Copyright © 2007 Global Insight, Inc.

The U.S. Economic OutlookThe U.S. Economic Outlook

Nigel GaultGroup Managing Director

North American Macroeconomic Services

Office of State Management and BudgetAnnual Conference

October 17, 2007Raleigh, North Carolina

Copyright © 2007 Global Insight, Inc. 2 10/2007

0

1

2

3

4

5

6

2004 2005 2006 2007 2008 2009

Real GDP Excl. Residential Fixed Investment Contribution

(Real GDP, annualized rate of growth)

Growth Resilient So Far Despite Housing BustGrowth Resilient So Far Despite Housing Bust

Copyright © 2007 Global Insight, Inc. 3 10/2007

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

1970 1975 1980 1985 1990 1995 2000 2005 2010

(Residential structures investment, percent of GDP)

Residential Construction Adjustment – Residential Construction Adjustment – Much More to ComeMuch More to Come

Copyright © 2007 Global Insight, Inc. 4 10/2007

The Most Overvalued Markets are on the West The Most Overvalued Markets are on the West Coast and in FloridaCoast and in Florida

UNDERVALUED: <-14%FAIRLY VALUED: -14% to 14%MOD. OVERVALUED: >14% to 33%OVERVALUED: >33%

Q2 2007Q2 2007

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Price Declines Widespread in California, Florida, Price Declines Widespread in California, Florida, MichiganMichigan

>-18% to 0%>0% to 5%>5% to 37%

Q2 2007, Q2 2007, annual rateannual rate

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3

4

5

6

7

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9

10

11

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Existing Homes New Homes

Bloated Supplies of Homes for SaleBloated Supplies of Homes for Sale

(Months’ supply at current selling rate, single-family homes)

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1.0

1.2

1.4

1.6

1.8

2.0

2.2

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-15

-10

-5

0

5

10

15

Housing Starts (Left scale) OFHEO House Price Index (Right scale)

(Million units)

Housing Starts Dip Further, Prices to FallHousing Starts Dip Further, Prices to Fall

(Year/year percent change)

Copyright © 2007 Global Insight, Inc. 8 10/2007

(Percent of disposable income)

Mortgage Equity Withdrawal Has Been Fueling Mortgage Equity Withdrawal Has Been Fueling Consumer Spending, and Is FadingConsumer Spending, and Is Fading

0

1

2

3

4

5

6

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8

9

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Net Equity Extraction

Source: Federal Reserve - Kennedy/Greenspan data updated as of September 2007

H1

Copyright © 2007 Global Insight, Inc. 9 10/2007

Some Rebuilding of Savings Is LikelySome Rebuilding of Savings Is Likely

(Percent growth, real)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2004 2005 2006 2007 2008 2009

Real Consumption Real Disposable Income

Copyright © 2007 Global Insight, Inc. 10 10/2007

-25

-20

-15

-10

-5

0

5

10

15

20

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Software & Equipment Buildings

(Percent change from a year earlier, real spending)

The Business Capital Spending Cycle:The Business Capital Spending Cycle:Construction Has Taken the LeadConstruction Has Taken the Lead

Copyright © 2007 Global Insight, Inc. 11 10/2007

U.S. Export Growth Is Catching Up with World U.S. Export Growth Is Catching Up with World Trade Growth — Helped By the Falling DollarTrade Growth — Helped By the Falling Dollar

-8

-4

0

4

8

12

16

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

U.S. Export Growth World Import Growth (Excluding U.S.)

(Percent change, real)

Copyright © 2007 Global Insight, Inc. 12 10/2007

1.0

1.5

2.0

2.5

3.0

2001 2002 2003 2004 2005 2006 2007 2008 2009

Core Consumption (PCE) Price Index

(Ex-food and energy, percent change from a year earlier)

Core Consumer Inflation Falling Below 2%Core Consumer Inflation Falling Below 2%

Copyright © 2007 Global Insight, Inc. 13 10/2007

0

1

2

3

4

5

6

7

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Federal Funds 10-Year Treasury Yield

(Percent)

The Fed Has Room To Cut Interest Rates AgainThe Fed Has Room To Cut Interest Rates Again

Copyright © 2007 Global Insight, Inc. 14 10/2007

(Percent change unless otherwise noted)

U.S. Economic Growth by SectorU.S. Economic Growth by Sector

2006 2007 2008 2009

Real GDP 2.9 2.0 2.0 2.9

Consumption 3.1 3.0 2.3 2.7

Light Vehicle Sales (Millions) 16.5 16.1 16.0 16.3

Residential Investment -4.6 -16.8 -17.9 6.2

Housing Starts (Millions) 1.81 1.34 1.12 1.40

Business Fixed Investment 6.6 3.8 2.4 3.7

Government 1.8 1.9 2.0 0.7

Exports 8.4 7.3 9.5 8.4

Imports 5.9 2.3 3.4 5.2

Copyright © 2007 Global Insight, Inc. 15 10/2007

(Percent unless otherwise noted)

Other Key IndicatorsOther Key Indicators

2006 2007 2008 2009

Employment (Percent growth) 1.9 1.3 0.7 1.2

Unemployment Rate 4.6 4.6 5.0 4.9

CPI Inflation 3.2 2.7 1.8 1.8

Oil Prices (WTI, US$/bbl) 66.12 68.88 74.25 74.33

Core PCE Price Inflation 2.2 2.0 1.7 1.8

Federal Funds Rate 4.96 5.03 4.25 4.57

10-year Government Bond Yield 4.79 4.69 4.58 5.05

Dollar (Major Currencies, 2000=1) 0.81 0.77 0.71 0.71

Copyright © 2007 Global Insight, Inc. 16 10/2007

Bottom LineBottom Line

Sluggish growth at best; housing has further to fall, the consumer will be cautious.

A deeper slowdown is the main risk (recession risk: 30%).

The Fed has room to cut interest rates again.

Downside Risk (1): Credit contagion worsens, spills over more severely to the U.S. and global economies

Downside Risk (2): Vulnerability to another energy shock remains high

Downside Risk (3): Mutual Assured Destruction: Protectionism at home, buyer’s strike against Treasuries by China

Copyright © 2007 Global Insight, Inc. 17 10/2007

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