Presented by

Slide 1© 2003 Economy.com

Economic Outlook

Mark Zandi

Economy.com, Inc.

Slide 2© 2003 Economy.com

-4

-2

0

2

4

6

99 00 01 02 03

Demand

Output

Laborhours

% change year agoSources: BEA, BLS

An Improving Economy

Potential GDP Growth

Slide 3© 2003 Economy.com

States in Recession October 2003

Recession

F lat

Expanding

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-4

-2

0

2

4

6

00 01 02 03

Real GDP growth% change year agoSources: BEA, Economy.com

Actual

Withoutstimulus

Enormous Policy Stimulus

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Surging Mortgage Borrowing

0

200

400

600

800

01 02 03H1

Cash raised via mortgage borrowing$ bilSource: Economy.com

$103

$178

$118

Home equity

Refinance

Home sales

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Plunging Tax Payments

-50

0

50

100

150

200

01 02 03YTD

Cash raised from lower tax payments$ bilSource: Economy.com

- $6

$180

$98

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-15

-10

-5

0

5

10

15

53 58 63 68 73 78 83 88 93 98 03

Real federal government spending% change year agoSource: BEA

Soaring Government Outlays

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Metro areas where defense procurement contracts are ≥ 1% of gross product, 2002

Norfolk (8.8%)

Washington DC (5.9%)

Fort Worth (5.8%)

St. Louis (4.8%)

San Diego (3.9%)

San Antonio (3.8%)

Orlando (3.1%)

Phoenix (2.7%)

Los Angeles (2.6%)

Baltimore (2.5%)

Atlanta (2.2%)

Salt Lake City (2.2%)

San Jose (1.9%)

Boston (1.8%)

Dallas

(1.7%)

Philadelphia (1.6%)

New Orleans (1.5%)

Cincinnati (1.5%)

New Haven (1.3%)

Austin (1.2%)

Tampa (1.2%)

Denver

(1.1%)Riverside

(1.0%)

Seattle (1.0%)

Defense Spending Boost

Sacramento (3.2%)

Orange County (1.0%)

(Red indicates greater than 3% of gross product)

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-2

0

2

4

6

55 60 65 70 75 80 85 90 95 00

Nonfinancial businesses% change year ago, 4-qtr MASource: BLS

Amazing Productivity Growth...

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380

430

480

530

580

97 98 99 00 01 02 03

7

8

9

10

11

12

13

Nonfinancial businessesSource: BEA

Profits$ bil (L)

Profitmargin (R)

...Lifts Profitability...

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380

400

420

440

460

99 00 01 02 03

Business spending on information technology$ bilSource: BEA

...Which Prompts Business to Invest...

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129.5

130.0

130.5

131.0

131.5

132.0

132.5

133.0

00 01 02 03

Jobs, milSource: BLS

...and Finally to Hire?

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-30

-20

-10

0

10

20

30

40

70 75 80 85 90 95 00

-2

0

2

4

6Profits growth 1 year lead (L)

Employment growth (R)

Sources: BEA, BLS

Higher Profits...More Jobs

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Near-Term Outlook % change year ago

-2

-1

0

1

2

3

4

5

00 01 02 03 04 05

Real GDP

Employment

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Vehicle Spent-Up Demand

14

15

16

17

18

95 97 99 01 03

Trend

ActualVehicle sales,mil, 12 mo MASources: Census, Economy.com

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PortlandBoston

San FranciscoSan Jose

Orange County

San Diego

Las Vegas

Miami

Ft. Lauderdale

Ft. Myers

Naples

Tampa

BaltimoreWashington DC

MonmouthJersey City

Bergen-PassaicNassau

Newark

Potential Housing Market Problems

Los Angeles

Potential Bubbles

Potentially Overbuilt

Salt Lake/Provo

El Paso

Corpus Christi

New Orleans

Tulsa

St. Louis

Milwaukee

Louisville

Indiannapolis

Detroit

Columbus

Cleveland

Buffalo

Pittsburgh

Syracuse

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Households Are Under Stress

10

11

12

13

14

15

16

17

96 97 98 99 00 01 02 03

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90Sources: MBA,U.S. District Courts

Bankruptcy rateper 1,000 households (L)

Mortgage foreclosure rate (R)

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-500

-450

-400

-350

-300

00 01 02 03

-125

-115

-105

-95

-85

-75

-65

China (R)

Ballooning Trade Deficit

Total excludingOPEC (L)

Trade deficit$ bil, 12 mo moving sumSource: Census

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-60

-40

-20

0

20

40

60

80

46 51 56 61 66 71 76 81 86 91 96 01

-2

-1

0

1

2State and local government deficitSource: BEA

$ bil (L)

Share of GDP (R)

Ongoing State Budget Woes

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-5

0

5

10

15

20

00 01 02 03

% change year agoSource: Economy.com

What if Jobs Fail to Rebound?

Real cashflow

Real wages and salaries

Real cashflowless wages

Slide 21© 2003 Economy.com

Outlook Summary

• There is substantial optimism regarding the economy's prospects. Demand, production, and even the job market are improving.

• Massive monetary and fiscal stimulus are the principal catalysts for the economic revival.

• The economy is also benefiting as the principal excesses of the late 1990s have been largely worked off and productivity growth remains robust.

• While the economy will come back, it will not coming roaring back. Vehicle and housing demand are spent and household leverage is high. Also weighing on the economy are a struggling global economy and fiscally stressed state governments.

• The recovery will evolve into a self-sustaining rebound only if the recent revival in jobs continues.