“What We’re Watching to Identify the Economic Recovery”

June 3, 2009

Richard Yamarone
Director of Economic Research
Argus Research Corp.
 Hoping for a “V”-Shaped Recovery

Real GDP (%)

10

-2

-4

-6
Source: Bureau of Economic Analysis
-8
'95 '97 '99 '01 '03 '05 '07 '09 F
Leading Indicators Signal Some Degree of Recovery

Leading Economic Indicators

vs. Real GDP Growth (Y/Y%)
GDP
10 10
LEI

8 8

6 6

4 4
-2.5%

2 2

0 0

-2 -2
-3.0%

-4 Source: Bureau of Economic Analysis, The Conference Board, Argus Research Corp. -4
'85 '95 '05
 The Most Convincing Argument of Recovery

ECRI Weekly Leading Index

15

10

-5

10
-10

-15
Source: Bloomberg, ECRI
-20

-25

-30
'99 '01 '03 '05 '07 '09
 Fed Indices Point to More Prosperous Times

Chicago Fed National Activity Index

Three Month Moving Average
1.00

0.50

0.00

-0 50
-0.50

-1.00

-1.50

-2.00

-2.50

-3.00

-3.50 Source: Federal Reserve Bank of Chicago

-4.00
'90 '93 '96 '99 '02 '05 '08
 A-D-S Business Conditions Index Improving

Source: Federal Reserve Bank of Philadelphia

 Anecdotal Reports Starting to Improve
U.S. Average Daily Package Volume UPS
UPS Volume vs. Real GDP Real GDP

7 6

5
5
4

3 3

2
1
1

-1 0
UPS Volume
Real GDP -1
3
-3
-2
Source: United Parcel Service, Bureau of Economic Analysis, Argus Research
-5 -3
2000 2002 2004 2006 2008
 Fiscal Policy Arriving at the Spigots

Direct Outlays, Stimulus Package ($Blns)

250

200

150

Source: CBO
100

50

-50
2009 '10 '11 '12 '13 '14 '15 '16 '17 '18 2019
 Monetary Policy…

Source: Federal Reserve Bank of St. Louis

 Business Investment has Collapsed

Capital Spending (%)

Non-Residential Investment

30

20

10

-10

-20

-30
Source: Bureau of Economic Research

-40
'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08
 Little Reason for Hope in New Orders Data

New Orders
NonDefense Capital Goods Ex-Aircraft (Y/Y%)

24

16

-8
8

-16

-24

-32
Source: Department of Commerce
-40
'94 '96 '98 '00 '02 '04 '06 '08
 Key Index Implying Strong Recovery
ISM New Orders - Inventories vs. Real GDP
NO-I
GD P Y / Y %

25 9

20

15 6

10

5 3

-5 GDP 0
NO-INV
NO INV
-10 Source: B EA , ISM , A rgus Research

-15 -3
1983 1988 1993 1998 2003 2008
Little Need to Build With Glut of Commercial Property

Structures Spending (%)

30

15

-15

-30

Source: Bureau of Economic Analysis

-45

'94 '96 '98 '00 '02 '04 '06 '08

 Signs of Stabilization
New & Existing Home Sales
New Existing

1350
7300

1200 New
Existing
6550
1050

900 5800

750
5050

600

4300
450
Source: US Dept. of Commerce, National Association of Realtors

300 3550
'96 '99 '02 '05 '08
 Home Prices Returning to Pre-Bubble Levels

S&P/Case Shiller Home Price Indices

AZ-Phoenix
300 CA-Los Angeles
CA-San Diego
275 CA-San Francisco
CO-Denver
250
DC-Washington
FL-Miami
225
FL-Tampa

200 GA-Atlanta
IL-Chicago
175 MA Boston
MA-Boston
Source: S&P MI-Detroit
150 MN-Minneapolis
NC-Charlotte
125 NV-Las Vegas
NY-New York
100
OH-Cleveland
OR-Portland
75
TX-Dallas
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09
WA-Seattle
S
Encouraging Signs in the Housing/Construction Market

Architecture Firms' Billing Index

65

60

55

50

45

40

35
Source: American Institute of Architects

30
1996 1998 2000 2002 2004 2006 2008
 “Stimulus” May Help Ailing Construction Sector

Construction Spending (Y/Y%)

30

20

10

-10

Non-Residential
-20
Residential

-30
Source: Department of Commerce

-40
2003 2005 2007 2009
 Trade, the Unsexy Savior
Contribution to GDP
Residential Spending & Trade
3.5
Residential 2.93
3
Trade
2.5 2.18
2 03
2.03
2 1.66
1.5 1.33
0.94 1.05
1 0.77
0.59
0.5
0.09
0
-0.12 -0.15
-0.5 -0.23
-0.6 -0.52 -0.6
-1
1 -0
0.8
8
-0.91
-1.11 -1.06 -1.12
-1.5 -1.18 -1.2
-1.4 -1.33 -1.39
Source: BEA, Argus Research
-2
'06 QI QII QIII QIV '07 QI QII QIII QIV '08 QI QII QIII QIV '09 QI
 Some Recovery in Container Traffic

Outbound Container Statistics (TEU)

Port of Long Beach

170,000

150,000

130,000

110,000

90,000

70 000
70,000
Source: Port of Long Beach

50,000
'95 '97 '99 '01 '03 '05 '07 '09
 Some Signs of Peak in Unemployment
'Jobs Hard-to-Get' &
Unemployment Rate
U Rate Jobs Index

10 50

9
40
8
Jobs Index
30
7

6
20

Unemployment Rate
5

10
4
Source: Conference Board, Bureau of Labor Statistics

3 0
'90 '92 '94 '96 '98 00 '02 '04 '06 '08
Unemployment Benefit Claims Point to Economic Trough

Weekly Initial Claims

700 000
700,000

650,000

600,000
Source: US Department of Labor
550,000

500,000

450 000
450,000

400,000

350,000

300,000

250,000
'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
 Ever-Resilient Consumer Tossed in Towel

Real Consumer Spending (%)

10

Source: Bureau of Economic Aanalysis

-5
1992 1995 1998 2001 2004 2007
 ‘Fab Five’ – Dining Out
Spending: Meals at Other Eating Places (Y/Y% )

-2

4
-4
Source: Bureau Economic Analysis, NBER
-6
'98 '01 '04 '07
 ‘Fab Five’ – Jewelry & Watches
Spending: Jewelry & Watches Y/Y%

16

12

-4

-8

-12
Source: Bureau Economic Analysis, NBER
-16
'98 '01 '04 '07
 ‘Fab Five’ – Cosmetics & Perfumes

Spending: Cosmetics & Perfumes (Y/Y% )

-3

-6

Source: Bureau Economic Analysis, NBER

-9
'98 '01 '04 '07
 ‘Fab Five’ – Women’s Dresses
Spending: Women's Clothing (Y/Y%)

12

10

-2

-4

-6
Source: Bureau Economic Analysis, NBER
-8
'98 '01 '04 '07
 ‘Fab Five’ – Casino Gambling
Spending: Casino Gambling Y/Y%

24

20

16

12

-4

-8

-12
Source: Bureau Economic Analysis, NBER
-16
'98 '01 '04 '07
 ‘Fab Five’ Recovery…

Post Recession, Fab-Five

December 2001=100
145

140

135

130 Dining Out

Perfumes
125
Women's
120 Jewelry
Casino
115

110

105

100

95
Dec 01
Dec-01 Dec 02
Dec-02 Dec 03
Dec-03 Dec 04
Dec-04 Dec 05
Dec-05 Dec 06
Dec-06 Dec 07
Dec-07
 Bad Signs for Summer Spending
Real Spending: Hotels & Motels (Y/Y% )

16

12

-4
4

-8

-12

-16
Source: Bureau Economic Analysis, Argus Research, NBER
-20
'98 '01 '04 '07
Auto Industry is the Wildcard
 America Still Loves Those Trucks
Total Vehicle Assemblies (Mlns)
9 Source: Federal Reserve System
Trucks
8
Autos
7

6
4.12
3.97
5 3.72

4
3.05 3.2
3.11
3
2.52
2 3 72
3.72
3 34
3.34
2.95
1 1.66 1.87 1.84
1.33
0
Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09
 Prices Aren’t
Aren t ‘Collapsing’
Collapsing
The Economist Commodity Price Index

275
All Items
260
Industrials
245 Food
230

215

200
Source: The Economist
185

170

155

140
2005=100
125

110
2/14/2001 2/13/2002 2/12/2003 2/11/2004 2/9/2005
 Market Inflation Expectations Rising

5-Year Treasury Note - Five Year TIPS Spread

3.50

3.00

2.50

2.00

1.50

1.00

0 50
0.50

0.00

-0.50

-1.00

-1.50

-2.00 Source: Federal Reserve Bank of St. Louis, Argus Research

-2.50
2003 2004 2005 2006 2007 2008 2009
Consumer Inflation Expectations on the Rise
Reuters/U. Michigan Inflation Expectations (%)

6.0

5.0

4.0

3.0

2.0

Source: Bloomberg

1.0

0.0
'03 '04 '05 '06 '07 '08 '09
 Broad Inflation Measures Still Elevated
GDP Deflators (%)

-2
PCE Deflator
GDP Deflator
-4
Source: Bureau of Economic Analysis

-6
2004 2005 2006 2007 2008 2009
No ‘Deflation’ in this Respected Measure

Dallas Fed Trimmed-Mean PCE Inflation (Y/Y%)

3.1

2.9

2.7

2.5

2.3

2.1

1.9

1.7
Source: Federal Reserve Bank of Dallas
1.5
'95 '97 '99 '01 '03 '05 '07 '09
Inflation Pressures Appear to be ‘Well-Anchored’…
For Now

Core Personal Consumption Expenditure Deflator

(Y/Y%)

4.5

40
4.0

3.5

3.0

2.5

2.0

1.5 Federal Reserve 'Comfort Zone'

1.0

0.5
Source: Bureau of Economic Analysis, Argus Research
0.0
'90
90 '92
92 '94
94 '96
96 '98
98 '00
00 '02
02 '04
04 '06
06 '08
08
 Monetary Policy Getting Easier Every Month

Real Fed Funds Rate

Core Personal Consumption Deflator (%)

6.0

4.0

2.0

0.0

-2.0
'87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09
 Internal Fed Gauge Implies Fed to Remain on ‘Hold’

Argus Leading Fed Funds Index

FF % Index

9 130
37 16
37.16
8 120
FED FUNDS
ALFFI 110
7
100
6
90
5
80
4
70
3
60
2
50

1 40

0 30
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08
 Risks to “V”-Shaped Recovery…

9 Auto Industry Collapse

9 Commodity (Food), Energy, Healthcare Inflation

9(price
( pass alongs announced during the quarterly
y earning season))

9 Stimulus Fails to Generate Jobs

9 Consumers Decide to Save

9 Jobs Climate Deteriorates Further

 Reasons for Optimism…

9 Massive Monetary Stimulus in Pipeline

9 Large Stimulus of Falling Energy Prices

9 Government Has Approved Whopping Fiscal Spending Program

9 Home Prices Have Returned to Pre-Bubble Levels

9 Frozen Credit Markets Have Thawed Considerably