The Economic Outlook:

Driving In Low Gear

Beth Ann Bovino Deputy Chief Economist Global Fixed Income Research Dec. 4, 2012 Data as of Nov. 27, 2012

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The Pace Of The Recovery Has Improved

Into its fourth year, the recovery has improved but headwinds remain. Consumers are more willing to open up their checkbooks Housing now appears to be stabilizing, and prices likely bottomed. Dollar weakness had helped exports Overseas partners have slowed, hurting exports. The financial problems

in Europe and the earthquake and subsequent nuclear problems in Japan add to risks from overseas.
The fiscal stimulus helped boost the economy, but is being reversed.

U.S. government inaction increases risk of austerity by default in 2013

Private nonresidential cornstruction is still weak Another recession is possible if the European debt crisis spreads to the

U.S., theres sharp near-term austerity at home, if financial markets lock up again, or oil prices spike on Middle East turmoil.
The risk of another recession is now 15% to 20%

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2.

The Housing Market Cycle

(Housing starts (1000) and 12-month % change in home prices (S&P/Case-Shiller, September 2012)

2,500 2,000 1,500 1,000 500 0 1992

30 20 10 0 -10 -20 1995

Starts

1998

2001

2004

2007

2010

Home prices (%chya, right)

Source: Standard & Poors and Census Bureau Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors.

3.

Fewer People Out Of Jobs, But Fewer People Looking.

%
12.0 68.0

66.0 10.0 64.0 8.0 62.0

6.0

60.0

58.0 4.0 56.0 2.0 54.0

0.0

52.0

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Unemployment Rate
Labor Force Statistics from the BLS Current Population Survey

Labor Force Participation Rate

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4.

2012

Unemployment Rates Are Not Declining Everywhere

Source: BLS Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors.

5.

Equipment Spending Follows Capacity Needs

(4-quarter percent change, and production as % of capacity)
20%

(Percent)

85

10%

80

0%

75

-10%

70

-20%

65

-30% 2000

60 2002 2004 2006 2008 2010 2012 2014

Business equipment (real, left scale)

Capacity Utilization, mfg (Right)

Source: Federal Reserve, Bureau of Economic Analysis, S&P Economics Projections Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors.

6.

The Impact Of the Fiscal Cliff On Growth

(Real GDP growth, annualized)
6 3 0 -3 -6 -9 -12 2007Q1

2008Q3

2010Q1 Baseline

2011Q3

2013Q1

2014Q3

2016Q1

2017Q3

Over Cliff

Source: Standard & Poors and Census Bureau Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors.

7.

The Future Looks Bleak

(Government debt as % of GDP)
800 700 600 500 415 400 308 300 200 100 0 US Japan 2010
Source: Standard & Poors, 2010 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors.

753

431

404

400

180 69 106 72

192 79

184 75

155

UK 2030

France

Germany 2050

8.

Aging Populations Will Boost Government Spending

(Retirees as percentage of labor force)
80 70 60 50 40 30 20 10 0 US Canada France Germany Italy 2010
Source: Organization for Economic Cooperation and Development Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors.

UK

Japan Australia China OECD 2030

9.

Bottom Line: The Economy Will Recover Slowly

The recession was the longest and deepest since the 1930s Fiscal stimulus has supported the recovery But recovery is likely to be slow because of financial markets

and switch to higher savings

If financial markets lock up again Fiscal stimulus ends abruptly Home prices continue to fall And oil prices continue to rise The recession could be longer and deeper With the risk of a lost decade similar to Japan in the 1990s

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10.

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