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Headwinds Fade…Tailwinds Develop MARK ZANDI, CHIEF ECONOMIST Fiscal Headwinds are Near Their Apex… Contribution to real GDP growth, % 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 Private Economy Federal Fiscal Policy Total '05 '06 '07 Source: Moody’s Analytics '08 '09 '10 '11 '12 '13F '14F '15F …and Fiscal Sustainability is Within Reach Debt held by the public, % GDP 90% 85% 80% 75% 70% 65% 60% 55% No Tax Increase/Sequester Current Policy Simpson-Bowles 50% '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 Sources: CBO, Moody’s Analytics 3 Banks are Well Capitalized and More Profitable… Commercial banks 9.25 1.6 1.4 8.75 1.2 8.25 1.0 7.75 0.8 0.6 7.25 6.75 Core Capital Ratio (L) 0.4 Return on Assets (R ) 0.2 6.25 0.0 '90 '92 Source: FDIC '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 …and Households Right the Wrongs 30-90 Day Delinquency Rate, % of $, SA 5.5 Non First Mortgage 5.0 First Mortgage 4.5 4.0 3.5 3.0 2.5 2.0 1.5 '06 07 '08 Sources: Equifax, Moody’s Analytics '09 '10 '11 '12 '13 Housing Will Soon Be Undersupplied… Vacant homes for sale, for rent and held off market, ths 11,500 Housing Supply Single-family Multifamily Manufactured Housing 10,500 9,500 Housing Demand 8,500 Household Formations Obsolescence Second Homes 7,500 950,000 600,000 300,000 50,000 1,800,000 1,250,000 350,000 200,000 Trend Vacancy 6,500 5,500 90 92 94 96 98 00 02 04 06 08 10 12 Sources: Census, Moody’s Analytics 6 …Fueling a Big Turn in Housing’s Contribution Contribution to real GDP growth, % 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 -0.5 -0.5 Wealth Effect Residential Investment Total -1.0 -1.5 -1.0 -1.5 -2.0 -2.0 '00 '02 '04 Source: Moody’s Analytics '06 '08 '10 '12 '14F Rising Rates Expose Financial Excesses Federal funds rate 10 S&L Crisis 8 Orange County Mexican Peso Tech Bust 6 Housing Bubble Busts 4 2 0 '85 '90 '95 '00 '05 '10 Sources: Treasury, BEA, Moody’s Analytics 8 121 North Walnut Street Suite 500 West Chester, PA 19380 610.235.5299 www.economy.com © 2012, Moody's Analytics, Inc. and/or its licensors and affiliates (together, "Moody's"). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. All information contained herein is obtained by Moody's from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. Under no circumstances shall Moody's have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of Moody's or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if Moody's is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The financial reporting, analysis, projections, observations, and other information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell, or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER. Each opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation prior to investing. 10