Synovate Economic Summary Q4 2010

$ynovate Economic
$ummary: Q4, 2010
• U.S. Edition

© 2011 Synovate Inc.

Fi na nci a l Outl ook
And Indus try Key Econmi c Yea r In Looki ng
Ba ckground Summa ry News Indi cators Ha l f Ful l Ha l f Empty Revi ew Ahea d References

Background
• Quarterly overview of trends and driving forces in the US economy and the Financial Services
(FS) sector.
- Useful as a backdrop against which to interpret changes in market research tracking data.
• Includes a number of key market metrics:
- Economic & financial indicators (S&P 500, interest rates, forex, commodity prices, etc.)
- Consumer measures (Synovate’s Financial Sentiment Index, the Conference Board’s
Consumer Confidence Index)
- Other indicators (housing data, unemployment, etc.)
• Definitions:
- Leading economic indicators change in advance of the overall economy and are useful for
prediction. Example: stock market returns, since the market usually declines and improves
before the economy does.
- Lagging economic indicators do not change direction until a few quarters after the
economy does and are useful for confirmation. Example: the unemployment rate; it tends
to increase 2 - 3 quarters after the economy starts to improve.
- Coincident economic indicators move at the same time the economy does and therefore
are the best measures of the current state of the economy. Examples: Gross Domestic
Product and personal income.

© 2011 Synovate Inc. 2

What Happened When?

A BP-operated oil rig explodes Tokyo intervenes in currency WikiLeaks releases a batch of
The Winter Olympics are held
and sinks in the Gulf of markets, spending $20 billion more than 250,000 American
in Canada.
Mexico, causing a massive oil to stem the rise in the diplomatic cables.
spill. Japanese yen.

Miners who were trapped in a The World Cup kicks off in BHP Billiton makes an Congress passes a historic
Chilean mine for more than South Africa; Spain won. unsolicited bid of nearly $40 health-care plan, which
two months begin to reach the billion for Potash Corp. of President Barack Obama signs
surface. Saskatchewan. into law.

Dubai opens the Burj Khalifa Congress passes a financial- The ‘flash crash’ drives the The Treasury sells the last of its
skyscraper – the world’s tallest regulation overhaul in the biggest Dow industrials down almost Citigroup common shares in a
expansion of government power 1,000 points before it $10.5 billion offering that caps
at 2,717 feet.
over banking and markets since the the biggest bailout of the
rebounds to a loss of 347.80
Great Depression.
points. financial meltdown.


As 2010 Comes To An End…
Financial markets of just about every stripe pushed higher, marking a second year of
recovery from the financial crisis despite two lurches due to the sovereign debt crisis
in Europe and near-constant worry of a double-dip recession in the U.S. The
challenges to the economy lurk and our oft-repeated series of ‘W-patterns’ continue
to best describe the state of our economy.
Half Full:
- Small & Big Business
- Retail Sales
- Positive GDP

Half Empty:
- Unemployment
- Real Estate
- European Sovereign Debt



What’s In The News
• Rescue Effort Reaches Miners (Oct. 13): The Chilean miners that were trapped deep underground for 69 days (dubbed
the longest shift in mining history) were rescued.
• Federal Reserve Announces Purchase of $600 Billion in Debt (Nov. 3): The Federal Reserve announced its intention to buy
$600 billion of the nation's debt, in treasury bonds, citing the slow economic recovery, high inflation, and concern about
continued unemployment. The Fed will complete these purchases by June 2011.
• In Midterm Elections, Republicans Win House, Democrats Keep Senate (Nov. 4): The Republican Party gained control of
the House of Representatives in the midterm elections, but the Democratic party retains the majority in the Senate
creating a state of ‘gridlock’ and making change harder to accomplish.
• Irish Prime Minister Dissolving Government After 2011 Budget Approval (Nov. 22):
Irish Prime Minister Brian Cowen announced he will dissolve his government and hold a new election after
the 2011 budget passes. This announcement came just one day after the Irish government requested a
$100 billion bailout package from the European Union and IMF to help save its flailing economy.

• North Korean Military Attacks South Korean Island, Killing 4 (Nov. 23): The military of North Korea
unexpectedly attacked the island of Yeonpyeong in South Korea, killing two civilians and two marines. This
was the first time North Korea fired on a civilian target since the suspension of the Korean War in 1953.
• Wikileaks Releases 3 Million Documents Related to the U.S. Military (Nov. 28): Wikileaks, the whistleblower website,
released 3 million documents spreading havoc on top secret and high level officials and some 260 embassies about the
war on terrorism. Rumors abound that a major U.S. financial institution could be the next ‘target’.
• Obama Announces Pay Freeze for Federal Employees (Nov. 30): President Obama announced he will freeze the pay of
all civilian federal workers for two years in an effort to offset the enormous budget deficit the United States faces.
• U.S. Extends Moratorium on Offshore Drilling off Eastern Gulf Coast, Along Atlantic Coast (Dec. 1):
The Obama administration announced that it would extend the moratorium on offshore drilling off the
Eastern Gulf Coast and along the Atlantic Coast until stricter environmental and safety regulations are
implemented.
• Senate Passes Tax Cut Compromise (Dec. 15): In a vote of 81 to 19, the Senate passed a $858 billion
tax package, that among other things extends the tax cuts to all Americans, including those earning
high incomes. (Dec. 17): The House of Representatives approved the new tax package that included in
the end a $801 billion package of tax cuts and $57 billion for extended unemployment insurance.



Financial Measures And News
In 2010, stocks retook territory not seen since the
collapse of Lehman Brothers, as investors laid bets on
stocks tied to emerging markets and commodities and—
in the latter half of the year—began to wager heavily on
the U.S. economy.

National Mortgage Rates – 1 year

• The Prime Rate remained level at 3.25% this quarter.

• Mortgage rates fell to a 40-year low of 4.17% in
November. These super-low rates have persuaded some
borrowers to refinance, but would-be buyers remain
hesitant. Mortgage rates are unlikely to revisit last
year’s historically low rates, unless the economy takes a
sharp turn for the worse.



Dollar's Up-and-Down Year
EU Debt Woes Made the Greenback a Haven Play on the Euro; to Japan's Chagrin, the Buck Proved
Weaker Than the Yen

The dollar managed to score a split decision against its two biggest rivals
in 2010: the European debt crisis battered the euro, but the yen chugged
higher despite Japan's own fiscal and economic woes.

The two overriding questions that will determine the performance of the
U.S. Dollar in 2011 are:
1. Whether European governments will finally be able to put an end to
the series of crises that started in Greece, swamped Ireland and now
threatens Spain and Portugal.
2. Whether the U.S. economy finally
gains traction with the help of both
monetary and fiscal stimulus.

Until clear answers emerge, expectations
center on the kind of whipsaw markets
seen in 2010 where the dollar is tossed
up and down as investors move their
focus between the regions' competing
woes.


Outlook: Half Full And
Half Empty


Small Businesses May Be Growing Again
It's no wonder the recovery has been so anemic: the U.S. economy has been trying to run on one leg. Large
businesses—the good leg—have been growing robustly for at least a year. Production is rising, sales are
higher and profits are through the roof. But the recovery missed the second leg—small businesses, which
account for about half of U.S. output and jobs. Encouragingly, there are now tentative signs that the second
leg may finally be healing.
• Companies, helped by a loosening in the credit markets as well
as improvements in consumer spending, are showing some
interest in raising prices and hiring new employees.
• Following record lows, 18% of 807 small-business owners surveyed
in November said they planned to raise prices over the next three
months, up from 12% a year ago.
• In December, employment in small firms
(fewer than 50 employees) rose by 117,000,
the biggest gain in nearly five years (according
to a December ADP employment report).
• Fifty-four percent of chief executives plan to
add employees this year, according to a
December survey of 1,729 small businesses
with between $5 million and $50 million in
annual revenue. It was the first time in three
years that the majority of respondents to the
quarterly survey said they intended to add
jobs.



Big Firms Poised To Spend Again
Big U.S. companies have cleaned up their balance sheets and, flush with cash, appear open to using their
cash sooner rather than later, setting the stage for a pretty good start to 2011.

• Profits were higher in 2010, after companies slashed their work forces and closed less-efficient
operations.
• With this stronger foundation, coupled with new confidence about the global economy, corporations
are looking to expand.

• The record-low interest rates are another reason companies are more likely to spend these piles of
cash in 2011 as opposed to hoarding it.



Defying the Pessimists, Holiday Sales Rebound
Retailers did not get all that they wanted for Christmas, with December sales coming in lower than expected. But
the holiday season altogether was still the strongest since 2006.

• A Thomson-Reuters index of 28 leading retailers showed sales
rose 3.1% at stores open at least a year, less than the expected
3.4%.

• According to the International Council of Shopping Centers, it is
estimated that sales for November and December rose 3.8%
compared to the year before.

• Online sales also grew 12% to $32.6 billion, the highest
total ever, as consumers continue shifting more shopping
to websites instead of physical locations.



Consumers Lose A Little Confidence
Consumer confidence took an unexpected step backward in
December, with Americans more concerned about the overall
economy and the jobs forecast.

• The index, which had improved in November, slipped to a
reading of 52.5 in December from 54.3 the month before.

• Consumers’ labor market assessment worsened. The “jobs
hard to get” index rose to 46.8 percent in December from
46.3 percent last month, while the “jobs plentiful” index
dropped to 3.9 percent from 4.3 percent.

• In general, consumer confidence is a coincident indicator,
and this suggests the recovery is still
relatively sluggish.



Shrinking U.S. Labor Force Keeps Unemployment
Rate From Rising
An exodus of discouraged workers from the job market kept the U.S. unemployment rate from climbing
above 10 percent in December. Volume of Jobs Added

• The economy added 103,000 jobs in December - falling short
of most expectations. Meanwhile, the unemployment rate
sunk to 9.4%, its lowest level since May 2009.
• While a sharply lower unemployment rate was a welcome
surprise, some experts said that drop was mostly due to a
shrinking workforce.

• Discouraged workers in December ticked up to 1.3 million,
with those workers falling off the unemployment rate
calculations. Volume of Discouraged Workers

Labor Force Participation Rate

• The overall participation rate in the U.S. labor force fell to a
new recession low of 64.3%.



Misery Index = Inflation + Unemployment
The misery index was initiated in the 1960s. It is simply the unemployment rate (currently 9.4%) added to the inflation
rate (currently 1.5%).
It is assumed that both a higher rate of unemployment and a worsening of inflation create economic and social costs for a
country. A combination of rising inflation and more people out of work implies a deterioration in economic performance
and a rise in the misery index.

25 1973-75 US Recessions
20 1980-82

1990-91 2008-09
15

2001
10

5

0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
Source: MiseryIndex.us



Key To Real Estate Rebound: Solid Economic
Growth
The housing sector, weighed down by a glut of unsold homes, needs job growth to boost demand and curb
the flow of delinquent loans into foreclosure. For commercial real estate investors, lackluster hiring means
fewer new jobs to fill empty office space and less consumer confidence to drive activity in stores and
distribution warehouses.

Residential Real Estate
• The Pending Home Sales Index, a forward-looking indicator, rose
3.5 percent to 92.2 based on contracts signed in November
from a downwardly revised 89.1 in October.
• NAR Chief Economist projects if we add 2 million jobs as
expected in 2011, and mortgage rates rise only moderately, we
should see existing-home sales rise to a higher, sustainable
volume.
• The 30-year fixed-rate mortgage is forecast to rise gradually to 5.3
percent around the end of 2011; at the same time, unemployment
should drop to 9.2 percent.

Commercial Real Estate
• Vacancy rates are near historic highs, from 10.9% in retail space
to 17.6% for office buildings across the country.
• The pace of construction starts for hotels, office buildings and
other kinds of commercial real estate is still falling, with the
total of $47 billion in commercial construction starts from
January to November, 2010, more than 8% below the same
period the previous year.

Year In Review:
Looking Back At
Major $E$ Stories


$E$ First-Quarter Rewind
Healthcare Overhaul
The new Congress prepared to begin business in 2011 much where lawmakers left off before the November
election—battling over the merits of the Democrats' health-care overhaul. With Republicans reviving the
health fight, other industry groups were restarting efforts to strip away their least favorite pieces of the law.

PIIGS
The ability to withstand misfortune was true in European stock markets, many of which managed to rise
despite several flare-ups of sovereign-debt crises that threatened the common currency and roiled European
Union resolve.

All five of the so-called PIIGS countries—Portugal, Italy, Ireland, Greece and Spain—finished in negative
territory for the year. Many of these countries face the prospect of years of fiscal austerity and a long road to
recovery in their banking sectors.



$E$ Second-Quarter Rewind
Fall-out From The Flash Crash
Market operators seek an extension until April 11 of so-called circuit breakers for individual
stocks and exchange-traded funds. Such circuit breakers halt trading in a security if its price
moves by 10% or more within a five-minute period.

Exchanges, regulators, banks and major trading firms are discussing a replacement for the
current single-stock circuit breaker system with a new model that would prevent the freezing
all trade in a stock or exchange-traded fund that breaks the price threshold.

BP Oil Spill
BP has had a good start to 2011, though it could hardly have been worse than the disaster that was 2010. It
began with comments from Kenneth Feinberg, the lawyer administering BP’s $20 billion compensation Gulf of
Mexico oil spill fund, that just $10 billion may be enough to compensate economic victims of the spill.

BP was predictably battered for multiple safety failings by early findings from the presidential commission
investigating the causes of the oil spill, but crucially it was not singled out for blame alone. The commission also
pointed to serious mistakes by BP contractors Halliburton and Transocean and wider systemic failings in the
deep water oil industry.



$E$ Third-Quarter Rewind
Inflation
With all the slack in the system, will the U.S. inflation rate stay below target? Will there be any spillover from
rising inflation rates in China and elsewhere? Over the last 12 months, several key measures of inflation have
shown small increases: CPI (Consumer Price Index) rose 1.1%, the median CPI increased 0.5%, the trimmed-
mean CPI increased 0.8%, core CPI (less food and energy) increased 0.8% (Q3 2009 to Q3 2010).

Core CPI, median CPI and trimmed-mean CPI on a year-over-year basis. They all show that inflation has been
falling, and that measured inflation is up less than 1% year-over-year.

Bank Failures
More banks failed in 2010 than any year since the savings-and-loan crisis ended in 1992, but regulators
believe failures have passed their peak. This year, the 157 banks that failed had total assets of $92.1 billion
compared to 140 bank failures with total assets of $169.7 billion in 2009.

Since 2008, 322 banks have failed with combined assets of $633.7 billion and total cost to the FDIC of $79.5
billion.



$E$ Fourth-Quarter Rewind
Quantitative Easing II (QE2)
Starting back in November the central bank starting buying $600 billion in long-term treasuries which will
continue over the next eight months. The Fed will also reinvest an additional $250 billion to $300 billion in
Treasuries with the proceeds of its earlier investments.

The bond purchases aimed at stimulating the economy - a policy known as quantitative easing - will total up
to $900 billion and be completed by the end of the third quarter of 2011.

Tax Cuts Passed
In the normally staid world of taxes, 2010 was downright tumultuous. Never was so much done to so many
by so few—and for such a short time. Lawmakers in December finally settled questions on income, capital-
gains and other taxes that had been burning for months, lowering rates for nearly all U.S. taxpayers
compared with what they were set to be in 2011.

But the legislation amounted to a giant punt: the changes are good only for two years at most, setting up
another election-year tax war in 2012. And it will add nearly $1 trillion to the public debt, plus interest.



What’s Next?
• The U.S. economic outlook for 2011 has certainly improved from our expectations last quarter/year.

• We are adding another factor to our $E$ watch-list for 2011: state and local governments, expected to face
substantial budget pressures. Weak state and local spending growth will weigh on employment in this
sector, which has shrunk by a quarter-million over the past year.

• While some of the risks have receded in recent months, albeit at the margin, others have become more
urgent. Double-dip fears re-emerged over the summer as the U.S. economy decelerated. And until the
headwinds - due to unemployment, real estate, global default-risks, consumer confidence - return to more
stable levels, this recovery remains choppy.



References
• Wall Street Journal. (Q4 2010). Retrieved from www.wsj.com
- World Stocks Defied Year of Worry
- In 2010, Growth Topped Gloom
- The Dollar’s Up-and-Down Year
- Treasury's End Up Year on Down Note
- Relying on Solid Economic Growth
- Meet the Supporting Cast
- What Happened When?
- As Bond Market Rallies On, Risks Lurk Beneath Surface
- Real Estate Faces Tough Recovery Slog
- Small Businesses May Be Growing Again
- December Retail Sales Are Weaker Than Expected
- For Retailers, Holiday Sales Mix Joy, Disappointment
- Key to Real-Estate Rebound: Solid Economic Growth
- Health Care Again Tops the Agenda, This Time of GOP
- U.S. Exchanges to Seek Extension of Circuit Breakers
- A Good Week for BP, But It Still Faces Long Road to Recovery
- Bank Failures at Highest Level Since 1992
- Taxing Year Brings a Less-Taxing Year
- 2010 Year End Review
• Mortgage-X.com (Q4 2010). Mortgage Rates. Retrieved from http://mortgage-x.com
• Marketwatch.com (Q4 2010). Trading Strategies. Retrieved from http://www.marketwatch.com/trading-strategies
• Moneycafe. (Q2 2010). Prime Rate. Retrieved from www.moneycafe.com/library/primerate.htm
• GoldmanSachs.com (Q4 2010). US Economics Analyst. Retrieved from http://www2.goldmansachs.com/ideas/global-economic-outlook/2011-economic-outlook/right-column/us-
econ-12-17-pdf.pdf
• CNNMoney.com (Q4 2010). Europe is the market’s biggest wild card in 2011. Retrieved from http://money.cnn.com/2011/01/05/markets/market_outlook_biggest_risks/index.htm
• Small businesses hiring surges. Retrieved from http://money.cnn.com/2011/01/05/smallbusiness/small_business_hiring/index.htm?iid=EL
• Weekly Online Holiday Sales. Retrieved from http://ir.comscore.com/releasedetail.cfm?ReleaseID=541869
• Consumers lose a little confidence. Retrieved from http://money.cnn.com/2010/12/28/news/economy/consumer_confidence/index.htm
• Consumer Confidence Slipped in December. Retrieved from http://www.nytimes.com/2010/12/29/business/economy/29econ.html
• TradingEconomics.com (Q4 2010). United States Consumer Confidence. Retrieved from http://www.tradingeconomics.com/Economics/Consumer-Confidence.aspx?Symbol=USD
• MiseryIndex.us (Q4 2010). The US Misery Index. Retrieved from http://www.miseryindex.us/
• Employment Situation. Retrieved from http://www.bls.gov/news.release/empsit.nr0.htm
• December jobs report: Unemployment rate at 9.4%. Retrieved from http://money.cnn.com/2011/01/07/news/economy/december_jobs_report/index.htm
• Shrinking U.S. Labor Force Keeps Unemployment Rate From Rising. Retrieved from http://www.businessweek.com/news/2010-01-09/shrinking-u-s-labor-force-keeps-unemployment-
rate-from-rising.html
• Pending Home Sales Continue Recovery, Gradual Improvement Seen in 2011. Retrieved from http://www.realtor.org/press_room/news_releases/2010/12/pending_gradual
• The European Debt Crisis. Retrieved from http://money.cnn.com/news/storysupplement/economy/euro_debt/
• Flash Crash Fallout. Retrieved from http://blogs.reuters.com/the-deep-end/2010/10/15/flash-crash-fallout/
• Inflation. Retrieved from http://www.calculatedriskblog.com/2010/12/question-9-for-2011-inflation.html
• QEII: Fed Pulls The Trigger. Retrieved from http://money.cnn.com/2010/11/03/news/economy/fed_decision/index.htm
• 2011 image. Retrieved from http://www.portfolio.com/business-news/portfolio/2010/12/30/eleven-reasons-why-2011-will-move-beyond-the-post-apocalypse


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Synovate Economic Summary Q4 2010

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