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The U.S. Economic Outlook Jay Bryson, Global Economist December 3, 2008 U.S. Real GDP National Economic Overview Real GDP Bars = Compound Annual Rate 8% The U.S. economy held up reasonably well in the first part of the year, but now is clearly struggling Line = Yr/ Yr % Change 8% 6% 6% 4% 4% 2% 2% 0% 0% Real GDP: Q3 @-0.5% Real GDP: Q3 @0.7% -2% -2% 96 97 98 99 00 01 02 03 04 05 06 07 08 Source: U.S. Department of Commerce and Wachovia Wachovia Economics Group 2 U.S. Real GDP National Economic Overview Real Final Sales to Domestic Purchasers Bars = Compound Annual Rate 8% The domestic economy is even weaker than the negative headline GDP number would suggest Line = Yr/ Yr % Change 8% 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% -1% -1% Final Sales to Dom. Purch.: Q3 @-2.30% Final Sales to Dom. Purch.: Q3 @-0.26% -2% -2% -3% -3% 96 97 98 99 00 01 02 03 04 05 06 07 08 Source: U.S. Department of Commerce and Wachovia Wachovia Economics Group 3 LIBOR Rates National Economic Overview 3-Month LIBOR Fixings Rate The credit crunch has caused the outlook to deteriorate significantly 8.00% 8.00% 6.00% 6.00% 4.00% 4.00% 2.00% 2.00% Dollar LIBOR: Nov @2.196% Pound LIBOR: Nov @3.964% Euro LIBOR: Nov @3.930% 0.00% Jan-07 0.00% Jul-07 Jan-08 Jul-08 Source: Bloomberg L.P. and Wachovia Wachovia Economics Group 4 ISM Manufacturing Index National Economic Overview ISM Manufacturing Composite Index Diffusion Index 65 There are signs the U.S. economy has hit an air pocket recently 65 60 60 55 55 50 50 45 45 40 40 ISM Composite Index: Oct @38.9 12-Month Moving Average: Oct @48.1 35 35 87 89 91 93 95 97 99 01 03 05 07 Source: Institute of Supply Management and Wachovia Wachovia Economics Group 5 Auto Sales National Economic Overview Light Vehicle Sales Millions, SAAR Auto sales are very weak 22 22 20 20 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Light Vehicle Sales: Oct @10.5 Million 0 0 2004 2005 2006 2007 2008 Source: U.S. Department of Commerce and Wachovia Wachovia Economics Group 6 Initial Jobless Claims National Economic Overview Initial Claims for Unemployment Seasonally Adjusted, In Thousands 600 550 The labor market has weakened sharply 600 Year-Over-Year Percent Change: Nov-15 @62.8% Initial Claims: Nov-15 @542.0 Thousand 4 Week Moving Average: Nov-15 @506.5 Thousand 52 Week Moving Average: Nov-15 @396.8 Thousand 550 500 500 450 450 400 400 350 350 300 300 250 250 86 88 90 92 94 96 98 00 02 04 06 08 Source: U.S. Department of Labor and Wachovia Wachovia Economics Group 7 Housing Starts National Economic Overview Housing Starts Seasonally Adjusted Annual Rate - In Millions 2.4 2.4 Housing Starts: Oct @0.791 Million 2.0 2.0 1.6 1.6 1.2 1.2 0.8 0.8 0.4 0.4 Are housing starts nearing a bottom? 87 89 91 93 95 97 99 01 03 05 07 Source: U.S. Department of Commerce and Wachovia Wachovia Economics Group 8 Business Inventories National Economic Overview Inventory Change in GDP Quarterly Change, Annual Rate, Billions of Dollars $150 Most of the inventory swing should be behind us $150 $100 $100 $50 $50 $0 $0 -$50 -$50 Change in Inventories: Q3 @-$29.1B -$100 1992 -$100 1994 1996 1998 2000 2002 2004 2006 2008 Source: U.S. Department of Commerce and Wachovia Wachovia Economics Group 9 Productivity Growth National Economic Overview Productivity - Total Nonfarm Year-over-Year Percent Change, 3-Year Moving Average 5.0% Productivity growth should remain rather solid 5.0% 4.0% 4.0% 3.0% 3.0% 2.0% 2.0% 1.0% 1.0% 0.0% 0.0% Nonfarm Productivity: Q3 @1.6% -1.0% -1.0% 60 65 70 75 80 85 90 95 00 05 Source: U.S. Department of Commerce and Wachovia Wachovia Economics Group 10 Oil Prices National Economic Overview Crude Oil NYMEX Front-Month Contract, Dollars per Barrel $160 Growth Sustained Remains Below Trend The decline in PCE Continues to energy prices should Maintain Strength help to prop up real disposable income Residential Weakness Yet to Infect Economy $160 $140 $140 $120 $120 $100 $100 $80 $80 $60 $60 $40 $40 $20 $20 Crude Oil: Nov @$49.93 $0 2000 $0 2001 2002 2003 2004 2005 2006 2007 2008 Source: New York Mercantile Exchange (NYMEX) and Wachovia Wachovia Economics Group 11 The U.S. Consumer National Economic Overview Real Disposable Income vs. Real PCE Both Series are 3-M Moving Averages, Year-over-Year Percent Change 8% Real Personal Consumption Expenditure: Sep @0.0% Real Disposable Income: Sep @0.5% 7% Continued growth in real disposable income should help to support consumer spending 8% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% -1% -1% 92 94 96 98 00 02 04 06 08 Source: U.S. Department of Commerce and Wachovia Wachovia Economics Group 12 The U.S. Consumer National Economic Overview Household Indicators in the United States Percent of Gross Domestic Product 140% Growth in consumer spending and residential investment likely will be subdued until the household sector reduces leverage 78% 120% 76% 100% 74% 80% 72% 60% 70% Household Liabilities: 2007 @104.3% (Left Axis) Consumer Spending & Res. Investment: 2007 @74.9% (Right Axis) 40% 68% 1990 1994 1998 2002 2006 Source: Federal Reserve Board and Wachovia Wachovia Economics Group 13 U.S. GDP Forecast National Economic Overview Wachovia U.S. Economic Forecast Actual 2005 The United States will probably experience its worst recession since the early 1980s Real Gross Domestic Product Personal Consumption Business Fixed Investment Equipment and Software 2 3 Consumer Price Index Corporate Profits Before Taxes 10-Year Treasury Note 1 3 2006 Forecast 2007 2008 2009 2010 2.9 3.0 7.2 9.3 3.4 2.8 3.0 7.5 7.2 3.2 2.0 2.8 4.9 1.7 2.9 1.3 0.4 2.4 -1.6 4.3 -1.0 -0.9 -9.5 -10.0 1.7 1.4 1.5 -6.1 -1.8 2.4 11.9 4.39 16.0 4.71 -0.6 4.04 -8.7 3.70 -19.8 4.00 8.3 4.50 Forecast as of: November 12, 2008 2Compound Annual Growth Rate 3 Year-over-Year Percent Change Source: Wachovia Wachovia Economics Group 14 York Economy York, Pennsylvania York MSA Unemployment Rate Seasonally Adjusted 8% 8% Unemployment Rate: Sep @5.1% 12-Month Moving Average: Sep @4.4% York appears to be outperforming the national economy at present 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 90 92 94 96 98 00 02 04 06 08 Source: Bureau of Labor Statistics and Wachovia Wachovia Economics Group 15 York Housing Market York, Pennsylvania York MSA Housing Permits 4 Thousands of Permits, Seasonally Adjusted Annual Rate 4 Single-Family: Sep @1,260 Permits Single-Family, 12-Month Mov. Avg.: Sep @1,015 Permits Multi-Family, 12-Month Mov. Avg.: Sep @131 Permits There was not much over-building in York 3 3 2 2 1 1 0 0 1990 1993 1996 1999 2002 2005 2008 Source: U.S. Department of Commerce and Wachovia Wachovia Economics Group 16 York Housing Market York, Pennsylvania York MSA Home Prices OFHEO Home Price Index 25% 20% Home prices are starting to edge lower, but they probably won’t crash 25% Quarterly Change, Annual Rate: Q2 @-5.5% Year-over-Year Percent Change: Q2 @0.4% 20% 15% 15% 10% 10% 5% 5% 0% 0% -5% -5% -10% -10% 90 92 94 96 98 00 02 04 06 08 Source: Office of Housing Enterprise Oversight and Wachovia Wachovia Economics Group 17 York Population York, Pennsylvania York MSA Population Growth In Thousands 10 Population growth is starting to slow 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Source: U.S. Department of Commerce and Wachovia Wachovia Economics Group 18 Global GDP Growth Global Economic Outlook Real Global GDP Growth Compound Annual Growth Rate 8.0% Growth Sustained Remains Below Trend A period of subPCE Continues trend global to Maintain economicStrength growth appears likely Residential Weakness Yet to Infect Economy 8.0% 6.0% 6.0% Period Average 4.0% 4.0% 2.0% 2.0% 0.0% 0.0% 1970 1975 1980 1985 1990 1995 2000 2005 Source: International Monetary Fund and Wachovia Wachovia Economics Group 19 Global Forecast Global Economic Outlook Wachovia International Economic Forecast1 (Year-over-Year Percentage Change) 2008 There appears to be a global recession underway Global Major Economies United States Eurozone Germany France Italy UK Japan Canada Developing Economies China India Mexico Brazil 1 GDP 2009 2010 2008 CPI 2009 2010 3.4% 1.7% 3.4% 5.8% 3.1% 3.0% 1.3% 1.0% 1.3% 0.7% -0.2% 0.8% 0.3% 0.7% -1.0% -0.3% -0.2% -0.3% -0.4% -1.0% -0.5% 0.0% 1.4% 1.8% 2.0% 1.8% 1.4% 1.5% 1.6% 2.4% 4.3% 3.4% 2.9% 3.3% 3.5% 3.7% 1.5% 2.6% 1.7% 1.6% 1.5% 1.5% 1.6% 2.1% 0.2% 1.9% 2.4% 1.4% 1.4% 1.4% 1.4% 1.3% 0.1% 1.7% 9.5% 6.8% 1.9% 5.0% 8.0% 6.1% 0.4% 2.0% 8.8% 7.5% 2.4% 3.0% 6.2% 7.2% 4.8% 5.6% 3.0% 5.6% 3.8% 4.4% 3.4% 4.6% 2.8% 3.9% Data As of: November 12, 2008 Wachovia Economics Group 20 Foreign Currency Global Economic Outlook Wachovia Major Currency Outlook1 (End of Quarter Rates) 2008 Q4 2009 Q1 Q2 2010 Q3 Q4 Q1 Q2 Q3 Major Currencies Euro ($/ €) U.K. ($/ £) U.K. (£/ €) Japan (¥/ $) 1.32 1.60 0.83 100 1.26 1.55 0.81 105 1.22 1.50 0.81 108 1.18 1.45 0.81 112 1.14 1.43 0.80 115 1.13 1.42 0.80 118 1.12 1.40 0.80 120 1.12 1.40 0.80 120 Other Industrialized Canada (C$/ US$) Switzerland (CHF/ $) Norway (NOK/ $) Sweden (SEK/ $) Australia (US$/ A$) 1.15 1.13 6.70 7.50 0.72 1.20 1.17 6.90 7.90 0.67 1.25 1.23 7.10 8.10 0.62 1.28 1.28 7.30 8.35 0.58 1.32 1.33 7.40 8.50 0.56 1.33 1.35 7.50 8.60 0.55 1.34 1.37 7.60 8.65 0.54 1.34 1.37 7.60 8.65 0.54 1 Data as of: November 12, 2008 Wachovia Economics Group 21 Summary of Near-Term Outlook Growth Insert slide callout Summary Interest Rates The credit crunch has probably We believe the Federal Reserve will caused the U.S. economy to enter its deepest recession since the early 1980s. Business conditions likely will remain challenging for the next few years as consumers retrench. It appears that most major foreign economies have also slipped into recession. However, economic fundamentals in many developing countries are sounder now than in previous cycles. cut rates a bit further as the economy contracts. Steps taken to date should help to shore up the financial system. Central banks in major foreign countries probably will cut rates further in the months ahead. Inflation should recede in most countries, which will give scope to central banks in developing countries to ease policy as well. Other Financial Markets The stock market should stabilize as credit markets start to function again and risk aversion abates. However, a significant rally in equity markets does not seem likely until the longevity of the global recession can be better assessed. Slower global growth means that most commodity prices, which have declined over the past few months, should not shoot up again. However, a return of commodity prices to 2003-like levels does not seem likely either because growth in the developing world is not falling completely apart. The dollar has rallied over the past few months. Although the greenback could give up some of its gains in the near term, we project that the dollar will continue to appreciate in 2009 as the U.S. current account deficit shrinks and as foreign central banks cut rates. Wachovia Economics Group 22 Appendix Wachovia Economics Group 23 Economics Group Publications Appendix A Sampling of Our Recent Special, Regional & Industry Commentary Distribution Lists Monthly Outlook Weekly Economic & Financial Commentary Special Reports Economic Indicators Global Commentary Regional Commentary Chief Economist List To join any of our research distribution lists please email us: [email protected] om Recent Special Commentary Date November-24 November-24 November-14 November-13 November-05 October-20 October-09 October-08 October-08 September-25 September-22 September-22 September-18 September-16 September-15 September-11 August-29 August-28 August-19 August-19 August-15 August-14 August-07 July-31 July-24 July-14 Title Recession to Persist for Next Six Months Employment Chartbook: November 2008 Trends, Cycles and Dangers of Historical Extrapolation Global Chartbook - November 2008 The Grinch May Roil Holiday Sales This Year Authors Silvia & Iqbal Silvia, York & Whelan Silvia & Iqbal Bryson & Quinlan Vitner & York Japan’ s “ Lost Decade” : Implications for the U.S. Economy Global Chartbook - October 2008 Housing Chartbook - October 2008 Everyone Seems To Have Gotten The Message Bryson Bryson & Quinlan Vitner & York Vitner & Bryson Recession Probability Remains Very High Silvia Story Continues: No Bright Light Marking End of Sub-Par Growth Silvia Implications of the Treasury' s Plan for the Dollar Bryson Global Central Banks Work to Soothe Fears Vitner FOMC September Meeting - No Change Vitner FOMC September Meeting - Workout Continues Silvia Global Chartbook - September 2008 Bryson California is Still Managing to Eke Out Modest Gains Housing Chartbook - August 2008 “ Older and More Diverse Nation by Midcentury” Commercial Real Estate Quarterly: Second Quarter Consumers Feeling A Little Blue This Year The Outlook for U.S. Export Growth Revisited Global Chartbook - August 2008 Vitner & Vitner & Vitner & Vitner & Vitner & Bryson Bryson York York York Khan York Florida’ s Economy Sinks To Unfamiliar Territory By Land and Sea: Autos, Boats, and RV Chartbook How Far Will Housing Prices Fall Vitner & York Vitner & Khan Vitner & York Wachovia Economics Group 24 Economics Group U.S. Macro Economy Appendix Comprehensive Coverage of the U.S. Economy Monthly Economic Forecast Weekly Analysis & Outlook Timely Commentary on Daily Economic Data Economics Group Coverage Releases Global Economies U.S. Regional Economics Macro Level Coverage of Major Foreign Economies Macro Forecasts of 11 Economies Monthly Forecasts of 19 Dollar Exchange Rates Weekly Analysis & Outlook Regional and MSA Level Expertise Extensive Coverage Across the Wachovia Footprint Ground level Analysis & Commentary of Local Markets Coverage Across CIB Industry Groups Regular Commentary on Economic Developments by Industry Industries Real Estat e Consum er & Healthcare Retail Industrial Growth Tech Media Financial Energy & Power Services Wachovia Economics Group 25 Economics Group Appendix John E. Silvia, Ph.D. Mark Vitner Jay H. Bryson, Ph.D. Chief Economist Senior Economist Global Economist [email protected] U.S. Macro Economy Interest Rates Monetary Policy [email protected] U.S. Macro Economy Real Estate Regional Economics [email protected] Global Economies Foreign Exchange Sam Bullard Anika Khan Azhar Iqbal Adam G. York Economist Economist Econometrician Economic Analyst [email protected] Desk Operations Financial Services [email protected] U.S. Macro Economy Real Estate Retail & Automotive [email protected] Quantitative MacroEconomic Modeling [email protected] U.S. Macro Economy U.S. Consumer Real Estate Tim Quinlan Kim Whelan Yasmine Kamaruddin Economic Analyst Economic Analyst Economic Analyst [email protected] U.S. Macro Economy Business Investment [email protected] U.S. Macro Economy [email protected] U.S. Macro Economy Wachovia Corporation Economics Group publications are distributed by Wachovia Corporation directly and through subsidiaries including, but not limited to, Wachovia Capital Markets, LLC, Wachovia Securities, LLC and Wachovia Securities International Limited. The information and opinions herein are for general information use only. Wachovia does not guarantee their accuracy or completeness, nor does Wachovia assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. © 2008 Wachovia Wachovia Economics Group 26