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Greater Uncertainty Threatens Expansion

The document discusses the state of the U.S. economy and interest rate outlook in August 2011. It notes that greater uncertainty threatens economic expansion due to inflation hurting demand, supply chain issues from Japan, and weak confidence from unemployment and fiscal policy issues. Key risks include financial market volatility and unfavorable fiscal situations in Europe and the Middle East. Continued government support and contained oil prices are key to maintaining the expansion. Housing and employment remain weak areas and the federal budget committee must address deficit issues.

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Greater Uncertainty Threatens Expansion U.S. Economic Assessment & Interest Rate Outlook August 18, 2011 GE Capital, Americas Robert Podorefsky (617) 973-4091 1/ GE / August 17, 2011
U.S. economy weakens …… Amid uncertainty and more policy risk Extraordinary factors contributed •• Inflation hurt demand, shortages from Japan impacted manufacturing, Q1 weather disrupted comps while unemployment and Washington’’s messy budget handling weakened confidence Key downside risk - financial market developments •• Market volatility –– raises business & consumer anxiety •• Unfavorable fiscal/geopolitical considerations –– Europe, Mid-East Key to maintaining expansion •• Continued government backstop ideology, contained oil prices Key challenges •• Housing sector and employment situation remain weak •• Federal budget ‘‘super committee’’ must find solutions to deficit 2/ GE / August 17, 2011
Watch the negative equity drivers …… Monthly Change in S&P 500 Equity Index U.S. household wealth fell $1.3 tn in Q2 '10, then up $4.0 tn thru Q1 '11 100 75 50 25 0 Australia -25 Up 30% thru Apr 30 began to China -50 after Bernanke tighten began to outlined "options for -75 tighten further easing" on -100 Fiscal & economic worries Aug 27, '10 -125 Apr May Jun Jul Aug Sep Oct Nov Dec Jan '10 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan '11 Feb Mar Apr May Jun Jul Aug so far Data source: Bloomberg and Federal Reserve 3/ GE / August 17, 2011
Parallel crises dominate while impact varies …… Total Marketable Sovereign Debt in trillions of U.S. dollars 10 % of total that comes due through 2013 $9.34 Ireland = 18% Portugal = 32% 8 Greece = 33% Spain = 41% Italy = 36% 6 United States = 46% 4 $2.28 2 $0.92 $0.13 $0.20 $0.42 0 Ireland Portugal Greece Spain Italy United States Data source: Bloomberg 4/ GE / August 17, 2011
Messy deficit debate dispirits the nation …… U.S. Federal Budget Gap 3.9 Gov't Spending in $Tn's Gov't Revenues in $Tn's 3.3 Fiscal year 2010 2.8 Outlays = $3.45 tn Revenues = $2.16 tn Deficit = $1.29 tn 2.2 1.7 1.1 White House estimate 2011 0.6 Data source: Outlays = $3.82 tn U.S. Treasury Revenues = $2.17 tn 0.0 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 5/ GE / August 17, 2011
U.S. rate structure benefits significantly …… U.S. Treasury Yields Compared Aug 16, 2011 Dec 31, 2010 4.33% 4.5% 3.67% 3.29% 2.22% 3.0% 2.01% 0.93% 1.5% 0.59% 0.12% 0.18% 0.01% 0.0% 3-month 2-year 5-year 10-year 30-year Data source: Bloomberg 6/ GE / August 17, 2011
Public debt surged, will keep rising yet rates fell …… Marketable Treasury Debt Outstanding - $'s Tn's (left axis) 5-yr U.S. Treasury yield (right axis) Fed tightened 9.4 Since Q4 '07 6.5% The debt's more Fed tightened than doubled 5.5% 7.3 4.5% 5.2 3.5% 2.5% 3.2 1.5% 1.1 0.5% Aug-98 Nov-01 Feb-05 May-08 Aug-11 Data sources: U.S. Treasury and Bloomberg 7/ GE / August 17, 2011
In ’’10, less inflation eased transition to lower rates …… Headline U.S. CPI yoy (left axis) Core U.S. CPI yoy (right axis) 5.6% (June '11) 2.5% Headline: 3.6% yoy 4.0% Core: 1.6% yoy - highest since Jan '10 1.9% 2.5% 1.0% 1.2% -0.6% -2.1% 0.6% Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Data source: Bureau of Labor Statistics 8/ GE / August 17, 2011
In ’’11, a complex path to lower rate expectations …… Expectation for 3m Libor - June 2013 3m U.S. Libor 3.0% Apr: Europe's debt crisis worsens May & June: Weaker U.S. economic data 2.5% July: U.S. budget impasse Mar 11: Tsunami Apr 18: Jul 8: June U.S. 2.0% devastates S&P lowered employment data Japan its long-term May 2: disappoints U.S. ratings Oil falls Jul 29: 1.5% outlook to Q2 U.S. GDP after bin negative Laden's disappoints 1.0% death Aug 9: FOMC says conditions warrant an exceptionally low fed 0.5% funds rate through mid -2013 Data source: Bloomberg 0.0% Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 9/ GE / August 17, 2011
Disinflation ends. Commodity surge hits a wall …… CRB Commodty Price Index 417 flat y-t-d- in 2011 as of Aug 17 up 17% in 2010 End May '10 - end up 23% in 2009 Apr '11, + 45% down 36% in 2008 338 Since Apr '11 CRB - 10% 259 Live cattle: + 29% - 1% Crude oil: + 54% - 23% Wheat: + 68% - 5% Corn: + 110% - 5% Cotton: + 123% - 39% 180 Data source: Aug-08 Mar-09 Oct-09 May-10 Dec-10 Aug-11 Bloomberg 10 / GE / August 17, 2011
Watch gasoline, price direction reflects outlook …… Avg U.S. retail gasoline price per gallon (right axis) Wholesale gasoline - Nymex price (left axis) 3.50 4.10 3.00 3.60 2.50 3.10 2.00 2.60 1.50 2.10 1.00 0.50 1.60 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Data source: Nymex and DOE 11 / GE / August 17, 2011
Extraordinary stimulus remains key policy stance …… FOMC Statement –– August 9th •• Inflation: ““Recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable”” •• Economic conditions: ““Somewhat slower pace of recovery”” is expected over coming quarters compared to previous (June) estimates. ““Downside risks to the economic outlook have increased”” •• Policy: Economic conditions are likely to warrant an ““exceptionally low”” fed funds rate ““at least through mid-2013”” 12 / GE / August 17, 2011
Expectations for Libor fall dramatically …… Expectation for 3m U.S. Libor implied yield per futures market 17-Aug-11 31-Mar-11 31-Dec-10 with December with December 5.17% implied yields implied yields 4.92% 5.0% 4.50% 3.85% 4.0% 3.61% 3.00% 3.18% 3.0% 2.53% 1.95% 2.0% 1.70% 0.61% 0.49% 0.85% 1.0% 0.46% 0.0% Sep '11 Dec '11 Mar '12 Jun '12 Sep '12 Dec '12 Mar '13 Jun '13 Sep '13 Dec '13 Mar '14 Jun '14 Sep '14 Dec '14 Mar '15 Jun '15 Sep '15 Dec '15 Mar '16 Jun '16 Sep '16 Dec '16 Mar '17 Jun '17 Sep '17 Dec '17 Data source: Bloomberg 13 / GE / August 17, 2011
Pass-through inflation pressures muted overall …… Consumer Price Index (yoy) 10.0% Producer Price Index (yoy) 7.0% 4.0% 1.0% -2.0% -5.0% Data source: -8.0% Bureau of Jun-91 Jun-95 Jun-99 Jun-03 Jun-07 Jun-11 Labor Statistics 14 / GE / August 17, 2011
Easing in gov’’t interest expense won’’t last …… U.S. Public Debt ($ Tn's) - left axis Interest Expense ($ Bn's) - right axis 15 Fiscal 2007 - 2010 460 Public debt: + 51% 13 Annual interest expense: - 4% 420 11 380 9 340 7 5 300 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (*) Data source: U.S. Treasury (*) Fiscal 2011: (based on Oct '10 - July '11 actual data plus estimate) 15 / GE / August 17, 2011
But interest burden is still very manageable …… U.S. Gov't Interest Expense as a Percent of Nominal GDP Fiscal Year (Sept) Comparison 4.7% 4.2% (*) 2011 Estimate - End Sept '11: 3.6% Nominal GDP = $15.083 Tn Interest expense = $462.5 Bn 3.1% 2.5% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (*) Data sources: U.S. Treasury and Bureau of Economic Analysis 16 / GE / August 17, 2011
Fortunately, foreign demand for Treasurys holds up …… Foreign Holdings of U.S. Treasurys in trillions of dollars 4.52 Up 11% yoy Jun (*) vs Up 20% in '10 3.80 vs Up 20% in '09 3.08 2.36 1.64 Top 2 Foreign Holders as of June '11 1. China @ $1,166 bn, + 5% yoy - was + 71% yoy in Jul '09 2. Japan @ $911 bn, + 14% yoy - was + 22% yoy in Dec '09 0.92 Oct-01 Oct-03 Aug-05 Aug-07 Jul-09 Jun-11 Data source: U.S. Treasury 17 / GE / August 17, 2011
Economic composition –– U.S. GDP …… Gov't Q2 2011 U.S. spending, Real GDP 18.9% vs 18.4% Breakout Q4 '07 Net exports, -3.1% vs -4.2% Q4 '07 Private investment, 13.4% vs 15.9% Q4 '07 Personal consumption, 70.7% vs 70% Data source: BEA Q4 '07 18 / GE / August 17, 2011
Consumption trend has stalled …… U.S. Real Personal Consumption Expenditures yoy change 3-month change - annualized 4.3% 3.3% 2.3% 1.3% 0.3% -0.7% -1.7% -2.7% Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Data source: Bureau of Economic Analysis 19 / GE / August 17, 2011
Amid unimpressive payroll gains …… Monthly Change in Private Payrolls Monthly Change in Nonfarm Payrolls in 000's 460 Past 12 months 242 23 -195 -413 Private: + 1.8 mn Headline: + 1.3 mn -632 Data source: Bureau of Labor Statistics -850 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 20 / GE / August 17, 2011
While income improved, inflation saps wages …… U.S. Personal Income (yoy) Real Personal Income Less Transfer Payments (yoy) Real Wages (yoy) 7.0% 5.0% 3.0% 1.0% -1.0% -3.0% -5.0% -7.0% Data source: Bureau of Economic Analysis -9.0% Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 21 / GE / August 17, 2011
Watch import prices from China …… U.S. Import Prices from China 6% y-o-y change July '11 4% +3.5% yoy 2% Through early '07, the U.S. imported deflation from China 0% -2% -4% Aug-05 Feb-07 Aug-08 Jan-10 Jul-11 Data source: Bureau of Labor Statistics 22 / GE / August 17, 2011
Consumers take on some more borrowing …… U.S. Consumer Credit, Ex-Real Estate ($ Bn's) 20 3-Month Average Largest increase Monthly Change in 4 years 10 0 -10 -20 Data source: Federal Reserve Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 23 / GE / August 17, 2011
Investment growth trend is moderating …… Change in Real Private Business Investment Quarterly outcome - annualized Half year outcome - annualized 18% 8% -2% -12% -22% -32% -42% Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Data source: Bureau of Economic Analysis 24 / GE / August 17, 2011
Key ‘‘services’’ sector gauge signals modest growth …… ISM non-manufacturing index (left axis) Non-manufact employment sub-index (right axis) 60 56 54 above 50 (left axis index) signals 49 service sector expansion 48 43 42 36 36 30 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Data source: Bloomberg 25 / GE / August 17, 2011
While manufacturing sector expansion slows …… ISM manufacturing index (left axis) Prices paid for purchases (right axis) 62 92 July 50.9 above 50 signals 55 expansion 67 47 41 40 32 16 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Data source: Bloomberg 26 / GE / August 17, 2011
Amid auto production adjustment …… US Capacity Utilization - left axis Cap U for Motor Vehicles - right axis 79% 68% 73% 49% 67% 30% Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Data source: Federal Reserve 27 / GE / August 17, 2011
Overall business inventory backdrop is favorable …… U.S. Inventory-to-Sales Ratio 1.72 number of months 1.59 Q1 '09 1.46 1.33 = Worst of U.S. recession Q1 '11 1.20 May-82 Aug-89 Nov-96 Feb-04 Jun-11 Data source: U.S. Commerce Dept 28 / GE / August 17, 2011
As is backdrop for private credit expansion …… Commercial and Industrial Loans at U.S. Commercial Banks 1.7 in trillions of dollars 1.5 - Oct '08 peak: $1.62 tn - Most recent: $1.28 tn 1.3 Decrease: $340 bn 1.1 Since post crisis low in 0.9 Sep '10, Fed tightening cycle began up $70 bn 0.7 Fed tightening cycle began 0.5 Dec-90 Jan-95 Mar-99 Apr-03 Jun-07 Aug-11 Data source: Federal Reserve 29 / GE / August 17, 2011
Still dealing with residential mortgage burden …… U.S. Residential Mortgages Outstanding in trillions of dollars Peak: 10.6 tn 10.7 Q1 '08 10.0 tn 8.0 8.0 tn 6.0 tn 5.3 Q3 '01 Q4 '98 2.7 0.0 Mar-80 Dec-87 Sep-95 Jun-03 Mar-11 Data source: Federal Reserve 30 / GE / August 17, 2011
And too many homes …… Ratio of U.S. Existing Housing Units to Number of U.S. Households 1.110 1.105 1.100 1.095 1.090 1.085 1.080 1.075 1.070 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (*) 2011 (*) (*) 2010 & 2011 estimated Data source: U.S. Census Bureau. Estimates based on Census Bureau and nielsenw ire 31 / GE / August 17, 2011
Causing home prices to fall …… U.S. Home Prices are 3% Below the 5-Year Average and 20% Below July '06 Peak 231 Single Family Home Prices in $000's - Past 30 years, prices averaged 8% above the 5-year average 154 - In June 2005, prices exceeded the 5- year average by 33% 77 Median Home Prices Data source: Nat'l Association of Realtors 5 year moving average 0 Jul-69 Jan-80 Jul-90 Dec-00 Jun-11 32 / GE / August 17, 2011
In all, some moderate growth still expected …… U.S. Real GDP (*) Bloomberg 1 year average consensus forecasts 4.0% 1.3% (Aug 12 survey) in Q2 % % % % 2.2 2.5 2.5 2.1 0.8% -2.5% -5.8% -9.0% Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Q4 '09 Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 * Q4 '11 * Q1 '12 * Q2 '12 * Data source: Bureau of Economic Analysis 33 / GE / August 17, 2011
In summary Near-term - 2011 & 2012 •• Policymakers focus on boosting near-term dynamics •• U.S. real GDP subject to energy and equity prices •• Equities vulnerable to extraordinary uncertainties •• Fed’’s key focus is jobs - watch employment data Beyond the moment •• Budget deficit will force tough decisions on spending and taxes •• Deeper fiscal erosion has risky inflation consequences •• Less stimulus does not have to derail growth 34 / GE / August 17, 2011
Appendix Answers to some recently asked questions 35 / GE / August 17, 2011
Magnitude of U.S. fiscal deterioration post crisis …… Fiscal '10 Fiscal '08 Peak Key budget receipts: Individual Income Tax * $ 899 bn $ 1,146 bn $ 1,163 bn '07 Corporate Income Tax $ 191 bn $ 304 bn $ 370 bn '07 Key budget outlays: Defense-Military $ 667 bn $ 595 bn Fiscal '10 Health & Human Services $ 854 bn $ 701 bn Fiscal '10 Interest on Treas Debt $ 414 bn $ 451 bn $ 451 bn '08 Dept of Labor $ 173 bn $ 59 bn Fiscal '10 Social Security $ 754 bn $ 658 bn Fiscal '10 Data source: www.fms.treas.gov 36 / GE / August 17, 2011
How fiscal 2011 is shaping up for the US …… Individual income tax receipts up, corporate tax receipts near flat and total outlays higher First 10 months of Fiscal ’’10 & ’’11 compared –– through July Fiscal 2011 Fiscal 2010 Total receipts (*): $1.893 Tn $1.753 Tn Total outlays: $2.993 Tn $2.922 Tn Deficit: $1.100 Tn $1.169 Tn (*) includes: Indiv. income tax receipts: $0.891 Tn $0.719 Tn Corp. income tax receipts: $0.141 Tn $0.140 Tn Data source: www.fms.treas.gov 37 / GE / August 17, 2011
Average maturities for Treasury debt are rising …… Average Maturity of Total Outstanding Marketable U.S. Treasury Debt - in months past 10 years 72 Recent Comparison Jun '08: 56 months Jun '09: 51 months 64 Jun '10: 58 months Jun '11: 62 months 56 Data source: U.S. Treasury 48 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 38 / GE / August 17, 2011
FOMC’’s views on a normalization policy …… Per Minutes of the June 21-22 FOMC Meeting 1st step –– FOMC would likely first cease reinvesting some or all payments of maturing principal on its securities holdings 2nd step –– At the same time or thereafter, the FOMC will modify its forward guidance on the path of the federal funds rate and will initiate temporary reserve-draining operations. 3rd step –– When economic conditions warrant, the FOMC will begin raising its target fed funds rate, and from that point on, changing the target rate will be the primary means of adjusting monetary policy. During the normalization process, adjustments to interest rates on excess reserves and to the level of reserves will be used 4th step –– Sales of agency securities from the Fed’’s balance sheet will likely begin sometime after the 1st fed funds rate increase 39 / GE / August 17, 2011
After QE2, no buying & run-off would look like this …… Fed's Balance Sheet - U.S. Treasury Holdings (*) Maturing Treasury Debt ($ Bn's) - left axis $'s Bn Potential Treasury Balance ($ Tn's) - right axis $'s Tn 180 1.65 1.45 150 Fed's Treasury balance Now: $1.63 Tn 1.25 120 1.05 With run-off & no adds End 2018: $460 Bn .85 90 (*) Includes Bills, Notes, .65 Bonds and TIPS 60 .45 .25 30 .05 0 -.15 mid-2011 2011 2012 2013 2014 2015 2016 2017 2018 Data source: Federal Reserve & N.Y.Fed 40 / GE / August 17, 2011
State & local government tax receipts edge higher …… State & Local Tax Revenues Total: 4-qtr avg, annualized in Tn's (left axis) Individual income tax: 4-qtr avg, annualized in Bn's (right axis) $1.32 $310 $1.27 $295 $1.22 $280 $1.17 $265 $1.12 $250 $1.07 $1.02 $235 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Data source: U.S. Census Bureau 41 / GE / August 17, 2011
Disclaimer Disclaimer: This report is for information purposes only and is not intended as an offer, solicitation, or recommendation for the purchase or sale of a financial instrument or to effect a transaction. The information contained within this report has been obtained from and is based upon sources believed to be reliable. General Electric Capital Corporation and any of its affiliates (collectively ““GECC””) do not guarantee the accuracy or completeness of the information and make no express or implied representations, but reasonable steps have been taken to determine the accuracy and completeness of the information. All opinions, projections and estimates constitute the judgment of the author as of the date of the report and are subject to change without notice. Market rates, valuations and availability of financial instruments also are subject to change without notice. Nothing contained within the materials constitutes financial, legal, tax, accounting or other advice, nor should any investment or any other decisions be made solely based on this report. You should obtain advice from qualified experts before making any investment decision. The GECC Interest Rate Management Team (““IRM””) acts solely in the role of an arranger for interest rate management transactions, and is not and makes no representations to being an agent for or advisor to any party involved, nor does IRM have any reporting, fiduciary or financial obligations to the parties. This research report is produced separately from any other activity of GECC and was completed without access to non-public information that may have been received by other units of GECC. This report may not be reproduced or redistributed in any form without prior written permission from GECC. The use of this report in connection with the writing, marketing or promotion of any financial instruments, services or products is prohibited. 42 / GE / August 17, 2011

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Greater Uncertainty Threatens Expansion

  • 1.
    Greater Uncertainty ThreatensExpansion U.S. Economic Assessment & Interest Rate Outlook August 18, 2011 GE Capital, Americas Robert Podorefsky (617) 973-4091 1/ GE / August 17, 2011
  • 2.
    U.S. economy weakens…… Amid uncertainty and more policy risk Extraordinary factors contributed •• Inflation hurt demand, shortages from Japan impacted manufacturing, Q1 weather disrupted comps while unemployment and Washington’’s messy budget handling weakened confidence Key downside risk - financial market developments •• Market volatility –– raises business & consumer anxiety •• Unfavorable fiscal/geopolitical considerations –– Europe, Mid-East Key to maintaining expansion •• Continued government backstop ideology, contained oil prices Key challenges •• Housing sector and employment situation remain weak •• Federal budget ‘‘super committee’’ must find solutions to deficit 2/ GE / August 17, 2011
  • 3.
    Watch the negativeequity drivers …… Monthly Change in S&P 500 Equity Index U.S. household wealth fell $1.3 tn in Q2 '10, then up $4.0 tn thru Q1 '11 100 75 50 25 0 Australia -25 Up 30% thru Apr 30 began to China -50 after Bernanke tighten began to outlined "options for -75 tighten further easing" on -100 Fiscal & economic worries Aug 27, '10 -125 Apr May Jun Jul Aug Sep Oct Nov Dec Jan '10 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan '11 Feb Mar Apr May Jun Jul Aug so far Data source: Bloomberg and Federal Reserve 3/ GE / August 17, 2011
  • 4.
    Parallel crises dominatewhile impact varies …… Total Marketable Sovereign Debt in trillions of U.S. dollars 10 % of total that comes due through 2013 $9.34 Ireland = 18% Portugal = 32% 8 Greece = 33% Spain = 41% Italy = 36% 6 United States = 46% 4 $2.28 2 $0.92 $0.13 $0.20 $0.42 0 Ireland Portugal Greece Spain Italy United States Data source: Bloomberg 4/ GE / August 17, 2011
  • 5.
    Messy deficit debatedispirits the nation …… U.S. Federal Budget Gap 3.9 Gov't Spending in $Tn's Gov't Revenues in $Tn's 3.3 Fiscal year 2010 2.8 Outlays = $3.45 tn Revenues = $2.16 tn Deficit = $1.29 tn 2.2 1.7 1.1 White House estimate 2011 0.6 Data source: Outlays = $3.82 tn U.S. Treasury Revenues = $2.17 tn 0.0 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 5/ GE / August 17, 2011
  • 6.
    U.S. rate structurebenefits significantly …… U.S. Treasury Yields Compared Aug 16, 2011 Dec 31, 2010 4.33% 4.5% 3.67% 3.29% 2.22% 3.0% 2.01% 0.93% 1.5% 0.59% 0.12% 0.18% 0.01% 0.0% 3-month 2-year 5-year 10-year 30-year Data source: Bloomberg 6/ GE / August 17, 2011
  • 7.
    Public debt surged,will keep rising yet rates fell …… Marketable Treasury Debt Outstanding - $'s Tn's (left axis) 5-yr U.S. Treasury yield (right axis) Fed tightened 9.4 Since Q4 '07 6.5% The debt's more Fed tightened than doubled 5.5% 7.3 4.5% 5.2 3.5% 2.5% 3.2 1.5% 1.1 0.5% Aug-98 Nov-01 Feb-05 May-08 Aug-11 Data sources: U.S. Treasury and Bloomberg 7/ GE / August 17, 2011
  • 8.
    In ’’10, lessinflation eased transition to lower rates …… Headline U.S. CPI yoy (left axis) Core U.S. CPI yoy (right axis) 5.6% (June '11) 2.5% Headline: 3.6% yoy 4.0% Core: 1.6% yoy - highest since Jan '10 1.9% 2.5% 1.0% 1.2% -0.6% -2.1% 0.6% Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Data source: Bureau of Labor Statistics 8/ GE / August 17, 2011
  • 9.
    In ’’11, acomplex path to lower rate expectations …… Expectation for 3m Libor - June 2013 3m U.S. Libor 3.0% Apr: Europe's debt crisis worsens May & June: Weaker U.S. economic data 2.5% July: U.S. budget impasse Mar 11: Tsunami Apr 18: Jul 8: June U.S. 2.0% devastates S&P lowered employment data Japan its long-term May 2: disappoints U.S. ratings Oil falls Jul 29: 1.5% outlook to Q2 U.S. GDP after bin negative Laden's disappoints 1.0% death Aug 9: FOMC says conditions warrant an exceptionally low fed 0.5% funds rate through mid -2013 Data source: Bloomberg 0.0% Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 9/ GE / August 17, 2011
  • 10.
    Disinflation ends. Commoditysurge hits a wall …… CRB Commodty Price Index 417 flat y-t-d- in 2011 as of Aug 17 up 17% in 2010 End May '10 - end up 23% in 2009 Apr '11, + 45% down 36% in 2008 338 Since Apr '11 CRB - 10% 259 Live cattle: + 29% - 1% Crude oil: + 54% - 23% Wheat: + 68% - 5% Corn: + 110% - 5% Cotton: + 123% - 39% 180 Data source: Aug-08 Mar-09 Oct-09 May-10 Dec-10 Aug-11 Bloomberg 10 / GE / August 17, 2011
  • 11.
    Watch gasoline, pricedirection reflects outlook …… Avg U.S. retail gasoline price per gallon (right axis) Wholesale gasoline - Nymex price (left axis) 3.50 4.10 3.00 3.60 2.50 3.10 2.00 2.60 1.50 2.10 1.00 0.50 1.60 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Data source: Nymex and DOE 11 / GE / August 17, 2011
  • 12.
    Extraordinary stimulus remainskey policy stance …… FOMC Statement –– August 9th •• Inflation: ““Recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable”” •• Economic conditions: ““Somewhat slower pace of recovery”” is expected over coming quarters compared to previous (June) estimates. ““Downside risks to the economic outlook have increased”” •• Policy: Economic conditions are likely to warrant an ““exceptionally low”” fed funds rate ““at least through mid-2013”” 12 / GE / August 17, 2011
  • 13.
    Expectations for Liborfall dramatically …… Expectation for 3m U.S. Libor implied yield per futures market 17-Aug-11 31-Mar-11 31-Dec-10 with December with December 5.17% implied yields implied yields 4.92% 5.0% 4.50% 3.85% 4.0% 3.61% 3.00% 3.18% 3.0% 2.53% 1.95% 2.0% 1.70% 0.61% 0.49% 0.85% 1.0% 0.46% 0.0% Sep '11 Dec '11 Mar '12 Jun '12 Sep '12 Dec '12 Mar '13 Jun '13 Sep '13 Dec '13 Mar '14 Jun '14 Sep '14 Dec '14 Mar '15 Jun '15 Sep '15 Dec '15 Mar '16 Jun '16 Sep '16 Dec '16 Mar '17 Jun '17 Sep '17 Dec '17 Data source: Bloomberg 13 / GE / August 17, 2011
  • 14.
    Pass-through inflation pressuresmuted overall …… Consumer Price Index (yoy) 10.0% Producer Price Index (yoy) 7.0% 4.0% 1.0% -2.0% -5.0% Data source: -8.0% Bureau of Jun-91 Jun-95 Jun-99 Jun-03 Jun-07 Jun-11 Labor Statistics 14 / GE / August 17, 2011
  • 15.
    Easing in gov’’tinterest expense won’’t last …… U.S. Public Debt ($ Tn's) - left axis Interest Expense ($ Bn's) - right axis 15 Fiscal 2007 - 2010 460 Public debt: + 51% 13 Annual interest expense: - 4% 420 11 380 9 340 7 5 300 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (*) Data source: U.S. Treasury (*) Fiscal 2011: (based on Oct '10 - July '11 actual data plus estimate) 15 / GE / August 17, 2011
  • 16.
    But interest burdenis still very manageable …… U.S. Gov't Interest Expense as a Percent of Nominal GDP Fiscal Year (Sept) Comparison 4.7% 4.2% (*) 2011 Estimate - End Sept '11: 3.6% Nominal GDP = $15.083 Tn Interest expense = $462.5 Bn 3.1% 2.5% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (*) Data sources: U.S. Treasury and Bureau of Economic Analysis 16 / GE / August 17, 2011
  • 17.
    Fortunately, foreign demandfor Treasurys holds up …… Foreign Holdings of U.S. Treasurys in trillions of dollars 4.52 Up 11% yoy Jun (*) vs Up 20% in '10 3.80 vs Up 20% in '09 3.08 2.36 1.64 Top 2 Foreign Holders as of June '11 1. China @ $1,166 bn, + 5% yoy - was + 71% yoy in Jul '09 2. Japan @ $911 bn, + 14% yoy - was + 22% yoy in Dec '09 0.92 Oct-01 Oct-03 Aug-05 Aug-07 Jul-09 Jun-11 Data source: U.S. Treasury 17 / GE / August 17, 2011
  • 18.
    Economic composition ––U.S. GDP …… Gov't Q2 2011 U.S. spending, Real GDP 18.9% vs 18.4% Breakout Q4 '07 Net exports, -3.1% vs -4.2% Q4 '07 Private investment, 13.4% vs 15.9% Q4 '07 Personal consumption, 70.7% vs 70% Data source: BEA Q4 '07 18 / GE / August 17, 2011
  • 19.
    Consumption trend hasstalled …… U.S. Real Personal Consumption Expenditures yoy change 3-month change - annualized 4.3% 3.3% 2.3% 1.3% 0.3% -0.7% -1.7% -2.7% Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Data source: Bureau of Economic Analysis 19 / GE / August 17, 2011
  • 20.
    Amid unimpressive payrollgains …… Monthly Change in Private Payrolls Monthly Change in Nonfarm Payrolls in 000's 460 Past 12 months 242 23 -195 -413 Private: + 1.8 mn Headline: + 1.3 mn -632 Data source: Bureau of Labor Statistics -850 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 20 / GE / August 17, 2011
  • 21.
    While income improved,inflation saps wages …… U.S. Personal Income (yoy) Real Personal Income Less Transfer Payments (yoy) Real Wages (yoy) 7.0% 5.0% 3.0% 1.0% -1.0% -3.0% -5.0% -7.0% Data source: Bureau of Economic Analysis -9.0% Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 21 / GE / August 17, 2011
  • 22.
    Watch import pricesfrom China …… U.S. Import Prices from China 6% y-o-y change July '11 4% +3.5% yoy 2% Through early '07, the U.S. imported deflation from China 0% -2% -4% Aug-05 Feb-07 Aug-08 Jan-10 Jul-11 Data source: Bureau of Labor Statistics 22 / GE / August 17, 2011
  • 23.
    Consumers take onsome more borrowing …… U.S. Consumer Credit, Ex-Real Estate ($ Bn's) 20 3-Month Average Largest increase Monthly Change in 4 years 10 0 -10 -20 Data source: Federal Reserve Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 23 / GE / August 17, 2011
  • 24.
    Investment growth trendis moderating …… Change in Real Private Business Investment Quarterly outcome - annualized Half year outcome - annualized 18% 8% -2% -12% -22% -32% -42% Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Data source: Bureau of Economic Analysis 24 / GE / August 17, 2011
  • 25.
    Key ‘‘services’’ sectorgauge signals modest growth …… ISM non-manufacturing index (left axis) Non-manufact employment sub-index (right axis) 60 56 54 above 50 (left axis index) signals 49 service sector expansion 48 43 42 36 36 30 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Data source: Bloomberg 25 / GE / August 17, 2011
  • 26.
    While manufacturing sectorexpansion slows …… ISM manufacturing index (left axis) Prices paid for purchases (right axis) 62 92 July 50.9 above 50 signals 55 expansion 67 47 41 40 32 16 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Data source: Bloomberg 26 / GE / August 17, 2011
  • 27.
    Amid auto productionadjustment …… US Capacity Utilization - left axis Cap U for Motor Vehicles - right axis 79% 68% 73% 49% 67% 30% Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Data source: Federal Reserve 27 / GE / August 17, 2011
  • 28.
    Overall business inventorybackdrop is favorable …… U.S. Inventory-to-Sales Ratio 1.72 number of months 1.59 Q1 '09 1.46 1.33 = Worst of U.S. recession Q1 '11 1.20 May-82 Aug-89 Nov-96 Feb-04 Jun-11 Data source: U.S. Commerce Dept 28 / GE / August 17, 2011
  • 29.
    As is backdropfor private credit expansion …… Commercial and Industrial Loans at U.S. Commercial Banks 1.7 in trillions of dollars 1.5 - Oct '08 peak: $1.62 tn - Most recent: $1.28 tn 1.3 Decrease: $340 bn 1.1 Since post crisis low in 0.9 Sep '10, Fed tightening cycle began up $70 bn 0.7 Fed tightening cycle began 0.5 Dec-90 Jan-95 Mar-99 Apr-03 Jun-07 Aug-11 Data source: Federal Reserve 29 / GE / August 17, 2011
  • 30.
    Still dealing withresidential mortgage burden …… U.S. Residential Mortgages Outstanding in trillions of dollars Peak: 10.6 tn 10.7 Q1 '08 10.0 tn 8.0 8.0 tn 6.0 tn 5.3 Q3 '01 Q4 '98 2.7 0.0 Mar-80 Dec-87 Sep-95 Jun-03 Mar-11 Data source: Federal Reserve 30 / GE / August 17, 2011
  • 31.
    And too manyhomes …… Ratio of U.S. Existing Housing Units to Number of U.S. Households 1.110 1.105 1.100 1.095 1.090 1.085 1.080 1.075 1.070 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (*) 2011 (*) (*) 2010 & 2011 estimated Data source: U.S. Census Bureau. Estimates based on Census Bureau and nielsenw ire 31 / GE / August 17, 2011
  • 32.
    Causing home pricesto fall …… U.S. Home Prices are 3% Below the 5-Year Average and 20% Below July '06 Peak 231 Single Family Home Prices in $000's - Past 30 years, prices averaged 8% above the 5-year average 154 - In June 2005, prices exceeded the 5- year average by 33% 77 Median Home Prices Data source: Nat'l Association of Realtors 5 year moving average 0 Jul-69 Jan-80 Jul-90 Dec-00 Jun-11 32 / GE / August 17, 2011
  • 33.
    In all, somemoderate growth still expected …… U.S. Real GDP (*) Bloomberg 1 year average consensus forecasts 4.0% 1.3% (Aug 12 survey) in Q2 % % % % 2.2 2.5 2.5 2.1 0.8% -2.5% -5.8% -9.0% Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Q4 '09 Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 * Q4 '11 * Q1 '12 * Q2 '12 * Data source: Bureau of Economic Analysis 33 / GE / August 17, 2011
  • 34.
    In summary Near-term -2011 & 2012 •• Policymakers focus on boosting near-term dynamics •• U.S. real GDP subject to energy and equity prices •• Equities vulnerable to extraordinary uncertainties •• Fed’’s key focus is jobs - watch employment data Beyond the moment •• Budget deficit will force tough decisions on spending and taxes •• Deeper fiscal erosion has risky inflation consequences •• Less stimulus does not have to derail growth 34 / GE / August 17, 2011
  • 35.
    Appendix Answers to somerecently asked questions 35 / GE / August 17, 2011
  • 36.
    Magnitude of U.S.fiscal deterioration post crisis …… Fiscal '10 Fiscal '08 Peak Key budget receipts: Individual Income Tax * $ 899 bn $ 1,146 bn $ 1,163 bn '07 Corporate Income Tax $ 191 bn $ 304 bn $ 370 bn '07 Key budget outlays: Defense-Military $ 667 bn $ 595 bn Fiscal '10 Health & Human Services $ 854 bn $ 701 bn Fiscal '10 Interest on Treas Debt $ 414 bn $ 451 bn $ 451 bn '08 Dept of Labor $ 173 bn $ 59 bn Fiscal '10 Social Security $ 754 bn $ 658 bn Fiscal '10 Data source: www.fms.treas.gov 36 / GE / August 17, 2011
  • 37.
    How fiscal 2011is shaping up for the US …… Individual income tax receipts up, corporate tax receipts near flat and total outlays higher First 10 months of Fiscal ’’10 & ’’11 compared –– through July Fiscal 2011 Fiscal 2010 Total receipts (*): $1.893 Tn $1.753 Tn Total outlays: $2.993 Tn $2.922 Tn Deficit: $1.100 Tn $1.169 Tn (*) includes: Indiv. income tax receipts: $0.891 Tn $0.719 Tn Corp. income tax receipts: $0.141 Tn $0.140 Tn Data source: www.fms.treas.gov 37 / GE / August 17, 2011
  • 38.
    Average maturities forTreasury debt are rising …… Average Maturity of Total Outstanding Marketable U.S. Treasury Debt - in months past 10 years 72 Recent Comparison Jun '08: 56 months Jun '09: 51 months 64 Jun '10: 58 months Jun '11: 62 months 56 Data source: U.S. Treasury 48 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 38 / GE / August 17, 2011
  • 39.
    FOMC’’s views ona normalization policy …… Per Minutes of the June 21-22 FOMC Meeting 1st step –– FOMC would likely first cease reinvesting some or all payments of maturing principal on its securities holdings 2nd step –– At the same time or thereafter, the FOMC will modify its forward guidance on the path of the federal funds rate and will initiate temporary reserve-draining operations. 3rd step –– When economic conditions warrant, the FOMC will begin raising its target fed funds rate, and from that point on, changing the target rate will be the primary means of adjusting monetary policy. During the normalization process, adjustments to interest rates on excess reserves and to the level of reserves will be used 4th step –– Sales of agency securities from the Fed’’s balance sheet will likely begin sometime after the 1st fed funds rate increase 39 / GE / August 17, 2011
  • 40.
    After QE2, nobuying & run-off would look like this …… Fed's Balance Sheet - U.S. Treasury Holdings (*) Maturing Treasury Debt ($ Bn's) - left axis $'s Bn Potential Treasury Balance ($ Tn's) - right axis $'s Tn 180 1.65 1.45 150 Fed's Treasury balance Now: $1.63 Tn 1.25 120 1.05 With run-off & no adds End 2018: $460 Bn .85 90 (*) Includes Bills, Notes, .65 Bonds and TIPS 60 .45 .25 30 .05 0 -.15 mid-2011 2011 2012 2013 2014 2015 2016 2017 2018 Data source: Federal Reserve & N.Y.Fed 40 / GE / August 17, 2011
  • 41.
    State & localgovernment tax receipts edge higher …… State & Local Tax Revenues Total: 4-qtr avg, annualized in Tn's (left axis) Individual income tax: 4-qtr avg, annualized in Bn's (right axis) $1.32 $310 $1.27 $295 $1.22 $280 $1.17 $265 $1.12 $250 $1.07 $1.02 $235 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Data source: U.S. Census Bureau 41 / GE / August 17, 2011
  • 42.
    Disclaimer Disclaimer: This reportis for information purposes only and is not intended as an offer, solicitation, or recommendation for the purchase or sale of a financial instrument or to effect a transaction. The information contained within this report has been obtained from and is based upon sources believed to be reliable. General Electric Capital Corporation and any of its affiliates (collectively ““GECC””) do not guarantee the accuracy or completeness of the information and make no express or implied representations, but reasonable steps have been taken to determine the accuracy and completeness of the information. All opinions, projections and estimates constitute the judgment of the author as of the date of the report and are subject to change without notice. Market rates, valuations and availability of financial instruments also are subject to change without notice. Nothing contained within the materials constitutes financial, legal, tax, accounting or other advice, nor should any investment or any other decisions be made solely based on this report. You should obtain advice from qualified experts before making any investment decision. The GECC Interest Rate Management Team (““IRM””) acts solely in the role of an arranger for interest rate management transactions, and is not and makes no representations to being an agent for or advisor to any party involved, nor does IRM have any reporting, fiduciary or financial obligations to the parties. This research report is produced separately from any other activity of GECC and was completed without access to non-public information that may have been received by other units of GECC. This report may not be reproduced or redistributed in any form without prior written permission from GECC. The use of this report in connection with the writing, marketing or promotion of any financial instruments, services or products is prohibited. 42 / GE / August 17, 2011