. 28 Western and Southern States Will Achieve the Fastest Employment Growth (Annual percent change, 2000 to 2005)