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“What We’re Watching to Identify the Economic Recovery” June 3, 2009 Richard Yamarone Director of Economic Research Argus Research Corp. Hoping for a “V”-Shaped Recovery Real GDP (%) 10 8 6 4 2 0 -2 -4 -6 Source: Bureau of Economic Analysis -8 '95 '97 '99 '01 '03 '05 '07 '09 F Leading Indicators Signal Some Degree of Recovery Leading Economic Indicators vs. Real GDP Growth (Y/Y%) GDP 10 10 LEI 8 8 6 6 4 -2.5% 4 2 2 0 0 -2 -3.0% Source: Bureau of Economic Analysis, The Conference Board, Argus Research Corp. -4 '85 '95 '05 -2 -4 The Most Convincing Argument of Recovery ECRI Weekly Leading Index 15 10 5 0 -5 -10 -15 Source: Bloomberg, ECRI -20 -25 -30 '99 '01 '03 '05 '07 '09 Fed Indices Point to More Prosperous Times Chicago Fed National Activity Index Three Month Moving Average 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00 -2.50 -3.00 Source: Federal Reserve Bank of Chicago -3.50 -4.00 '90 '93 '96 '99 '02 '05 '08 A-D-S Business Conditions Index Improving Source: Federal Reserve Bank of Philadelphia Anecdotal Reports Starting to Improve UPS Volume U.S. Average Daily Package Volume UPS vs. Real GDP Real GDP 7 6 5 5 4 3 3 2 1 1 -1 0 UPS Volume -1 Real GDP -3 -2 Source: United Parcel Service, Bureau of Economic Analysis, Argus Research -5 -3 2000 2002 2004 2006 2008 Fiscal Policy Arriving at the Spigots Direct Outlays, Stimulus Package ($Blns) 250 200 150 Source: CBO 100 50 0 -50 2009 '10 '11 '12 '13 '14 '15 '16 '17 '18 2019 Monetary Policy… Source: Federal Reserve Bank of St. Louis Business Investment has Collapsed Capital Spending (%) Non-Residential Investment 30 20 10 0 -10 -20 -30 Source: Bureau of Economic Research -40 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 Little Reason for Hope in New Orders Data New Orders NonDefense Capital Goods Ex-Aircraft (Y/Y%) 24 16 8 0 -8 -16 -24 -32 Source: Department of Commerce -40 '94 '96 '98 '00 '02 '04 '06 '08 Key Index Implying Strong Recovery ISM New Orders - Inventories vs. Real GDP NO-I GD P Y / Y % 25 9 20 15 6 10 5 3 0 -5 0 GDP NO-INV -10 Source: B EA , ISM , A rgus Research -15 1983 -3 1988 1993 1998 2003 2008 Little Need to Build With Glut of Commercial Property Structures Spending (%) 30 15 0 -15 -30 Source: Bureau of Economic Analysis -45 '94 '96 '98 '00 '02 '04 '06 '08 Signs of Stabilization New & Existing Home Sales New Existing 1350 7300 1200 New Existing 6550 1050 900 5800 750 5050 600 4300 450 Source: US Dept. of Commerce, National Association of Realtors 300 3550 '96 '99 '02 '05 '08 Home Prices Returning to Pre-Bubble Levels S&P/Case Shiller Home Price Indices AZ-Phoenix 300 CA-Los Angeles CA-San Diego 275 CA-San Francisco CO-Denver 250 DC-Washington FL-Miami 225 FL-Tampa GA-Atlanta 200 IL-Chicago MA-Boston 175 MI-Detroit Source: S&P 150 MN-Minneapolis NC-Charlotte 125 NV-Las Vegas NY-New York 100 OH-Cleveland OR-Portland 75 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 TX-Dallas WA-Seattle Encouraging Signs in the Housing/Construction Market Architecture Firms' Billing Index 65 60 55 50 45 40 35 Source: American Institute of Architects 30 1996 1998 2000 2002 2004 2006 2008 “Stimulus” May Help Ailing Construction Sector Construction Spending (Y/Y%) 30 20 10 0 -10 -20 Non-Residential Residential -30 Source: Department of Commerce -40 2003 2005 2007 2009 Trade, the Unsexy Savior Contribution to GDP Residential Spending & Trade 3.5 2.93 Residential 3 Trade 2.5 2.18 2.03 2 1.66 1.33 1.5 0.5 1.05 0.94 1 0.77 0.59 0.09 0 -0.5 -0.12 -0.23 -0.15 -0.52 -0.6 -1 -1.11 -1.5 -1.18 -0.91 -1.2 -1.4 -0.6 -0.8 -1.06 -1.12 -1.33 Source: BEA, Argus Research -1.39 -2 '06 QI QII QIII QIV '07 QI QII QIII QIV '08 QI QII QIII QIV '09 QI Some Recovery in Container Traffic Outbound Container Statistics (TEU) Port of Long Beach 170,000 150,000 130,000 110,000 90,000 70,000 Source: Port of Long Beach 50,000 '95 '97 '99 '01 '03 '05 '07 '09 Some Signs of Peak in Unemployment 'Jobs Hard-to-Get' & Unemployment Rate U Rate Jobs Index 10 50 9 40 8 Jobs Index 30 7 6 20 Unemployment Rate 5 10 4 Source: Conference Board, Bureau of Labor Statistics 3 0 '90 '92 '94 '96 '98 00 '02 '04 '06 '08 Unemployment Benefit Claims Point to Economic Trough Weekly Initial Claims 700,000 650,000 600,000 Source: US Department of Labor 550,000 500,000 450,000 400,000 350,000 300,000 250,000 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 Ever-Resilient Consumer Tossed in Towel Real Consumer Spending (%) 10 5 0 Source: Bureau of Economic Aanalysis -5 1992 1995 1998 2001 2004 2007 ‘Fab Five’ – Dining Out Spending: Meals at Other Eating Places (Y/Y%) 8 6 4 2 0 -2 -4 Source: Bureau Economic Analysis, NBER -6 '98 '01 '04 '07 ‘Fab Five’ – Jewelry & Watches Spending: Jewelry & Watches Y/Y% 16 12 8 4 0 -4 -8 -12 Source: Bureau Economic Analysis, NBER -16 '98 '01 '04 '07 ‘Fab Five’ – Cosmetics & Perfumes Spending: Cosmetics & Perfumes (Y/Y% ) 6 3 0 -3 -6 Source: Bureau Economic Analysis, NBER -9 '98 '01 '04 '07 ‘Fab Five’ – Women’s Dresses Spending: Women's Clothing (Y/Y%) 12 10 8 6 4 2 0 -2 -4 -6 Source: Bureau Economic Analysis, NBER -8 '98 '01 '04 '07 ‘Fab Five’ – Casino Gambling Spending: Casino Gambling Y/Y% 24 20 16 12 8 4 0 -4 -8 -12 Source: Bureau Economic Analysis, NBER -16 '98 '01 '04 '07 ‘Fab Five’ Recovery… Post Recession, Fab-Five December 2001=100 145 140 135 130 125 120 Dining Out Perfumes Women's Jewelry Casino 115 110 105 100 95 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Bad Signs for Summer Spending Real Spending: Hotels & Motels (Y/Y% ) 16 12 8 4 0 -4 -8 -12 -16 Source: Bureau Economic Analysis, Argus Research, NBER -20 '98 '01 '04 '07 Auto Industry is the Wildcard America Still Loves Those Trucks Total Vehicle Assemblies (Mlns) 9 Source: Federal Reserve System Trucks 8 Autos 7 6 4.12 3.97 5 3.72 4 3.11 3.05 3.2 1.33 1.66 1.87 1.84 Jan-09 Feb-09 Mar-09 Apr-09 3 2.52 2 3.72 3.34 2.95 1 0 Oct-08 Nov-08 Dec-08 Prices Aren’t ‘Collapsing’ The Economist Commodity Price Index 275 All Items 260 245 Industrials Food 230 215 200 185 170 155 140 2005=100 125 110 2/14/2001 2/13/2002 2/12/2003 2/11/2004 2/9/2005 Market Inflation Expectations Rising 5-Year Treasury Note - Five Year TIPS Spread 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00 Source: Federal Reserve Bank of St. Louis, Argus Research -2.50 2003 2004 2005 2006 2007 2008 2009 Consumer Inflation Expectations on the Rise Reuters/U. Michigan Inflation Expectations (%) 6.0 5.0 4.0 3.0 2.0 Source: Bloomberg 1.0 0.0 '03 '04 '05 '06 '07 '08 '09 Broad Inflation Measures Still Elevated GDP Deflators (%) 6 4 2 0 -2 PCE Deflator GDP Deflator -4 Source: Bureau of Economic Analysis -6 2004 2005 2006 2007 2008 2009 No ‘Deflation’ in this Respected Measure Dallas Fed Trimmed-Mean PCE Inflation (Y/Y%) 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 Source: Federal Reserve Bank of Dallas 1.5 '95 '97 '99 '01 '03 '05 '07 '09 Inflation Pressures Appear to be ‘Well-Anchored’… For Now Core Personal Consumption Expenditure Deflator (Y/Y%) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 Federal Reserve 'Comfort Zone' 1.0 0.5 Source: Bureau of Economic Analysis, Argus Research 0.0 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 Monetary Policy Getting Easier Every Month Real Fed Funds Rate Core Personal Consumption Deflator (%) 6.0 4.0 2.0 0.0 -2.0 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 Internal Fed Gauge Implies Fed to Remain on ‘Hold’ Argus Leading Fed Funds Index FF % Index 9 130 37.16 8 120 FED FUNDS ALFFI 7 110 100 6 90 5 80 4 70 3 60 2 50 1 40 0 30 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 Risks to “V”-Shaped Recovery… Auto Industry Collapse Commodity (Food), Energy, Healthcare Inflation (price pass alongs announced during the quarterly earning season) Stimulus Fails to Generate Jobs Consumers Decide to Save Jobs Climate Deteriorates Further Reasons for Optimism… Massive Monetary Stimulus in Pipeline Large Stimulus of Falling Energy Prices Government Has Approved Whopping Fiscal Spending Program Home Prices Have Returned to Pre-Bubble Levels Frozen Credit Markets Have Thawed Considerably