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US Economic Outlook From Financial Crisis to Severe Recession January 2009 Peter Hooper Chief Economist Deutsche Bank Securities All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access IR at http://gm.db.com or by calling 1-877208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1 US GDP Growth Outlook Real GDP Contributions to GDP Growth Q4/Q4 Q/Q%, AR Consumer spending (PCE) Residential investment Net exports Business investment Change in inventories Government spending Q/Q%, AR 2009 -1.1 8 8 Potential growth Real GDP growth 6 Forecast 6 4 4 2 2 0 0 -2 -2 -4 -4 2003-07 average -6 -6 -8 -8 -10 -10 Q1 Q2 Q3 2008 Q4 Q1 Q2 Q3 2009 . 1 Source: BEA, DB Global Markets Research Q4 2008 -0.4 Q4 2010 2010 2.6 The cyclical elements of GDP $ bln Consumer durables + BFI + residential investment (ls) 3750 $ bln Other components of GDP (rs) 10000 3000 8000 2250 6000 1500 4000 750 2000 375 1000 200 1947 2 1959 1971 1983 Source: BEA, DB Global Markets Research 1995 2007 Cyclical elements of GDP: Key Components $ bln Real private nonresidential fixed investment Real private residential investment Real PCE: durable goods 1500 1250 1000 750 1500 1250 1000 750 500 500 250 250 125 125 50 50 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007 3 $ bln Source: BEA, DB Global Markets Research Credit crunch depressing real consumer spending % 80 2-qtr %chg, AR FEB Survey: banks willingness to lend (ls) 10.0 7.5 40 5.0 0 2.5 0.0 -40 Real PCE (rs) -80 1968 4 -2.5 -5.0 1973 1978 1983 1988 1993 1998 Source: FRB, BEA, DB Global Markets Research 2003 2008 Spreads on US consumer loans have blown out 5-10 fold as securitization has died bps Fixed-rate spreads to swaps 3000 3-yr auto* 5-yr credit card 3000 2500 5-yr HEL 5-yr CMBS 2500 2000 2000 1500 1500 1000 1000 500 500 0 39451 0 39535 39619 39703 * 3-yr auto spreads are for prime benchmark autos 5 bps Source: DB Global Markets Research 39787 Personal saving rate should jump in response to plunge in household wealth % 14 12 Ratio Stock at current level, House prices -12% Personal saving rate (ls) 6.5 6.0 10 5.5 8 Wealth-to-income ratio (rs) 6 5.0 4 4.5 2 4.0 0 -2 1950 6 3.5 1960 1970 1980 1990 Source: BEA, FRB, DB Global Markets Research 2000 2010 Summing up impacts on consumer spending for year ahead Driver 7 Impact on real PCE growth % pts Wealth loss -3.5 Credit crunch -2.0 Oil price decline 2.0 Tax cuts + transfers 1.5 Total -2.0 Residential investment has been in decline for 3+ years Ratio Ratio Residential investment as a share of GDP 0.070 0.070 0.060 0.060 0.050 0.050 0.040 0.040 0.030 0.030 Forecast 0.020 1961 8 0.020 1968 1975 1982 1989 1996 Source: BEA, DB Global Markets Research 2003 2010 Homebuilding has fallen below demand trend Thousands Thousands 2500 New home permits 2500 2000 2000 1500 1500 Trend 1000 1000 500 500 Household formations 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 9 Source: Census,NAR, DB Global Markets Research 0 Excess Housing Stock beginning to recede Thousands 18000 Thousands 18000 Vacant homes* 17000 16000 15000 14000 17000 16000 Trend calculated from 1965 to 2003 15000 14000 13000 13000 12000 12000 11000 11000 10000 1990 10000 1994 1998 2002 2006 * Includes homes for sale, homes for rent, and homes held off the market; excludes seasonal homes and second homes not used a primary residence. 10 Source: Census, DB Global Markets Research Total housing stock has fallen less than homebuilding Thousands Total housing stock, yoy Thousands 2500 2500 2000 2000 1500 1500 1000 500 0 1998 11 1000 Housing completions plus mobile home placements, 4-qtr MA 500 0 2000 2002 2004 2006 Source: Census, DB Global Markets Research 2008 Business fixed investment relatively subdued during recent expansion Business fixed investment as a share of GDP Ratio Ratio 0.16 0.16 0.14 0.14 Forecast 0.12 0.12 0.10 0.10 0.08 1961 0.08 12 1968 1975 1982 1989 1996 Source: BEA, DB Global Markets Research 2003 2010 Inflation risk has disappeared yoy% 5 4 Consumer prices (PCE) 5 Core (ex food and energy) Headline 4 3 3 2 2 1 1 0 0 -1 -3 1996 -1 Fed's comfort zone -2 13 yoy% -2 -3 1998 2000 2002 2004 2006 Source: BEA,DB Global Markets Research 2008 2010 Projections of US federal budget balance CBO baseline deficit excluding Obama stimulus plan (OSP) 14 CBO baseline + Obama stimulus plan +OSP and extension of tax cuts Billion $ % of GDP (% of GDP) (% of GDP) 2008 -455 -3.2 -3.2 -3.2 2009 -1186 -8.3 -11.1 -11.1 2010 -703 -4.9 -7.6 -8.3 2011 -498 -3.3 -3.4 -4.8 2012 -264 -1.6 -2.0 -3.9 2013 -257 -1.5 -2.1 -4.1 Avg. 2014-18 -236 -1.2 -2.5 -4.3 Source: CBO, DB Global Markets Research Projections of federal debt held by public CBO baseline deficit excluding Obama stimulus plan (OSP) 15 CBO baseline + Obama stimulus plan +OSP and extension of tax cuts Billion $ % of GDP (% of GDP) (% of GDP) 2008 5803 40.6 40.6 40.6 2009 7193 50.5 53.3 53.4 2010 7829 53.6 59.1 59.9 2011 8238 51.9 59.0 61.4 2012 8475 49.2 57.3 61.8 2013 8516 47.9 54.5 61.3 2018 9054 42.1 47.5 67.5 Source: CBO, DB Global Markets Research US debt/GDP moving to highest level in 50 years Debt held by the public % of GDP % of GDP CBO baseline + OSP and extension of tax cuts 100 90 100 90 CBO baseline + Obama Stimulus Plan 80 80 70 70 CBO baseline projections 60 50 16 60 50 40 40 30 30 20 1947 20 1957 1967 1977 1987 1997 Source: Haver, CBO, DB Global Markets Research 2007 2017 US debt surges in WWII and in 1980s not strongly associated with rising Treasury yields % of GDP 120 US Debt held by the public (ls) 20-yr real treasury bond yield (rs) % 10 100 6 80 2 60 -2 40 -6 20 1939 1945 1951 1957 1963 1969 1975 1981 1987 1993 1999 2005 -10 17 Source: OMB, NBER, Haver, DB Global Markets Research Rising debt in Japan has had little effect on real rates % % Japan 180 2.5 160 2.0 1.5 140 1.0 120 0.5 100 0.0 Govt. debt as a % of GDP (ls) 80 10-yr real Govt. bond yield (4q MA, rs) 60 1996 18 -0.5 -1.0 1998 2000 2002 2004 Source: Haver, DB Global Markets Research 2006 2008 A positive relationship between debt and real rates in Sweden % Sweden 80 % 10 8 60 6 40 4 2 20 Govt. debt as a % of GDP (ls) 10-yr real Govt. bond yield (4q MA, rs) 0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 19 Source: Haver, DB Global Markets Research 0 -2 Government debt and real interest rates across industrial countries Govt debt as % of GDP : 2007* Real interest rate (10-yr): 2007 Govt. debt as % of GDP 180 Japan 160 y = -4.4682x + 59.577 R2 = 0.013 140 120 Italy Regression line 100 80 60 Germany 40 Ireland 20 0 -1 0 1 * For US Govt debt as % of GDP in 2008 20 2 3 4 5 Real interest rate (10-yr) (%) Source: Haver, DB Global Markets Research Government debt and real interest rates across industrial countries, excluding Japan Govt debt as % of GDP : 2007* Real interest rate (10-yr): 2007 Govt. debt as % of GDP 180 160 y = 0.0732x + 42.81 140 R = 8E-06 2 120 100 Regression line Italy Germany 80 60 40 20 Ireland 0 -1 0 1 2 * For US Govt debt as % of GDP in 2008 21 3 4 5 Real interest rate (10-yr) (%) Source: Haver, DB Global Markets Research Sovereign CDS spreads and debt levels across countries Govt debt as % of GDP: 2007 Sovereign CDS spread as on Jan 09 latest value Govt. debt as % of GDP 180 Japan 160 140 120 Belgium 100 US 80 60 Germany France UK 40 Spain 20 Australia 0 0 50 100 22 y = -0.1612x + 77.898 2 R = 0.0851 Italy Regression line Brazil Ireland 150 200 250 300 350 Sovereign CDS spread (bps) Source: Haver, Bloomberg, DB Global Markets Research US government deficit and nominal yields 16 Nominal interest rate (10-yr) (%) US: 1955-2008 y = -0.1334x + 13.376 R2 = 0.3829 14 12 10 8 6 Regression line 4 2 20 23 30 40 50 60 Source: Haver, FRB, DB Global Markets Research 70 80 Debt as % of GDP US government deficit and real yields 7 Real interest rate (10-yr) (%) US: 1955-2008 y = -0.0358x + 5.2392 2 R = 0.1152 6 5 4 3 2 Regression line 1 0 20 24 30 40 50 60 Source: Haver, FRB, DB Global Markets Research 70 80 Debt as % of GDP Regression model relating US real 10-year Treasury yield to government finances Sample 1960-2007 1990-2007 1960-2007 1990-2007 Expected inflation 1.31 (0.00) 2.16 (0.00) 1.54 (0.00) 2.10 (0.00) Output gap -4.05 (0.53) 18.0 (0.09) 0.80 (0.90) 26.8 (0.00) Deficit/GDP -0.02 (0.82) 0.10 (0.33) 0.04 (0.00) 0.00 (0.86) Debt/GDP Constant 2.66 (0.00) 1.20 (0.00) -0.00 (0.99) 0.94 (0.58) R-squared 0.87 0.94 0.89 0.93 Note: P-values in parentheses. Bold indicates statistical significance at the 95% level. 25 Source: DB Global Markets Research Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Peter Hooper The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively “Deutsche Bank”). The information herein is believed by Deutsche Bank to be reliable and has been obtained from public sources believed to be reliable. With the exception of information about Deutsche Bank, Deutsche Bank makes no representation as to the accuracy or completeness of such information. This published research report may be considered by Deutsche Bank when Deutsche Bank is deciding to buy or sell proprietary positions in the securities mentioned in this report. 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