Putnam Investments | putnam.com We have held a relativ ely upbeat view of U.S. and global economic prospects for 2011 and into 2012 for some time, but no forecast can be held with complete certainty. There is always a chance that things will wo rk out better or worse than one expects, and it is wise to keep an eye on shifting probabilities. There are also dierent ways in which things can go wrong. For example, maybe there are visible clouds on the horizon, and a forecast of some rain, but the rain ends up being heavier than expected. Alternatively , maybe the forecast is for sunny skies, but a storm quickly appears, and all of a sudden it’s raining. The coming withdrawal of monetary stimulus falls into the former category; we knew it was coming, but its eect s may nevertheless be more painful than we imagined. And now a handful of recent events — notably the Japanese earthquake and tsunami, and unrest in the Middle East — f all into the latter category, and these raise some risks for our mildly optimistic outlook, increasing the probability that things will be worse. Oil is trending dangerously high The most obvious way in which these events matter for the U. S. outlook is via oil prices. Oil is now trading at over $100/bbl and, perhaps more to the point, average retail gasoline prices in the United States are now over $3. 50/ gallon. In parts of California, the $4.00/gallon barri er has been broken. The price of gasoline matters for the United States because of its role in household budgets. Most U.S . households buy more or less the same amount of gasoline every week; lacking transportation options, they need thei r vehicles to commute to w ork. So they see the impact of higher gasoline prices immediately. • Beyond $120/bbl, oil poses a distinct threat • Mideast turmoil and the Japanese recovery are both applying pressure • The Fed is exiting markets at a delicate moment April 2011 » Putnam perspectives Risks to the recovery Michael J. Atkin Director of Sovereign Research
