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What Were Watching to Identify the Economic Recovery

Richard Yamarone

June 3, 2009

Director of Economic Research

Argus Research Corp.

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Hoping for a V-Shaped Recovery

Real GDP (%)

6

8

2

4

-4

-2

-8

-6

'95 '97 '99 '01 '03 '05 '07 '09 F

Source: Bureau of Economic Analysis

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Leading Indicators Signal Some Degree of Recovery

Leading Economic Indicators

vs. Real GDP Growth (Y/Y%)

8

10

8

10

GDP

LEI

4

6

4

6

-2.5%

-

0

2

-

0

2

-4

'85 '95 '05

-4

-3.0%

Source: Bureau of Economic Analysis, The Conference Board, Argus Research Corp.

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The Most Convincing Argument of Recovery

ECRI Weekly Leading Index

5

10

15

-5

0

-20

-15

-10

Source: Bloomberg, ECRI

-30

-25

'99 '01 '03 '05 '07 '09

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Fed Indices Point to More Prosperous Times

Chicago Fed National Activity Index

1.00

Three Month Moving Average

-

0.00

0.50

-1.50

-1.00

- .

-3.00

-2.50

-2.00

-4.00

-3.50

'90 '93 '96 '99 '02 '05 '08

Source: Federal Reserve Bank of Chicago

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A-D-S Business Conditions Index Improving

Source: Federal Reserve Bank of Philadelphia

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Anecdotal Reports Starting to Improve

U.S. Average Daily Package Volume UPS

vs. Real GDP Real GDPUPS Volume

5

7

4

5

6

1

3

2

3

-1

-1

0

1

UPS Volume

Real GDP

-5

-3

2000 2002 2004 2006 2008

-3

-2

Source: United Parcel Service, Bureau of Economic Analysis, Argus Research

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Fiscal Policy Arriving at the Spigots

Direct Outlays, Stimulus Package ($Blns)

200

250

100

150

Source: CBO

50

-50

2009 '10 '11 '12 '13 '14 '15 '16 '17 '18 2019

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Monetary Policy

Source: Federal Reserve Bank of St. Louis

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Business Investment has Collapsed

Capital Spending (%)Non-Residential Investment

20

30

0

10

-20

-10

-40

-30

'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08

Source: Bureau of Econom ic Research

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Little Reason for Hope in New Orders Data

New Orders

NonDefense Capital Goods Ex-Aircraft (Y/Y%)

16

24

0

8

-24

-16

-

-40

-32

'94 '96 '98 '00 '02 '04 '06 '08

Source: Department of Commerce

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Key Index Implying Strong Recovery

ISM New Orders - Inventories vs. Real GDP

25 9

NO-I

GD P Y / Y %

15

20

6

5

10

3

-5

0

0GDP

NO-INV

-15

-10

1983 1988 1993 1998 2003 2008

-3

Source: BEA, ISM, Argus Research

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Little Need to Build With Glut of Commercial Property

Structures Spending (%)

15

30

0

-30

-15

-45

'94 '96 '98 '00 '02 '04 '06 '08

Source: Bureau of Economic Analysis

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Signs of Stabilization

New & Existing Home SalesNew Existing

1200

1350

7300

New

900

1050

5800

6550

600

750

5050

300

450

'96 '99 '02 '05 '08

3550

Source: US Dept. of Commerce, National Association of Realtors

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Home Prices Returning to Pre-Bubble Levels

S&P/Case Shiller Home Price Indices

AZ-Phoenix

-

250

275

CA-San Diego

CA-San Francisco

CO-Denver

DC-Washington

200

225FL-Miami

FL-Tampa

GA-Atlanta

IL-Chicago

125

150

175 - os on

MI-Detroit

MN-Minneapolis

NC-Charlotte

NV-Las Vegas

Source: S&P

75

100

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09

NY-New York

OH-Cleveland

OR-Portland

TX-Dallas

WA-Seattle

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Encouraging Signs in the Housing/Construction Market

Architecture Firms' Billing Index

60

50

55

40

45

30

35

1996 1998 2000 2002 2004 2006 2008

Source: American Institute of Architects

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Stimulus May Help Ailing Construction Sector

Construction Spending (Y/Y%)

30

20

0

-20

-10

Non-Residential

Residential

-40

-30

2003 2005 2007 2009

Source: Department of Commerce

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Trade, the Unsexy Savior

Contribution to GDP

Residential Spending & Trade

2.93

2.182.5

3

3.5

Residential

Trade

0.59

1.33

1.66

.

0.94

0.77

1.05

1

1.5

2

-0.23

-0.6 -0.52 -0.6-

0.09

-0.12 -0.15

-1

-0.5

0

0.5

-1.11-1.4

-1.18

-0.91

-1.06-1.33

-1.12

.

-1.39-1.2

-2

-1.5

'06 QI QII QIII QIV '07 QI QII QIII QIV '08 QI QII QIII QIV '09 QI

Source: BEA, Argus Research

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Some Recovery in Container Traffic

Outbound Container Statistics (TEU)Port of Long Beach

150,000

170,000

110,000

130,000

90,000

50,000

,

'95 '97 '99 '01 '03 '05 '07 '09

Source: Port of Long Beach

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Some Signs of Peak in Unemployment

'Jobs Hard-to-Get' &

Unemployment Rate

9

10 50

7

8

30

Jobs Index

5

620

Unemployment Rate

3

4

'90 '92 '94 '96 '98 00 '02 '04 '06 '08

0

Source: Conference Board, Bureau of Labor Statistics

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Unemployment Benefit Claims Point to Economic Trough

Weekly Initial Claims

600,000

650,000

700,000

500,000

550,000

350,000

400,000

,

250,000

300,000

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

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Ever-Resilient Consumer Tossed in Towel

Real Consumer Spending (%)

10

5

0

-5

1992 1995 1998 2001 2004 2007

Source: Bureau of Economic Aanalysis

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Fab Five Dining Out

Spending: Meals at Other Eating Places (Y/Y%)

8

4

6

2

-2

-6

-4

'98 '01 '04 '07

Source: Bureau Economic Analysis, NBER

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Fab Five Jewelry & Watches

Spending: Jewelry & Watches Y/Y%

8

12

0

4

-8

-4

-16

-12

'98 '01 '04 '07

Source: Bureau Economic Analysis, NBER

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Fab Five Cosmetics & Perfumes

Spending: Cosmetics & Perfumes (Y/Y%)

6

3

0

-6

-3

-9

'98 '01 '04 '07

Source: Bureau Economic Analysis, NBER

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Fab Five Womens Dresses

Spending: Women's Clothing (Y/Y%)

12

8

10

2

4

-4

-2

0

-8

-6

'98 '01 '04 '07

Source: Bureau Economic Analysis, NBER

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Fab Five Casino Gambling

Spending: Casino Gambling Y/Y%

24

12

16

20

4

8

-8

-4

0

-16

-12

'98 '01 '04 '07

Source: Bureau Economic Analysis, NBER

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Fab Five Recovery

Post Recession, Fab-FiveDecember 2001=100

135

140

145

120

125

130 Dining Out

Perfumes

Women's

Jewelry

110

115

Casino

95

100

105

ec- ec- ec- ec- ec- ec- ec-

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Bad Signs for Summer Spending

Real Spending: Hotels & Motels (Y/Y%)

8

12

-

0

4

-12

-8

-20

-16

'98 '01 '04 '07

Source: Bureau Economic Analysis, Argus Research, NBER

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Auto Industry is the Wildcard

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Total Vehicle Assemblies (Mlns)

8

9

Trucks

Autos

Source: Federal Reserve System

4.12

3.97

3.725

6

2.52

3.11 3.053.2

2

3

4

.3.34

2.95

1.33 1.661.87 1.84

0

1

Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09

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The Economist Commodity Price Index

260

275All Items

Industrials

215

230

245 Food

155

170

185Source: The Economist

110

125

140

2/14/2001 2/13/2002 2/12/2003 2/11/2004 2/9/2005

2005=100

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5-Year Treasury Note - Five Year TIPS Spread

2.50

3.00

3.50

1.00

1.50

2.00

-1.00

-0.50

0.00

.

-2.50

-2.00

-1.50

2003 2004 2005 2006 2007 2008 2009

Source: Federal Reserve Bank of St. Louis, Argus Research

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Reuters/U. Michigan Inflation Expectations (%)

5.0

6.0

3.0

4.0

1.0

2.0

Source: Bloomberg

0.0

'03 '04 '05 '06 '07 '08 '09

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GDP Deflators (%)

4

6

2

-2

0

PCE Deflator

-6

-4

e a or

Source: Bureau of Economic Analysis

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No Deflation in this Respected Measure

Dallas Fed Trimmed-Mean PCE Inflation (Y/Y%)

2.9

3.1

2.3

2.5

2.7

1.9

2.1

1.5

1.7

'95 '97 '99 '01 '03 '05 '07 '09

Source: Federal Reserve Bank of Dallas

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Inflation Pressures Appear to be Well-Anchored

For Now

(Y/Y%)

4.5

3.0

3.5

4.0

1.5

2.0

2.5

Federal Reserve 'Comfort Zone'

0.0

0.5

1.0

' ' ' ' ' ' ' ' ' '

Source: Bureau of Economic Analysis, Argus Research

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Monetary Policy Getting Easier Every Month

Real Fed Funds Rate

Core Personal Consumption Deflator (%)

6.0

2.0

4.0

0.0

-2.0

'87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09

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Internal Fed Gauge Implies Fed to Remain on Hold

Argus Leading Fed Funds Index

9 130

FF % Index

7

8

100

110

120FED FUNDS

ALFFI

.

4

5

80

90

2

3

50

60

0

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08

30

40

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Risks to V-Shaped Recovery

Auto Industry Collapse

Commodity (Food), Energy, Healthcare Inflation

(price pass alongs announced during the quarterly earning season)

Stimulus Fails to Generate Jobs

Consumers Decide to Save

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Reasons for Optimism

Massive Monetary Stimulus in Pipeline

Large Stimulus of Falling Energy Prices

Government Has Approved Whopping Fiscal Spending Program

Home Prices Have Returned to Pre-Bubble Levels

Frozen Credit Markets Have Thawed Considerably