Principal Global Investors

The Lowdown on the SlowdownBOB BAUR, PHD

CHIEF GLOBAL ECONOMISTOctober 2010

All expressions of opinion and predictions in this report are subject to change without notice. This report is not intended to be, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. All opinions expressed are those of Principal Global Investors.

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But, Is That the Whole Story?

•How we got here

•Moderate economic recovery

•Main risk: uncertain tax, regulatory environment

•Despite problems, odds of a double-dip are low

3

Financial Crisis Hits Economy…

Real GDP during Recessions and Beyond

95%

96%

97%

98%

99%

100%

101%

102%

103%

Peak Quarter 4 8

1973-19751981-19821990-19912001 2008-2009

Full Recovery

Source: Bureau of Economic Analysis, U.S. Dept. of Commerce, Principal Global Investors

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And Employment

Job Losses during Recessions and Beyond

94.0%

95.0%

96.0%

97.0%

98.0%

99.0%

100.0%

101.0%

Peak Month Year One Year Two

1973-1975

1981-1982

1990-1991

2001

2008-2009

Source: Bureau of Labor Statistics, U.S. Dept. of Labor, Principal Global Investors

5

Great Start to Recovery

Industrial Production from Recession Trough

99%

101%

103%

105%

107%

109%

111%

113%

115%

Trough Month Year One

Nov-70

Mar-75

Nov-82

Mar-91

Nov-01

Jun-09

Source: Federal Reserve, Principal Global Investors

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Moderate Economic Growth

Real GDP from Recession Trough

100%

102%

104%

106%

108%

110%

Trough Quarter 2 4 6

Q4 1970

Q1 1975

Q4 1982

Q1 1991

Q4 2001

Q2 2009

Source: Bureau of Economic Analysis, U.S. Dept. of Commerce, Principal Global Investors

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Job Doldrums

Job Growth from Recession Trough

98%

99%

100%

101%

102%

103%

104%

105%

106%

Trough Month Year One Year Two

Nov-70

Mar-75

Nov-82

Mar-91

Nov-01

Jun-09

Source: Payroll Survey, Bureau of Labor Statistics, U.S. Dept. of Labor, Principal Global Investors

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Moderate Recovery Continues

• In the Euro area…– More resilient than believed

• Surveys show expansion

• German export engine revving

• Industrial production rising

– Fiscal austerity may help

– Growth slows, but double-dip appears unlikely

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China Driving Growth

• In emerging markets…– 35% of global GDP

– Growing fast

•China growth decelerating– Likely to remain 8% or more

– Wages rising fast

– Consumer spending stronger

– Policy loosening at margin

– More infrastructure funding

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In the United States

• Momentum turned down

• But many positives– Rising income supports consumer spending

– Huge profits lead to strong investment

– Exports growing fast

– Loan demand, credit availability rising

– U.S. financial crisis gradually abating

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What Happened?

•The 3G problem:– Growth slowed

• Business pumped up output…then turned cautious

– Greece debt

• Another financial crisis?

– Government policy uncertainty

• Intrusive regulation, burdensome taxes, record deficits

•Fear returned– Stock market plunge can be self-fulfilling

– Confidence markets economy

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The Main Risk

•Poor policy– Incentives matter

• High taxes suppress jobs, investment

• Excessive regulation raises costs, reduces supply

• Uncertainty keeps business cautious

– Reduces potential growth

•Pro-growth policies needed

13

Double-Dip Ahead?

•Odds don’t seem high– Double-dips rare

– Decelerating growth is natural

– Stocks not expensive

– Yield curve steep

– Bond market performing

– Job market improving

– Euro bailout big enough

– Emerging market story…soooo not over

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U.S. Investment Themes

•Growth is good for stocks– Emerging market consumers

– U.S. growth, large cap, dividend payers

•Absent a market collapse…– Inflation likely bottoming

– Rising interest rate environment

– Corporate vs. sovereign bonds

•Commercial real estate trough

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The information in this document has been derived from sources believed to be accurate as of September 2010. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however we do not independently verify or guarantee its accuracy or validity.

The information in this document contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The general information it contains does not take account of any investor's investment objectives, particular needs or financial situation. Nor should it be relied upon in any way as forecast or guarantee of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice.

Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions in this document.

 All figures shown in this document are in U.S. dollars unless otherwise noted.

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