1

Michael FeroliSenior US EconomistJPMorgan October 2009

Click to edit Master title style

The US economic outlook

2

Economic outlook Evidence of recovery building in the data

Recovery—Policy support—Pent-up demand, inventory cycle—Drags fading

Structural drags remain—Consumer rebalancing—Financial headwinds

Risks V-shaped recovery W-shaped recovery L-shaped recovery

For (almost) all scenarios, long-term damage from recession is large Unemployment Deflation Fiscal imbalances

3

With final sales stabilizing, production has a lot of catching up to do

12000

12500

13000

13500

14000

billions, real $

Production and final sales

2005 2006 2007 2008 2009 2010

GDP

Final sales

Forecast

4

Leading to period of above-trend growth

-10

-5

0

5

10

%ch at annual rate

Real GDP

97 99 01 03 05 07 09

Forecast:

Q3 09 - Q4 10

5

Fading of uncertainty shock stabilizing demand

20

40

60

80

100

120

140

-20

-10

0

10

20

30

Index, %less-%more

Employment expectations and real consumer spending

% ch, oya

78 83 88 93 98 03 08

U Mich survey, expected unemployment over next year

Real durables spending

6

Saving rate secondary to income outlook

400

450

500

550

600

650 -2

0

2

4

6

8

10

12

Ratio

Houshold net worth in relation to disposable income and saving rate

Percent

84 89 94 99 04 09

Net worth to

incomeSaving rate

(inverted scale)

3Q09 wealth to income ratio

7

Leverage more a housing than consumption story

0

20

40

60

80

100

120

%, debt-to-income

Household leverage

60 65 70 75 80 85 90 95 00 05

Mortgage

debt

Consumer

credit

20

40

60

80

100

62

64

66

68

70

%, both scales

Homeownership and mortgage debt

65 70 75 80 85 90 95 00 05

Homeownership

rate

Mortgage debt-

to-income

8

Homebuilding coming up from the dead

500

1000

1500

2000

2500

thousands

Vacant, for-sale housing units

95 97 99 01 03 05 07 09

500

1000

1500

2000

2500

3000

3500

thousands, saar

Construction and demographics

69 74 79 84 89 94 99 04 09

New housing units started

Household growth (5-yr average)

9

Capital spending near a trough

-30

-20

-10

0

10

20

% change over year-ago

Real capital spending

97 99 01 03 05 07 09

Structures

Equipment and

software

-20

-10

0

10

20

30

Index, 3mma, weighted average of

regional Fed manufacturing surveys

Capex plans

00 02 04 06 08

10

Stimulus has been important 2H support

-3

-2

-1

0

1

2

3

4

%ch, saar (note: includes expiration of Bush tax cuts)

Estimated contribution of fiscal policy to GDP growth

2009 2010 2011

11

Federal support has helped states and localities

-10

0

10

20

30

% ch, oya

State and local government receipts

47 52 57 62 67 72 77 82 87 92 97 02 07

Total receipts(including federal transfers)

Tax receipts

12

Narrowing current account here to stay

-1000

0

1000

2000

3000

$ billion

US Saving-investment balance

98 00 02 04 06 08

Gross investment

Gross saving

Net foreign lending

-15

-10

-5

0

5

10% GDP

Private and public domestic financial balance

70 75 80 85 90 95 00 05 10

Private

financial

balance

Government

financial balance

Forecast

13

Structural issues could restrain US potential growth

0

1

2

3

4

5

6

%ch, private nonresidential

60 65 70 75 80 85 90 95 00 05 10

Growth of the capital stock

Forecast

0

5

10

15

20

weeks, sa

Median duration of unemployment

67 72 77 82 87 92 97 02 07

14

Unemployment to come down slowly

2

4

6

8

10

12

% sa

Unemployment rate

70 75 80 85 90 95 00 05 10

15

Wage inflation has collapsed, recovery bodes more of the same

0

2

4

6

8

%ch at annual rate over 2 quarters

Employment cost index

82 87 92 97 02 07

16

Public ignoring gas prices and bad economics

0

1

2

3

4

5

6

-15

-10

-5

0

5

10

15

%

Michigan 1-year median inflation expectations

%ch, 3-mo saar

99 01 03 05 07 09

Headline CPI

Median 1-yr inflation expectations

17

Money creation unlikely to lead to inflation

0.5

1.0

1.5

2.0

2.5

3.0

Index, 1994=1.0

Japanese QE

94 96 98 00 02 04 06 08

Monetary base

GDP deflator

18

Core inflation heading under 1%

0

2

4

6

8

10

12

%ch at annual rate over 1 quarter

Core PCE deflator

60 65 70 75 80 85 90 95 00 05 10

Forecast

19

The US economic forecast in brief

Second half move into positive growth

Second half growth of 3-1/2% Fading of drags Policy support

Above trend growth in 2010

Output gap stays large Deflation risks grow Fed to stay accommodative through 2011

20

The US economic forecast in detail

%q4/q4 %y/y

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 2008 2009 2010 2008 2009 2010Gross domestic productReal GDP -6.4 -1.0 4.0 3.0 3.0 4.0 4.0 3.5 -1.9 -0.2 3.6 0.4 -2.4 3.2 Final sales -4.1 0.4 2.1 0.4 2.0 3.0 3.9 3.8 -1.4 -0.4 3.2 0.8 -1.8 2.2 Domestic -6.4 -1.2 2.2 0.8 2.3 2.9 3.8 3.9 -2.1 -1.2 3.2 -0.4 -2.8 2.2 Consumer spending 0.6 -1.0 2.0 0.0 1.5 2.0 3.0 3.0 -1.8 0.4 2.4 -0.2 -0.8 1.5 Business investment -39.2 -10.9 -3.9 -3.2 0.5 3.4 7.0 7.9 -6.0 -15.7 4.7 1.6 -18.2 0.3 Equipment -36.4 -8.4 0.0 0.0 3.0 5.0 8.0 8.0 -10.7 -12.6 6.0 -2.6 -18.3 2.6 Structures -43.6 -15.1 -12.0 -10.0 -5.0 0.0 5.0 8.0 3.2 -21.5 1.9 10.3 -18.2 -4.7 Residential investment -38.2 -22.8 30.0 25.0 25.0 25.0 20.0 20.0 -21.0 -6.2 22.5 -22.9 -18.5 21.0 Government -2.6 6.4 2.4 2.6 2.6 2.6 2.5 2.4 3.1 2.1 2.5 3.1 2.0 2.8Net exports ($bn, chained $2000) -387 -332 -337 -352 -361 -358 -358 -365 - - - - - -Exports (goods and services) -29.9 -5.0 6.0 9.0 10.0 12.0 10.0 8.0 -3.4 -6.3 10.0 5.4 -11.7 8.6Imports (goods and services) -36.4 -15.0 6.0 11.0 10.0 9.0 8.0 8.0 -6.8 -10.7 8.7 -3.2 -15.7 7.4Inventories (ch $bn, chained $2000) -113.9 -159.2 -98.8 -14.4 16.0 46.7 50.4 42.5 - - - - - -Contribution to real GDP growth (% pts):Domestic final sales -6.6 -1.2 2.2 0.8 2.3 2.9 3.8 3.9 -2.2 -1.2 3.2 -0.4 -2.8 2.2Net exports 2.6 1.6 -0.1 -0.5 -0.2 0.2 0.1 -0.1 0.7 0.8 0.0 1.2 1.0 0.0Inventories -2.4 -1.4 1.9 2.6 1.0 1.0 0.1 -0.3 -0.4 0.2 0.4 -0.3 -0.6 1.1Income and profits (NIPA basis)Adjusted corp profits 22.8 24.9 35.0 15.0 12.0 20.0 12.0 9.0 -25.1 24.2 13.2 -11.8 -4.9 17.1Real disposable personal income 0.2 3.8 -3.5 0.0 2.5 2.5 3.0 3.5 0.3 0.1 2.9 0.5 0.4 1.5Saving rate1 3.7 5.0 3.6 3.6 3.9 4.0 4.0 4.1 - - - 2.7 4.0 4.0Prices and labor costConsumer price index -2.4 1.3 3.7 2.2 1.1 1.0 0.8 0.6 1.5 1.2 0.9 3.8 -0.4 1.6

Core 1.5 2.4 1.5 1.0 0.8 0.6 0.3 0.1 2.0 1.6 0.4 2.3 1.7 0.9Producer price index -6.2 1.1 7.0 3.0 1.0 0.5 0.5 0.5 1.4 1.1 0.6 6.4 -2.5 1.9

Core 2.2 1.3 1.5 1.0 0.8 0.5 0.0 0.0 4.4 1.5 0.3 3.4 2.7 0.7GDP chain-type price index 1.9 0.0 2.0 0.9 0.8 0.6 0.4 0.3 1.9 1.2 0.5 2.1 1.4 0.8Core PCE deflator 1.1 2.0 1.3 1.0 0.7 0.5 0.2 0.0 2.0 1.4 0.3 2.4 1.5 0.8S&P/C-S house price index (%oya) -19.1 -14.9 -10.5 -7.0 -3.0 -2.0 -1.5 0.0 -18.4 -7.0 0.0 -15.8 -13.1 -1.6Productivity 0.3 6.6 6.0 2.5 2.0 1.5 1.5 2.5 0.9 3.8 1.9 1.8 2.5 2.7Other indicatorsHousing starts (mn units, saar)1 0.528 0.539 0.600 0.650 0.700 0.750 0.790 0.830 - - - 0.900 0.579 0.768Industrial production, mfg. -22.1 -10.4 6.0 4.0 5.0 5.0 5.0 4.0 -8.7 -6.3 4.7 -3.2 -11.9 3.8Capacity utilization, mfg. (%)1 66.7 65.1 66.5 67.2 68.0 68.7 69.4 69.8 - - - 75.1 66.4 69.0Light vehicle sales (mn units, saar)1 9.5 9.6 11.4 9.5 10.5 11.2 11.5 12.2 - - - 13.2 10.0 11.4Unemployment rate1 8.1 9.3 9.7 10.0 9.9 9.8 9.6 9.4 - - - 5.8 9.3 9.7Nominal GDP -4.6 -1.0 6.1 3.9 3.8 4.6 4.4 3.8 0.1 1.0 4.2 2.6 -1.0 4.0Current account balance ($bn)1 -101.5 -97.0 -107.7 -94.8 -93.7 -91.0 -90.0 -90.7 - - - -706.1 -401.0 -365.5

% of GDP -2.9 -2.7 -3.0 -2.6 -2.6 -2.5 -2.4 -2.4 - - - -4.9 -2.8 -2.5Federal budget balance ($bn)1 - - - - - - - - - - - -454.8 -1600.0 -1350.0

% of GDP - - - - - - - - - - - -3.1 -11.2 -9.11. Entries are average level for the period. Federal balance figures are for fiscal years.

1Q07

Sep 4 3Q09 4Q09 1Q10 2Q10

Interest rate forecast (end of period)Fed funds target 0.13 0.13 0.13 0.13 0.133-mo LIBOR 0.31 0.35 0.35 0.35 0.353-month T-bill (bey) 0.13 0.20 0.20 0.20 0.20

2-yr Treasury 0.93 0.90 1.00 1.10 1.255-yr Treasury 2.36 2.40 2.50 2.65 2.9010-yr Treasury 3.44 3.50 3.60 3.75 4.0030-yr Treasury 4.27 4.30 4.35 4.50 4.60

%q/q, saar

21

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