Table of Contents I. Retail & Consumer Products Leadership Team - - PowerPoint PPT Presentation

Table of Contents

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I. Retail & Consumer Products Leadership Team 3 II. The 2013 Holiday Season Outlook 6 III. U.S. Retail Sector Trends 14 IV. Appendix: Macroeconomic Outlook 21

Retail & Consumer Products Leadership Team

Our Retail & Consumer Products Experts

Bob Duffy

Global Leader, Retail & Consumer Products

Boston, MA +1 617 897 1501 bob.duffy@fticonsulting.com Over 20 years restructuring experience, including experience as COO and CRO of retailers Specializes in revitalizing underperforming retailers that need fast and decisive improvement Led over 40 assignments involving retailers Led many large and high profile engagements for companies and equity sponsors Instrumental in the creation of cash flow forecasting systems and implementation of action plans to increase cash flow and reduce working capital Established credibility with banks Effective at negotiating with banks and creating solutions for retailers M.B.A., Kellogg School, Northwestern B.S., Babson College

Steve Coulombe

Senior Managing Director

Boston, MA +1 617 897 1515 steve.coulombe@fticonsulting.com 15+ years restructuring experience Significant experience and expertise in advising underperforming specialty retail companies Experience as interim CFO of $600M+ furniture retailer Led efforts to raise new and replacement financing for several specialty retailers Developed and implemented asset disposition and cost containment plans Worked extensively with suppliers and customers to minimize working capital needs Effective at implementing cost effective out-of-court store closure programs M.B.A., Babson College B.A., University of Massachusetts Boston, MA +1 617 897 1522 mark.weinsten@fticonsulting.com 19 years restructuring experience Substantial experience negotiating loan agreements and debt restructurings Assisted financial sponsors and strategic acquirers in assessing and analyzing potential transactions Significant experience and expertise in advising underperforming companies Assisted companies in creating liquidity to avoid impairment of

• perations and executing

restructuring plans Implemented initiatives necessary to realize cost synergies associated with acquisitions M.B.A., Wharton School, UPenn B.S., Carnegie-Mellon University

Mark Weinsten

Senior Managing Director

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Retail and Consumer Products Practice

5 Grocery and Food Stores Education Consumer Products

Overview

Our retail and consumer practice is dedicated to helping companies and their stakeholders at every stage of the corporate life cycle to prosper in the midst of market changes. We apply our highly developed analytics and expertise to move decisively, and our network of relationships with key industry players keeps us on the cutting edge of industry trends and provides us with unmatched capabilities. We have been engaged by many of the world’s leading retail and consumer companies to provide a wide range of services.

Retai ail a l and Consumer P Prod

• ducts E

Engag agements

Bu Busi siness S s Strategy

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Strategic diagnostic

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Business strategy development

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Business plan assessment

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Strategic communications

Corporat ate F Finan ance

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Working capital management

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Finance organization transformation

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M&A / IPO advisory

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Investor relations

Pe Performan ance & & Process

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Store portfolio

• ptimization

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Merchandise assessment

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Marketing effectiveness

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Store operational efficiency

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Cost optimization Specialty Retail Apparel Restaurants and Pubs

The 2013 Holiday Season Outlook

Holiday Season Outlook Overview

Our forecast model projects that nominal sales of holiday-inclined merchandise will increase by 4.9% in 2013 — an average year by historical standards but, nonetheless, one with which we suspect most retailers will be pleased.

Holiday sales consistently account for about 28%-32% of annual sales but 35%-45% of annual operating profits. Department stores are the most seasonally influenced retail segment, followed by specialty apparel.

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Many stores have begun to run holiday promotions prior to Black Friday and hold longer store hours in November. These earlier holiday promotions are increasing the length of the holiday season to well before Black Friday. We expect an increasing share of sales to be claimed by the online channel this holiday season. Shopping mall traffic figures have weakened in recent seasons as the convenience, transparency and deals found online have become irresistible to many millions of shoppers. This trend will continue in 2013. The thrill of hitting the malls has waned for many Americans; we still do it but are making fewer trips during the holiday season. A key concern for retailers during the holiday season will be the prospect of depressed margins. Although promotions and discounts drive sales, retailers will need to be especially conscious of the bottom line. Aggressive promotions across the retail sector benefit consumers but often do little or nothing for the sector’s overall profitability. The season itself is always a promotional one; the key question always is how soon and how deep? Macy’s strong third-quarter results and fairly bullish comments regarding the upcoming holiday season indicate that the

• utlook for the season isn’t as gloomy as some have made it out to be, though low-end retailers will continue to see

extremely value conscious shoppers.

And the Survey Says…

We also recently surveyed nearly 10,000 adults across the nation in an online survey about holiday shopping intentions and attitudes. Some of the more noteworthy findings of the survey include:

63% of respondents intend to spend as much on holiday gifts as they did last year; 12% will spend more, 19% will spend less, and 7% don’t intend to spend on gifts this season. Households with income greater than $100,000 will spend twice as much this holiday season as those with incomes below this threshold. On average, Americans surveyed spend approximately $1,200 on total holiday spending in a typical year, though the median is $500—an indication that high spending households have a strong influence on the average amount spent.

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Respondents on average will purchase gifts for four adults and nearly three children this holiday season. Respondents in households with children will purchase gifts for nearly four children. Approximately 51% of respondents’ holiday budgets will be spent on gifts this year, with the balance for entertaining, decorating, dressing up, and holiday-related travel. Amazon.com is the favored shopping destination for gifts among our respondents, with 22% citing it as their favorite shopping destination, followed by Wal-Mart at 19% and Target at 8%. Online shoppers tend to spend more, with those who say they do most of their holiday shopping online spending an average

• f $1,721 versus $1,015 for those who shop primarily in stores.

51% of Americans love the holiday season planning, preparation and shopping, while 31% says it causes them a great deal of stress. Higher income households enjoy the holiday season more, with 70% of the top 1% of spending households saying they love it and 63% of the next 19% of spending households indicating that they too love it.

3.7% 4.2% 4.7% 4.2% 4.5% 1.9% 4.0% 3.2% 15.0% 11.1% 9.1% 11.8% 11.6% 8.2% 16.7% 11.6% 5.9% 5.5% 5.7% 5.7% 6.0% 3.2% 6.8% 5.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% Nov-11 Dec-11 Jan-12 Holiday 2011 Nov-12 Dec-12 Jan-13 Holiday 2012 GAFO Category Stores Non-Store Sales Combined

The 2013 Holiday Season May Look A Lot Like Last Year

We expect the 2013 holiday season to be similar to last season—characterized by solid, but not great, sales growth. We do not share the dour outlook some have expressed for the season. Nearly all our forecast variables have improved to some degree from a year ago. Online sales, which account for 15%-20% of total holiday season sales, should grow at a 15%-20% rate this season while store-based sales should increase by 2.0%-3.0%. (Note that the chart below shows all non-store sales growth, which includes the weaker catalog and other direct-to-consumer channels.)

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U.S. Monthly Retail Sales

(YOY % change in nominal sales)

Source: U.S. Census Bureau

Online Channel Getting a Bigger Piece of Holiday Sales

The non-store channel, primarily online sites, have been getting a larger share of holiday sales since 2009. Many consumers believe the best deals to be had are found online. That has generally been true in recent years but the announced price-matching policies of many large retail chains this year may slow this migration.

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Non-Store Sales as a % of Adjusted GAFO Sales

5% 10% 15% 20% 25% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Rest of Year Avg Nov-Jan Average

Source: U.S. Census Bureau

Free shipping is a highly valued attribute for most online shoppers during the holidays. The soaring popularity of tablet computers has made mobile transacting online much more shopper-friendly since 2010. We expect online sales will continue to increase at a mid-teen rate (YOY) this holiday season. Relatively speaking, January, which we include in our holiday season, is the strongest month of the year for

• nline sales share.

20% 25% 30% 35% 40% 45% 50% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 November December January

Starting Earlier, Ending Later

Although Thanksgiving is late this year, November’s portion of holiday sales should remain strong due to the fact that many retailers have been kicking off the holiday season well in advance of the traditional Black Friday start. Retail holiday promotions now routinely begin by early November and some select holiday- themed promotional events began in late October. We are also seeing many stores move up the traditional Black Friday shopping event to Thanksgiving Day. Many more stores were open on Thanksgiving Day last year and this trend will continue in 2013. There is no going back on this trend, as many Americans prefer shopping late on Thanksgiving Day compared to the wee hours of Black Friday. The holiday shopping season does not end at Christmas. We have found that gift cards are packing more sales into January because these sales are counted when a gift card is used. Accordingly, we count January in our holiday season. Last year nearly $45 billion of gift cards were purchased in November and December. The net effect of earlier promotions and an increase in the sale of gift cards has been a stretching of holiday-related retail sales into early November and well past Christmas, as evidenced by the graph shown below.

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Monthly Share of Holiday Season Sales

Source: U.S. Census Bureau

Holiday 2013 Select Store Opening Times

• 6 a.m. on Thanksgiving
• Kmart

(open for 41 straight hours)

• 8 p.m. on Thanksgiving
• J.C. Penney
• Kohl’s
• Macy’s (first timer)
• Sears

• 5.0%
• 4.0%
• 3.0%
• 2.0%
• 1.0%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 26 26 27 27 27 28 28 29 29 29 29 30 30 30 31 31 31 32 32 32 # of Days between Thanksgiving and Christmas

Does the Length of the Season Matter? We Don’t Think So

Fortunately, generosity does not depend on the length of the holiday season.

Depending on the date of Thanksgiving, the unofficial length of the holiday season, that is the number of days between Thanksgiving and Christmas, can vary from 26 days up to 32 days. 2013 is a “short year” with only 26 days compared to 32 days last year. We would argue that shoppers have relatively fixed shopping lists and budgets, and having the luxury of a few additional days or an extra weekend between the two holidays to get that shopping done doesn’t make people spend more – it just lets them procrastinate and perhaps hold out for better deals. Shoppers’ budgets largely dictate seasonal spending, and it’s hard to accept the premise that people are less generous or self-indulgent in those years when the season is shorter. Historically, short holiday seasons have not been associated with weaker sales nor have longer seasons been associated with stronger sales—measured over the entirety of the season comprising the months of November through January.

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Holiday Season Sales Since 1993

(YOY % Change)

Source: FTI Consulting Research

2% 4% 6% 8% 10% 12% 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Average Trimmed

Margins Likely to be Under Pressure

Margins will continue to be pressured as retailers increasingly use markdowns as a promotional activity. While markdowns often drive sales growth, it is ultimately profits that matter, and retailers will need to decide how aggressively they want to discount without jeopardizing the profitability of the season. Whether or not customers respond sufficiently to changing price points is the perennial game of chicken that plays out each holiday season, and chances are if your competitors are responding similarly, it blunts the effectiveness of such moves. Declining EBITDA margins among our group of retailers during the last two holiday seasons, especially in 2012, are indicative of the willingness of large retailers to sacrifice gross margins to achieve sales growth. This was true across all four retail segments we evaluated last year. Overall EBITDA margins declined by nearly 100 basis points in 4Q12, with department stores registering the largest declines of nearly 200 basis points. Margin pressure has continued through 2Q13. Another interesting consideration for this season is the ripple effect that J.C. Penney’s promotional activities could have on sales and margin performance across the middle market sector. Many retail experts consider this to be a make-or-break season for Penney’s turnaround, and it surely needs to show vendors and other creditors that its efforts are finally bearing some fruit after losing nearly

• ne-third of its sales to other retailers since 2009. This augurs for a highly promotional season from J.C. Penney right from the get-go,

and other department stores and large general merchandisers will have to anticipate this move respond prudently. Penney already was running aggressive promotions in October.

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Quarterly EBITDA Margin

Source: S&P Capital IQ

U.S. Retail Sector Trends

State of the U.S. Retail Sector

Despite Macro Concerns, Shoppers Cautiously Upbeat

Nominal retail sales growth has decelerated in 2013—to about 4.0%-4.5% recently from 5.0%-5.5% in 2011-2012. Strong auto sales may be suppressing other discretionary spending, especially for middle class households. There are some recent signs of stronger spending on home-related categories, most likely attributable to the improved housing market in 2013. Consumer confidence was running even to slightly ahead of last year through the summer until this past October’s government shutdown caused confidence to fall across most surveys. However, these surveys indicate that it is the future expectations component that has been shaken most, while the current conditions component of each index has remained fairly stable. Americans are concerned that we could see another political impasse in Congress in early 2014 when the temporary resolutions that ended the shutdown expire and Congress again takes up issues of expenditure funding, the debt ceiling and possibly entitlement reform. Our research indicates that it is the current conditions component of the index that is most strongly associated with consumer spending over the last 25 years. Consumer confidence has been bolstered in 2013 by fewer concerns about joblessness and an improving housing market. Personal income gains remain weak by historical standards but are improving slowly. Notable gains in home values and financial assets should put many shoppers in a better frame of mind this season. It is unclear what the lingering economic impact of the 16-day partial government shutdown will be but it is not likely to have any notable impact on 2013 holiday sales. Those who continue to be impacted or put at risk by any residual effects of the shutdown will be more restrained in their spending, but the numbers are not likely to be large enough to do noticeable harm to the season. Nearly all variables in our sales forecast model have improved from a year ago, though none is especially strong at the moment.

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• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5% 6% 7%

1980Q1 1981Q2 1982Q3 1983Q4 1985Q1 1986Q2 1987Q3 1988Q4 1990Q1 1991Q2 1992Q3 1993Q4 1995Q1 1996Q2 1997Q3 1998Q4 2000Q1 2001Q2 2002Q3 2003Q4 2005Q1 2006Q2 2007Q3 2008Q4 2010Q1 2011Q2 2012Q3

• 10%
• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10% 1980Q1 1981Q3 1983Q1 1984Q3 1986Q1 1987Q3 1989Q1 1990Q3 1992Q1 1993Q3 1995Q1 1996Q3 1998Q1 1999Q3 2001Q1 2002Q3 2004Q1 2005Q3 2007Q1 2008Q3 2010Q1 2011Q3 2013Q1 Retail Sales excl. Auto, Gas & Food

• Adj. GAFO

Aggregate U.S. Retail Sales

Personal consumption expenditures (PCE), which includes all consumer outlays for goods and services, has been sluggish in 2013 with real growth just below 2.0% (YOY). U.S. retail sales of goods have been stalled as well, with real YOY growth decelerating to approximately 3.0%-3.5%% in 2013.

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Real Personal Consumption Expenditures

(YOY % Change)

Real U.S. Retail Sales

Source: Moody's FreeLunch.com

0.86 0.90 0.94 0.98 1.02 1.06 1.10 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Department Store General Merchandise Specialty Apparel Home Furnishings / Misc. 0.90 0.92 0.94 0.96 0.98 1.00 1.02 1.04 1.06 1.08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Median Average Trimmed Mean

U.S. Retail Sales—Select Public Retail Chains

Quarterly sales growth (nominal, YOY) at more than 100 large retailers that we track has clearly decelerated so far in 2013.

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Quarterly Sales Growth

(YOY)

Quarterly Sales Growth by Type

(YOY)

Source: S&P Capital IQ Note: 1.00 equals no change from prior year.

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% $0 $10 $20 $30 $40 $50 $60 $70

1Q2000 4Q2000 3Q2001 2Q2002 1Q2003 4Q2003 3Q2004 2Q2005 1Q2006 4Q2006 3Q2007 2Q2008 1Q2009 4Q2009 3Q2010 2Q2011 1Q2012 4Q2012

Quarterly Online Sales in billions (left scale) Market Share of Adj. Retail Sales (right scale)

• 10%
• 5%

0% 5% 10% 15% 20% 25% 30% 35% 40%

4Q2001 2Q2002 4Q2002 2Q2003 4Q2003 2Q2004 4Q2004 2Q2005 4Q2005 2Q2006 4Q2006 2Q2007 4Q2007 2Q2008 4Q2008 2Q2009 4Q2009 2Q2010 4Q2010 2Q2011 4Q2011 2Q2012 4Q2012 2Q2013

Store-Based Retail Sales Growth E-Commerce Sales Growth

Online Retail Sales Continue to Buck the Trend

Online retail sales of goods is growing at more than four times the rate of store-based sales in 2013 and will hit the $260 billion mark this year. The market share of online sales relative to total comparable retail sales is approaching 9.0%.

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U.S. Quarterly Online Retail Sales and Market Share

(in $ billions)

Percentage Change in Sales

(YOY %)

Source: U.S. Census Bureau

$10,000 $30,000 $50,000 $70,000 Amazon (North America only) Web only (excl. Amazon) Retail chains Catalog / Call Centers Manufacturers 2009 2012 0% 10% 20% 30% 40% Amazon (North America only) Web only (excl. Amazon) Retail chains Catalog / Call Centers Manufacturers 2009 2012

Multi-Channel Retailers Doing Well Despite Amazon’s Huge Impact

Amazon.com alone accounted for 16% of all online retail sales in the U.S. last year compared to 10% three years ago. Store-based multi-channel chains generated $75 billion in online sales in 2012, the largest dollar total of any online channel but saw its market share of online sales slip from 39% in 2009 to 35% last year.

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U.S. Online Market Share by Channel U.S. Online Sales by Channel

(in $ millions)

Source: internetRETAILER

$168,270 $193,720 $227,618 $259,155 $291,834 $325,511 $360,122 $395,665 $432,182 $469,737 $508,404 $548,255

7.3% 8.1% 9.1% 9.8% 10.5% 11.2% 11.8% 12.3% 12.8% 13.3% 13.7% 14.1% 0% 2% 4% 6% 8% 10% 12% 14% 16% $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Online Sales Online Marketing Share

Upping our Online Sales Forecast Through 2020

We have revised our online forecast model given the strength of online sales over the past year. We now expect online sales in the United States to hit $260 billion in 2013 and eventually reach $508 billion by 2020, a $46 billion increase from our previous forecast of $462 billion, achieving a 13.7% market share by the end of this decade compared with our previous market share forecast of 12.0% and an actual 8.1% market share at the end of 2012. If we exclude the supermarket sector from the mix, our forecast for online sales will reach $495 billion by 2020 compared to

• ur previous forecast of $446 billion, and a 17.0% market share of retail sales by the end of the decade (not shown below).

We have found that tablets are powering this growth in online sales. The accelerating pace of online sales over the last several quarters undoubtedly is being influenced by the rapid proliferation of the tablet computer, which has facilitated mobile commerce for millions of users compared with transactions on a smartphone. A June 2013 survey by the Pew Research Center indicated that 34% of adult Americans owned a tablet computer, nearly double the 18% ownership rate in the Pew 2012 survey.

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U.S. Online Retail Sales and Market Share

(in $ millions)

Source: U.S. Census Bureau

Appendix: Macroeconomic Outlook

Variables Impacting Our Holiday Forecast

40 50 60 70 80 90 100 110 120

• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10%

1Q1980 3Q1981 1Q1983 3Q1984 1Q1986 3Q1987 1Q1989 3Q1990 1Q1992 3Q1993 1Q1995 3Q1996 1Q1998 3Q1999 1Q2001 3Q2002 1Q2004 3Q2005 1Q2007 3Q2008 1Q2010 3Q2011 1Q2013

Consumer Sentiment Index YOY % Change in Real Sales GAFO Sales (YOY; left axis) Consumer Sentiment Index (right axis) 40 50 60 70 80 90 100 110 120

1Q1980 2Q1981 3Q1982 4Q1983 1Q1985 2Q1986 3Q1987 4Q1988 1Q1990 2Q1991 3Q1992 4Q1993 1Q1995 2Q1996 3Q1997 4Q1998 1Q2000 2Q2001 3Q2002 4Q2003 1Q2005 2Q2006 3Q2007 4Q2008 1Q2010 2Q2011 3Q2012

CS Index Current Index Expected Index

Consumer Sentiment

Consumer sentiment was at five-year highs through the summer and was approaching its long-term average until it began to pull back in late September. The partial government shutdown and ensuing political brinkmanship in Congress caused a notable pullback in sentiment in October, one which we believe won’t be long lasting. The same general pattern has also been observed with other sentiment indexes, such as the Conference Board’s Consumer Confidence Index and Bloomberg’s Consumer Comfort Index. Two prior episodes involving drama in Washington, the 2011 debt ceiling debate and subsequent sovereign credit rating downgrade and the 2012 fiscal cliff showdown, resulted in widespread consumer anxiety that abated relatively quickly and had little effect on those seasons’ holiday results. Some economists are dismissive of consumer sentiment surveys on the basis that people often don’t behave consistently with their stated intentions but our research indicates a compelling relationship between sentiment and discretionary spending over the last 30 years.

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University of Michigan's Surveys of Consumer Sentiment Consumer Sentiment vs. Spending Growth

Source: University of Michigan and U.S. Census Bureau

• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10% 1970Q1 1971Q1 1972Q1 1973Q1 1974Q1 1975Q1 1976Q1 1977Q1 1978Q1 1979Q1 1980Q1 1981Q1 1982Q1 1983Q1 1984Q1 1985Q1 1986Q1 1987Q1 1988Q1 1989Q1 1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 Wage Income Disposable Income Personal Income

Real Income Growth

Growth in real income remains weak more than four years into this recovery due mostly to persistently high unemployment and meager wage gains for labor. Current growth in real personal income pales in comparison to the mid-to-late nineties and is even weaker than relatively modest gains of a decade ago. The expiration of the 2.0% tax holiday on social security contributions has hurt disposable income in 2013, especially for lower and middle income families. It’s hard to expect strong spending growth until real income gains accelerate and it’s hard to expect strong income gains amid such tepid economic growth—that’s the conundrum the U.S. economy has been experiencing for the last few years.

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Real Income Growth

(YOY)

Source: Department of Commerce

0% 2% 4% 6% 8% 10% 12% 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 1970Q1 1971Q1 1972Q1 1973Q1 1974Q1 1975Q1 1976Q1 1977Q1 1978Q1 1979Q1 1980Q1 1981Q1 1982Q1 1983Q1 1984Q1 1985Q1 1986Q1 1987Q1 1988Q1 1989Q1 1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 # of Unemployed (LHS) Unemployment Rate (RHS)

Unemployment

The unemployment rate has dropped to 7.3% compared to 9.9% at the height of the recession and 7.8% one year ago. Some economists point out that the shrinking labor participation rate, caused by discouraged job seekers dropping out of the work force, has kept the officially unemployment rate artificially low. There are 11.3 million Americans unemployed currently—one million fewer than a year ago but four million more than when the recession began. Approximately 36% of those currently unemployed have been out of work for more than six months. The economic impact of unemployment is captured by personal income data.

24

U.S. Unemployment

(in $ thousands)

Source: Moody's FreeLunch.com

• 10%
• 5%

0% 5% 10% 15% 50 100 150 200 250 300 350 400 1988Q1 1989Q2 1990Q3 1991Q4 1993Q1 1994Q2 1995Q3 1996Q4 1998Q1 1999Q2 2000Q3 2001Q4 2003Q1 2004Q2 2005Q3 2006Q4 2008Q1 2009Q2 2010Q3 2011Q4 2013Q1 FHFA Home Pice Index (LHS) YOY % Change (RHS)

• 25%
• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 50 70 90 110 130 150 170 190 210 1988Q1 1989Q2 1990Q3 1991Q4 1993Q1 1994Q2 1995Q3 1996Q4 1998Q1 1999Q2 2000Q3 2001Q4 2003Q1 2004Q2 2005Q3 2006Q4 2008Q1 2009Q2 2010Q3 2011Q4 2013Q1 Case Shiller Composite Index (LHS) YOY % Change (RHS)

Home Prices

The most commonly referenced home price index is the Case Shiller Home Price Index, which is not true national index of housing market conditions. It’s composite index comprises repeat-sales data from 20 major metro markets. The Case Shiller Index has clearly been recovering in 2013, with its most recent reading showing 12% price gains from a year ago. However, this is its composite index; gains in specific metro markets vary widely, with the largest gains accruing to markets hardest hit by the housing downturn. Other markets that did not appreciate excessively during the housing bubble had shown more modest gains in 2013. There is some concern that home prices have appreciated too rapidly in some previously depressed markets largely due to investor purchases of homes. Another less referenced housing price index is from FHFA. It is more indicative of national housing market conditions. It gains and losses since the housing bubble have been more subdued than the Case Shiller index but it tells the same story directionally. Both home price indexes are now back to levels of mid-2004. U.S. consumers are feeling better about home values and home purchasing this year despite the uptick in mortgage rates since mid- year.

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Case Shiller Home Price Index FHFA Home Price Index

Source: S&P and FHFA

• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% 20% $0 $10,000,000 $20,000,000 $30,000,000 $40,000,000 $50,000,000 $60,000,000 $70,000,000 $80,000,000

1980Q1 1981Q3 1983Q1 1984Q3 1986Q1 1987Q3 1989Q1 1990Q3 1992Q1 1993Q3 1995Q1 1996Q3 1998Q1 1999Q3 2001Q1 2002Q3 2004Q1 2005Q3 2007Q1 2008Q3 2010Q1 2011Q3 2013Q1

Households' Net Worth (left axis) YOY % Change (right axis) $0 $3,000,000 $6,000,000 $9,000,000 $12,000,000 $15,000,000 $18,000,000 $21,000,000 $24,000,000 $27,000,000 $30,000,000 $33,000,000 $36,000,000

1980Q1 1981Q3 1983Q1 1984Q3 1986Q1 1987Q3 1989Q1 1990Q3 1992Q1 1993Q3 1995Q1 1996Q3 1998Q1 1999Q3 2001Q1 2002Q3 2004Q1 2005Q3 2007Q1 2008Q3 2010Q1 2011Q3 2013Q1

Credit, Equity & Mutual Fund Assets Equity in Residences

Household Wealth

Household net worth, which fell an unprecedented 20% during the recession has made it all back and then some. Household net wealth hit $75 trillion in 2Q13 compared to $56 trillion in 2Q09 and $69 trillion in 2Q07. Much of these gains have accrued to financial market assets and have benefitted a relatively small percentage of U.S.

• households. Broad equity market indexes are up around 25% so far this year.

However, gains in home equity value have climbed to $9.3 trillion in 2Q13 compared to $6.1 trillion in 2Q09 and $13 trillion in 2Q06---an encouraging development for homeowners.

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Net Worth of Households

(in $ millions)

Major Components of Household Net Worth

(in $ millions)

Source: FRB Flow of Funds

• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 25% $0 $200 $400 $600 $800 $1,000

1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1

Amount Outstanding (left axis) YOY % Change (right axis)

• 10%
• 5%

0% 5% 10% 15% $0 $500 $1,000 $1,500 $2,000

1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1

Amount Outstanding (left axis) YOY % Change (right axis)

Consumer Debt

Consumer revolving debt, mainly credit card debt, fell by nearly 20% during the recession and has barely recovered since

• then. Many consumers do not want to use the plastic as they did previously, while others, particularly sub-prime borrowers,

have found credit access reduced by banks. Outstanding installment credit remains around $850 billion compared to $1.05 trillion prior to the recession. Conversely, consumer debt outstanding under non-revolving borrowings has soared again, mostly for auto-financing and education loans. (This category excludes mortgages and other home-related loans.) In total, about $3.1 trillion of consumer installment debt is outstanding today compared to $2.6 trillion prior to the recession, an increase of nearly 20%.

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Consumer Revolving Credit

(in $ billions)

Consumer Non-Revolving Credit

(in $ billions)

Source: Moody's Economy.com