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Economic Outlook CCIM March 5, 2008 Economic Growth Wachovia While Risks to the Economic Expansion Have Increased Considerably, We Continue To Believe We Will Avoid A Recession Real GDP 8.0% Bars = Compound Annual Growth Rate Line = Yr/ Yr Percent Change 8.0% 7.0% 7.0% 6.0% 6.0% Forecast Growth will be slower during the first half of the year but Real GDP should remain positive 5.0% 5.0% 4.0% 4.0% 3.0% 3.0% 2.0% 2.0% 1.0% 1.0% 0.0% 0.0% -1.0% GDPR - CAGR: Q4 @0.6% GDPR - Yr/ Yr Percent Change: Q4 @2.5% -2.0% 1998 -1.0% -2.0% 2000 2002 2004 2006 2008 Wachovia Economics Group 2 Employment Growth Wachovia Preliminary Figures Show Job Growth Fell Slightly In January. Declines Would be Much Larger In An Actual Recession Nonfarm Employment Change Total Employed in Thousands 500 Employment growth has weakened but is nowhere near recession levels 500 400 400 300 300 200 200 100 100 0 0 -100 -100 -200 -200 -300 -300 Nonfarm Employment Change: Jan @-17,000 -400 2000 -400 2001 2002 2003 2004 2005 2006 2007 2008 Wachovia Economics Group 3 Labor Markets Wachovia The Unemployment Rate Has Risen But Remains Relatively Low. Past Gains Of This Magnitude Have Coincided With Recessions Or Sharp Slowdowns Unemployment and Wage Rates Seasonally Adjusted 8% 5% 7% 4% The unemployment rate remains slightly below “full employment” 6% 3% 5% 2% 4% Unemployment Rate: Jan @4.9% (Left Axis) Hourly Earnings: Jan @3.7% (Right Axis) 3% 1% 86 88 90 92 94 96 98 00 02 04 06 Wachovia Economics Group 08 4 Consumer Spending Wachovia Consumer Spending Is Primarily Driven By Income Growth, Which Remains Solidly Positive. However, The Housing Slump Will Slow Spending Growth Retail Sales Ex. Auto and Gas vs. Income Growth 3 Month Moving Averages 15.0% 15.0% Tax Cut 2 12.5% Housing Refi Boom 12.5% Stock Market Bubble 10.0% 10.0% Tax Cut 1 Concerns about the wealth effect are overblown 7.5% 7.5% 5.0% 5.0% 2.5% 2.5% 0.0% 0.0% Disposable Personal Income Yr/ Yr % Change: Dec @5.8% 3 Month Annual Rate: Jan @1.9% -2.5% -2.5% 96 97 98 99 00 01 02 03 04 05 06 07 08 Wachovia Economics Group 5 ISM Manufacturing Wachovia ISM Manufacturing Composite Index Diffusion Index 65 Manufacturing activity is consistent with a slowdown not a recession 65 60 60 55 55 50 50 45 45 40 40 ISM Composite Index: Feb @48.3 12 Month Moving Average: Feb @51.0 35 35 87 89 91 93 95 97 99 01 03 05 07 Wachovia Economics Group 6 Housing Wachovia The Bulk Of The Declines In Homebuilding Are Behind Us Real Residential Investment 30.0% Bars = Compound Annual Growth Rate Line = Yr/ Yr Percent Change 20.0% 30.0% 20.0% Forecast Permits in many of the most challenged markets are approaching zero 10.0% 10.0% 0.0% 0.0% -10.0% -10.0% -20.0% -20.0% Res. Investment - CAGR: Q4 @-23.9% Res. Construction - Yr/ Yr Percent Change: Q4 @-18.3% -30.0% 1998 -30.0% 2000 2002 2004 2006 2008 Wachovia Economics Group 7 Housing Wachovia We Overbuilt Homes for Five Straight Years & We Will Need to UnderBuild For A Few Years Before the Excess Inventory is Corrected Housing Starts Millions of Units 2.1 2.1 Dashed Line is Underlying Demographic Trend Housing will not meaningfully rebound before the end of the decade 1.9 1.9 1.7 1.7 1.5 1.5 1.3 1.3 1.1 1.1 0.9 0.9 0.7 0.7 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Wachovia Economics Group 10 8 OFHEO Wachovia Over Sixty Percent of the U.S. Population Live in Cities With Positive Home Price Growth OFHEO Home Price Index OFHEO Home Price Index Q4-2007 vs. Q4-2006 Greater than 4.9% 3.1% to 4.9% 1.5% to 3.1% -2.0% to 1.5% Less than -2.0% Source: OFHEO and Wachovia Corp. Wachovia Economics Group 9 Investor & Second-Home Mortgages Wachovia Investors Were Responsible For More than Half of the Purchases in Some Markets in 2006 Non-Owner Occupied Purchase Loans: 2006 Non-Owner Occupied Purchase Loans Percent of Total Value of Purchase Loans Greater than 25% 15.0% to 25.0% 10.0% to 15.0% 7.5% to 10.0% Less than 7.5% Source: HMDA and Wachovia Corp. Wachovia Economics Group 10 Office Vacancies Wachovia Office Vacancy Rates Percent Vacant 25.0% 25.0% Metropolitan Office Vacancy Rate: Q4 @12.8% Suburban Office Vacancy Rate: Q4 @14.2% Downtown Office Vacancy Rate: Q4 @10.3% The office market is essentially in equilibrium 20.0% 20.0% 15.0% 15.0% 10.0% 10.0% 5.0% 5.0% 0.0% 1990 0.0% 1994 1998 2002 2006 Wachovia Economics Group 11 Industrial Vacancies Wachovia Industrial Vacancy Rates Percent Vacant 12.0% 12.0% 10.0% Industrial markets are stronger than the vacancy data suggest 10.0% 8.0% 8.0% 6.0% 6.0% 4.0% 4.0% 2.0% 2.0% Industrial Vacancy Rate: Q4 @10.2% 0.0% 1980 0.0% 1984 1988 1992 1996 2000 2004 Wachovia Economics Group 12 Greensboro Wachovia Greensboro MSA Unemployment Rate Seasonally Adjusted 7% Unemployment remains near the national average 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% Unemployment Rate: Dec @4.8% 12-Month Moving Average: Dec @4.9% 1% 1% 90 92 94 96 98 00 02 04 06 Wachovia Economics Group 08 13 Greensboro Wachovia Greensboro MSA Home Prices OFHEO Home Price Index 15% 15% Quarterly Change, Annual Rate: Q4 @6.7% Year-Over-Year Percent Change: Q4 @3.9% Home price growth remains steady 12% 12% 9% 9% 6% 6% 3% 3% 0% 0% -3% -3% -6% -6% 90 92 94 96 98 00 02 04 06 Wachovia Economics Group 14 Greensboro Wachovia Greensboro MSA Population Growth In Thousands 15 Population growth has been a great strength of many North Carolina cities 15 12 12 9 9 6 6 3 3 0 0 80 82 84 86 88 90 92 94 96 98 00 02 04 Wachovia Economics Group 06 15 Appendix Wachovia Economics Group 16 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 February-22 February-14 February-11 February-11 Title Will U.S. Export Growth Buckle? The Outlook for Bank of England Monetary Policy (When) Will the ECB Cut Rates? Global Chartbook - February 2008 Bryson Bryson Bryson Bryson January-30 January-28 January-28 January-22 January-22 January-16 January-16 January-09 January-09 January-03 Fed Lowers Target Funds Rate by 50 Basis Points It Would Be So Much Easier To Be a Pessimist U.S. Recession? Who Would be Next? Fed Slashes the Funds Rate 75 Basis Points Recession: The Measure of Economic Weakness 2007 Holiday Sales Wrapped-Up Housing Outlook 2008 Credit & The Real Economy: Part II Global Chartbook - January 2008 Credit & The Real Economy: Part I Silvia Vitner Bryson Vitner Silvia & Iqbal Khan Vitner & York Silvia Bryson Silvia State Personal Income - Third Quarter 2007 2008 Annual Outlook - What' s to Come in the Year Ahead? Central Banks Take Step to Combat Credit Crunch FOMC Meeting - December 11, 2007 Housing Chartbook - December 2007 Holiday Sales Forecast Update Texas Feels Heat from the Housing Slump OFHEO House Price Index Recession Forecasting: A Statistical Approach Vitner & York December-19 December-17 December-12 December-11 December-11 December-07 December-04 December-04 December-03 Authors November-30 Is a Lasting Improvement in the Trade Deficit in the Cards? November-29 Impact of the Credit Crisis on Banks Bryson Silvia Vitner & York Vitner & Khan Vitner & York Vitner & York Silvia & Lai Bryson Silvia Wachovia Economics Group 17 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 18 Economics Group Appendix John E. Silvia, Ph.D. Mark Vitner Jay H. Bryson, Ph.D. Chief Economist Senior Economist Global Economist 704.374. 7034 [email protected] U.S. Macro Economy Interest Rates Monetary Policy 704.383.5635 [email protected] U.S. Macro Economy Real Estate Regional Economics: State & MSA Level 704.383.3518 [email protected] Global Economies Foreign Exchange Sam Bullard Huiwen Lai, Ph.D. Anika Khan Economist Quantitative Analyst Economist 704.383.7372 [email protected] Desk Operations Financial Services 704.715.7415 [email protected] Quantitative Macro-Economic Modeling 704.715.0575 [email protected] U.S. Macro Economy Consumer & Retail Non-residential Real Estate Azhar Iqbal Adam G. York Tim Quinlan Quantitative Analyst Economic Analyst Economic Analyst 704.383.6805 [email protected] Quantitative Macro-Economic Modeling 704.715.9660 [email protected] U.S. Macro Economy Real Estate Industrial Growth & Services 704.383.9613 [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 Corp. Wachovia Economics Group 19 Logo Page