US Economy Review and ForecastPrepared byE-forecasting.comOctober 27th, 2009

Presentation AgendaOverview of recent US recessionSnapshot of current economic climateFuture outlook thru 2015Q&A

The Recent Economic Episode?A catastrophe ?OrLife as Usual?A Brief Review in Pictures

NYSE Oct 10, 2008 Stocks on free fall

Frankfurt October 10, 2008 European stocks in free fall

Is Capitalism Dead ?

A Global Catastrophe? Business schools have done too little to reform themselves in the light of the credit crunch So what should business schools do?The Economist, Sep 24th 2009

A Global Catastrophe? “More history classes would help. Would-be business titans need to learn that economic history is punctuated with crises and disasters, that booms inevitably give way to busts, and that the business cycle, having survived many predictions of extinction, continues to prey on the modern economy.”

National Business Activity,Since 1880

Stock Market History

Then: 1930s DepressionJuly 9, 1932 was a day Wall Street would never wish to relive. The Dow Jones Industrial Average closed at 41.63, down 91% from its level exactly three years earlier. Total trading volume that day was a meager 235,000 shares. "Brother, Can You Spare a Dime," was one of the top songs of the year. Investors everywhere winced with the pain of recognition at the patter of comedian Eddie Cantor, who sneered that his broker had told him "to buy this stock for my old age. It worked wonderfully. Within a week I was an old man!“New York's Sub-Treasury Building (now Federal Hall National Memorial), in the early 1930s. Hulton Archive/Getty Images

Now: Bailout Proposal Gets Hung Up Over Central Issue: Will It Work?A crowd gathered outside NYSE on Thursday afternoon to protest Bush administration's proposed bailout of Wall Street's missteps in mortgage crisis.WSJ SEPTEMBER 26, 2008

A Bubble is a Bubble, is a Bubble, is a Bubble,………………… Keynes argues that we have a system where speculators seeking short-term gains cause erratic movements in stock prices which leads to unstable investment. “Stock prices, which are partly based on prospective yields on capital, are determined by ‘a large number of ignorant individuals’ and ‘liable to change violently as a result of a sudden fluctuation of opinion due to factors which do not really make a difference to the prospective yield.” (Keynes 1936 p. 150)

A Bubble is a Bubble, is a Bubble, is a Bubble,………………… Keynes contends that these speculators can be seized by fits of optimism or pessimism he terms their ‘animal spirits’ which cause the fluctuations in share prices. This is consistent with the ‘greater fool’ theory of stock prices which states that individuals will buy stocks at perhaps greatly inflated prices as long as they believe that greater fools exist who will pay even more for stocks.

A Bubble is a Bubble, is a Bubble, is a Bubble,………………… During downturns stock prices collapse because there are no fools left to buy shares. Indeed, this behavior characterizes several of the famous speculative bubbles that have occurred throughout history, such as the 1720s South Sea bubble and the 1920s Florida land bubble.

The Drill: Winners & LosersBig stock market bubbles have typically been followed by crashes, then by recessions.During bubble times people’s hopes become unrealistic. The high returns cause people to save less and companies to invest more.

The Drill: Winners & LosersPost-bubble economies are hard to manage. They don’t respond well to falling interest rates.The greater the debt building the worse will be the subsequent pain and the more difficult the subsequent recovery.

Real-Time Look @ Economy NOWWhat is happening RIGHT now with the economyUS monthly GDP, current macro components, policies, etc

Real Time Monthly GDPe-forecasting estimates US monthly GDP increased 1.9% in September to $13,044.5B, after going up 4.6% in AugustAnnual growth rate in the third quarter is estimated to have been 3.6% Six-month growth rate, which signals confirmation of turning points, went up 0.5% in September, first time it is positive since August 08

e-forecasting estimates US monthly GDP increased 1.9% in September to $13,044.5B, after going up 4.6% in August

Annual growth rate in the third quarter is estimated to have been 3.6%

Six-month growth rate, which signals confirmation of turning points, went up 0.5% in September, first time it is positive since August 08

Growth in Monthly GDPLooking @ growth rate, can see depth of recession and current upswingFirst time positive since Aug 08When negative, recession; when positive, expansion23

Historical ViewTaking the current recession in context over a long history, we can see how deep the recession was as well as the length (solid fill)

Q3 will be positiveLooking @ table, we see Q3 as being first month out of recession

What’s Ahead? Focus on manufacturing, inflation, other major factorsGlobal overviewExports/imports outlook

Short-Term Outlook: US LeadUsing leading indicator helps with short-term forecast and turning point identificationUS leading indicator has gone up 6X, growth rate above long-term trend

Short-Term Outlook: USLooking at growth in the US economy, we see a peak then growth to stabilize just under 2% through 2012

US ManufacturingManufacturing hit its bottom and already has started to rebound

US Consumer PricesLook for inflation due to major increases in money supply

US Durable GoodsConsumer expenditures on durable goods will level off near $1 trillion at 2005 constant prices

Trade OutlookExports have hit the bottomReal imports will sharply rebound

Trade Balance OutlookTrade balance of manufactures as percent of GDP will increase through forecast horizon

Monetary Policy on the HorizonLook for the Fed Funds rate to start going North

Global Future OutlookLooking @ major economic blocs and their leading indicators helps give an idea of turning points, which areas suffered more than others and which will come out of recession faster and stronger…

World vs. USThe US moves with the world economy, usually the timing of recessions and peaks are the same

BRIC AttackBRIC continually outperforms the world and is moving out of recession much fasterBRIC only experienced negative growth in the leading indicator for a brief time during last recession

Latin America’s Bumpy RideLatin America’s economy fluctuates much greater than rest of world, still feeling negative effects and in negative territory although improving

Euro vs Non-Euro AreaEuro area mirrors global economy, headed out of recession with the same timing and nearly same degreeNon-Euro area is experiencing more growth than Euro area

Africa & Middle EastAfrica and Middle East moving along with world economy, reaching expansion to a slower degree

Asia PacificAsia Pacific continues to show strength, on par with global recovery, most likely will move past world in next few months

Market Size of Regions

Long-Term Global Forecast

Q&AAny questions, please contact: Maria mesimos@e-forecasting.comThank you!