The document provides an analysis of recent U.S. economic indicators and recommendations for Precision Castparts. It finds that key indicators point to slow growth in 2016 but prepare for a possible contraction in 2017. The ISM manufacturing index improved but remains neutral, and the Fed is expected to raise rates in June to curb inflation. Declines in consumer confidence and new home sales may lead to a self-fulfilling recession. It recommends Precision Castparts hedge risks through workforce training, process improvements, and inventory and expense management to gain an advantage in a potential late-cycle contraction.

1. U.S. ECONOMIC
OUTLOOK &
INDUSTRY
RECCOMENDATION
Presented by:
Thana Kittisathanon
March 10,2016

2. STOCK MARKET TREND
 S&P 500 closed at 1,999 points last week (3/4/16)
 Stock market continues to be volatile, especially the last 6 months
 Does not indicate a recession or economic expansion
SOURCE: BLOOMBERG

3. GDP REPORT
 Real GDP rose 1% in the
fourth quarter
 Consumer spending drove
growth, contributing 1.4%
 Inventory accumulation &
trade reduced GDP growth
 The economy is creating lots
of jobs across all pay scales
 Household debt growth
continues to lag income
gains, & debt burdens
 Overall, risk of a recession
remains low
SOURCE: DISMAL SCIENCE

4. ECRI WEEKLY LEADING INDEX
 ECRI WLI gained less than
0.1 point
 Brings the indicators value
down -3.5%, its lowest in 11
months
 Economic data released
countervailed the ECRI's
negativity
 Acceleration in wage and
income
 Consumption expenditure
and prices increased more
than expected
 Indicates positive economic
trends heading into 2016
SOURCE: DISMAL SCIENCE

5. YIELD CURVE SPREAD
 Compared short-term & long-term treasury yield curve rates in 2016
 2007 shows an inverted curve indicating a recession
 2016 shows no inversion; does not indicate a recession
2007 2016
SOURCE: US TREASURY

6. CONSUMPTION
 January sales up 2.4%
 Due to discretionary spending ( non-
store retailers)
 Negative wealth effects will continue
unless the stock market rebounds
strongly
SOURCE: DISMAL SCIENCE
 Dropped 9.2% in January
 Inventory-to-sales up 0.7
 Homeowners are exchanging
homes not buying new ones

7. CONSUMPTION
 Fell 5.6 points to 92.2
 First drop since November;
lowest confidence index since
July
 The present situation index
fell 4.5 points to 112.1
 The expectations index fell
6.4 points to 78.9
 Slower GDP growth and
weak international demand
 Labor utilization: People can
generally find work, but it’s
not always the work they
really want.
SOURCE: DISMAL SCIENCE

8. ISM INDEX
 Increased from 48.2 in
January to 49.5 in February
 6 of the 18 manufacturing
industries reported growth in
employment, 8 reported a
decline
 Manufacturing can support
expansion due to under utilize
capacity
 Manufacturing remains in a
late-cycle expansion, not a
recession
SOURCE: DISMAL SCIENCE
 50 is consider neutral
 A value >50 indicates an expansion
 A value <50 signals a recession

9. TREASURY REPORT
 Surplus of $55.2B in January
($26B Social Security
benefits that was moved to
December 2015)
 Federal revenues were
$313.6B, a 2.2% increase
from January 2015
 Long-run outlook remains
bleak
 Cumulative deficit from 2016
to 2025 by $1.5 trillion
 Which political party will
control the federal
government next year?
SOURCE: DISMAL SCIENCE

10. TRADE REPORT
 U.S. foreign trade deficit increased to
$45.7 billion in January
 The strength of the dollar is
impeding exporters
 A decline in the price of energy has
lead to a drop in total imports
SOURCE: DISMAL SCIENCE
 Defense spending accounts for 14%
of the national budget
 Projected Defense spending to
increase by $12B in 4 years
SOURCE: DEPTMENT OF DEFENSE

11. INFLATION
 CPI rose 0.3% in January
 Core inflation improved, Feds may
postpone rate hikes until June
 Feds are expected to raise interest
rates 3 out of 4 times this year
SOURCE: DISMAL SCIENCE
 PPI for final demand increased
 This increase is welcome news
 Core PPI is expected to raise 1.5%

12. GLOBAL ECONOMY
 Asia:
1. China possibly exporting deflation around the world
2. Monetary stimulus policies in Japan, Korea and New Zealand
 Europe:
1. The ECB has missed its inflation for 3 straight years
2. Cut interest rates this week to stimulate economy
SOURCE: BLOOMBERG

13. FINAL ANALYSIS
 Key economic indicators are pointing to slow growth for the U.S this year
 ISM Manufacturing Index improved to 49.5 which indicates the sector remains
neutral
 Fed’s are expected to increase interest rates in June to curve expected inflation
while other countries fight deflation
 A decline in consumer confidence and new home sales due to volatility in the
stock market may lead to a “self fulfilling prophecy” of a recession
 Fiscal and monetary policies remains uncertain until after the November general
elections
2016 2017
OVERALL TREND

14. RECCOMENDATION
 Precision Castparts should anticipate a “Late Bull” run in 2016 but prepare for a
possible contraction cycle in 2017 by:
1. Use cross-training to prepare workforce for recession cutbacks
2. Aggressively pursue process improvement pipeline projects in order to be
more efficient and gain a competitive advantage
3. Hedge raw material prices by using “financial derivatives” to lock prices
2016 2017
OVERALL TREND

15. RECCOMENDATION
4. Reevaluate CAPEX in order to reduce cost in preparation for a recession
5. Tighten credit & collect outstanding account receivable
6. Conduct book-to-bill ratios comparison: If needed, start the process of
reducing raw material, WIP inventory and finish goods inventory
2016 2017
OVERALL TREND