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Compliance Advertising Approval Form Branch 11D Ad Number 2011-008320 Reviewed By Approval Date 11/14/2011 Approved Until 11/14/2012 Approved – Unchanged Approved with Corrections X Disapproved – Resubmit Include Firm Logo, Branch Address, Branch Phone Include Firm Slogan I added a disclosure page to the end. PMB.

Economic Outlook

Scott J. Brown, Ph.D. Chief Economist November 16, 2011

This Recession/Recovery Is Different This Recession/Recovery Is Different

• Recessions caused by financial crises tend to be:

Recessions caused by financial crises tend to be:

– more severe – longer‐lasting – longer‐lasting – with gradual economic recoveries – And more often than not, monetary/fiscal stimulus is removed too soon y/ This is not your father’s recession…

Addressing The Crisis Addressing The Crisis Three Policy Prescriptions: Three Policy Prescriptions:

Federal Reserve Policy

(liquidity, monetary stimulus)

The Bank Rescue The Bank Rescue

(stabilization of the banking system)

Fi l Sti l Fiscal Stimulus

(limiting the downside)

Federal stimulus ramping down Federal stimulus ramping down

American Recovery and Reinvestment Act of 2009, $bln

400 400 300 350 300 350 Tax Cuts Added Spending 200 250 200 250 Added Spending note: infrastructure 50 100 150 50 100 150 spending is about 1/5, aid to the states is about 1/3

• 50

50

• 50

50 source: Congressional Budget Office 2009 2010 2011 2012 2013 2014 2015-19

Large budget deficits in the near term Large budget deficits in the near term

CBO Budget Projections ($bln, % of GDP)

200 400 2

• 200

200 2

• 600
• 400
• 4
• 2

assumes

• 1200
• 1000
• 800
• 8
• 6

$ billion % of GDP assumes Bush tax cuts expire

• 1600
• 1400

1200 80 85 90 95 00 05 10 15 20

• 12
• 10

source: Congressional Budget Office August 2011 projections 80 85 90 95 00 05 10 15 20

Super committee to the rescue? Super committee to the rescue?

• Deadline approaching: $1.5 trillion in defict reduction (10 yrs)

package due by November 23 (pass by December 23)

Nowhere near completion

• No incentive to compromise

Republican goal: no tax increases Republican goal: no tax increases Democratic goal: no major cuts in entitlements Do nothing: both sides achieve main goal B li i ill l d i d f d h Bottom line: trigger will lead to automatic cuts to defense and other discretionary spending

• Bush tax cuts, debt ceiling pushed past Nov. 2012

A lot of uncertainty in the fiscal outlook

• Another downgrade?

Who cares? Who cares?

Outlook: Muddling Along Outlook: Muddling Along

Federal Reserve Officials' Projections of Real GDP growth (4Q/4Q, %)

November 2, 2011 4 5 4 5 2 3 4 2 3 4

• 1

1

• 1

1 4

• 3
• 2

4

• 3
• 2

central tendency range of forecasts history y/y

• 6
• 5
• 4
• 6
• 5
• 4

05 06 07 08 09 10 11 12 13 14 history y/y source: Federal Reserve 05 06 07 08 09 10 11 12 13 14

Outlook: Muddling Along Outlook: Muddling Along

Federal Reserve Officials' Projections of the Unemployment Rate (4Q)

November 2, 2011 10 10 9 9 central tendency range of forecasts history 7 8 7 8 6 6 4 5 4 5 05 06 07 08 09 10 11 12 13 14 source: Federal Reserve 05 06 07 08 09 10 11 12 13 14

Job gains by size of firm Job gains by size of firm

ADP: Private-Sector Payrolls, monthly change, th.

200 300 200 300

• 100

100

• 100

100

• 400
• 300
• 200
• 400
• 300
• 200

700

• 600
• 500

400 700

• 600
• 500

400 ADP: Small (1-49 employees) ADP: Medium (50-499) ADP: Large (>499) BLS

• 900
• 800
• 700

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

• 900
• 800
• 700

source: ADP, BLS

Headwinds Headwinds

• Lingering problems in housing

Many mortgage holders under water, prices bottoming Many mortgage holders under water, prices bottoming

• Higher prices of food & gasoline

Inflation reduced purchasing power considerably in 1H11 p g p y

• Contractionary policies in state & local gov’t

‐25,000 jobs per month , j p

• Federal fiscal stimulus is ramping down

Will subtract from GDP growth in 2012 and 2013

• Europe

Slower global growth, financial market risks

Housing: still weak Housing: still weak

Single-family Starts, Permits, and New Home Sales, mln.

1.8 1.8 1.4 1.6 1.4 1.6 0 8 1.0 1.2 0 8 1.0 1.2 0.4 0.6 0.8 0.4 0.6 0.8 Housing Starts Building Permits New Home Sales 0.0 0.2 99 00 01 02 03 04 05 06 07 08 09 10 11 12 0.0 0.2 source: Census Bureau 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Home prices are still a concern Home prices are still a concern

S&P/Case-Shiller Home Price Indices (Jan-00 = 100)

280 280

Washington Los Angeles New York San Diego

220 240 260 220 240 260

g Boston Miami Portland Seattle San Francisco Tampa Denver Minneapolis Chicago Dallas

160 180 200 160 180 200

g Charlotte Phoenix Atlanta Cleveland Las Vegas Detroit

100 120 140 100 120 140 60 80 100 00 01 02 03 04 05 06 07 08 09 10 11 12 60 80 100 source: Standard & Poor's 00 01 02 03 04 05 06 07 08 09 10 11 12

State & local government contracting State & local government contracting

Public-Sector Payrolls, change since December 2008, th.

100 100

• 100
• 100
• 300
• 200
• 300
• 200
• 500
• 400
• 500
• 400

Federal ex-census State & Local Gov't

• 700
• 600

Jan 09 Jan 10 Jan 11 Jan 12

• 700
• 600

source: BLS Jan-09 Jan-10 Jan-11 Jan-12

Gasoline prices down but not by much Gasoline prices down, but not by much

Energy Prices, $

125 4.00 115 3.75 95 105 3.25 3.50 85 3.00 65 75 2.50 2.75

• Avg. Gasoline Price (right)

Crude Oil Futures, Brent (left) West Texas Intermediate (left)

source: Raymond James Jan-10 Jan-11 Jan-12

Reduced purchasing power Reduced purchasing power

Real Personal Income and Spending, trln $2005, annual rate

10.6 10.6 Disposable Income 10 0 10.2 10.4 10 0 10.2 10.4 Consumer Spending 9.6 9.8 10.0 9.6 9.8 10.0 9.2 9.4 9 6 9.2 9.4 9 6 8.8 9.0 06 07 08 09 10 11 12 8.8 9.0 source: Bureau of Economic Analysis 06 07 08 09 10 11 12

Real consumer spending rebounded in 2Q10 Real consumer spending rebounded in 2Q10

Real Consumer Spending, 2005 dollars, annual rate

9500 9500 9400 9450 9400 9450 quarter 9300 9350 9300 9350 month 9150 9200 9250 9150 9200 9250 9050 9100 9150 9050 9100 9150 source: Bureau of Economic Analysis 9050 2010 2011 2012 9050

Federal Reserve Policy Federal Reserve Policy

• Sept. 22 and Nov. 2: “there are significant downside risks to the economic
• utlook, including strains in global financial markets”

Sh i i ll l l l “ l

• Short‐term interest rates to stay at an exceptionally low level “at least

through mid‐2013” conditional on: 1) low rates of resource utilization 2) a subdued outlook for inflation over the medium run ) a subdued outlook for inflation over the medium run

• Maturity Extension Program (“Operation Twist”):

by the end of June 2012, 1) purchase $400 bln in Treasuries maturing in 6‐30 year 1) purchase $400 bln in Treasuries maturing in 6‐30 year 2) sell $400 bln in Treasuries maturing in 3 years or less

• MBS Reinvestment: reinvest maturing MBS and agency debt into MBS

R l l l i

• Result: lower long‐term interest rates
• More to come: QE3 (mortgage‐backed securities) and possible changes to

the Fed’s communication strategies

Inflation – What Me Worry? Inflation What, Me Worry?

• Higher food & energy prices – only minor relief so far
• Core inflation trending higher than in 2010, but moderate
• Where would inflation come from?

1) Commodity prices? Not so much 2) Labor market? No way 3) P d i i b l k ? N 3) Production constraints, bottlenecks? Nope 4) Import prices, weaker dollar? Some

• Inflation expectations:

p well‐anchored

• Currently in sweet spot

Not higher inflation not deflation Not higher inflation, not deflation Until this outlook changes, Fed on hold

Europe Europe

• October agreement was short on details

– Just enough to prevent a catastrophe

• Greece may be the least of out worries

– Italy a much greater concern

• Little help from the ECB

1) not the lender of last resort 2) not there to address financial instability 3) new president may need to prove “toughness” on inflation

• Faced with a major financial crisis, the authorities should hit back hard

and early – European leaders have lagged, doing barely just enough

• ECB must step in more forcefully. Get used to disappointment…

Summing Up Summing Up

• The recovery is expected to continue, but there’s a

lot to worry about y

• A number of economic headwinds

(housing, s&l gov’t, fading fiscal stimulus)

• Lackluster‐to‐moderate growth near term, not a

double dip, but some downside risks

• Keys to the outlook:

– gasoline prices – fiscal policy – Europe

Things could be worse Things could be worse

17

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