1E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Less than $5,000 per capita GDP$5,000 - $10,000 per capita GDPOver $10,000 per capita GDP
Turmoil amid …
Jim Glassman
Circa 1980
2E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Less than $5,000 GDP per person$5,000 - $15,000 GDP per personOver $15,000 GDP per person
Circa 2005
… a Great Awakening
3E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Ten surprises …
4E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Real GDP growth% change over the four quarters of the year
2007 2008
United States 2.3 2.2
Europe (EU-11) 1.9 1.2
Japan 1.3 0.0
Newly industrializing 8.1 6.6
China 10.8 10.2
#1. The slowdown more global
5E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#2. The US economy steadier …US real GDP (percent change from four quarters earlier)
Source: US Department of Commerce
2.2
0.2
1.9
3.7
3.12.7
2.4 2.3
-2
-1
0
1
2
3
4
5
6
7
8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-2
-1
0
1
2
3
4
5
6
7
8Forecast ofquarter-to-quarter realGDP growth
Quarter-to-quarter realGDP growth
Annualgrowth ofreal GDP(Q4 to Q4)
Change inreal GDPfrom fourquartersearlier
6E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… steadier, even though oil “ate” the fiscal stimulusUS real GDP (chained 2000 dollars)
Source: Macroeconomic Advisers LLC
7,000
8,000
9,000
10,000
11,000
12,000
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 087,000
7,500
8,000
8,500
9,000
9,500
10,000
10,500
11,000
11,500
12,000
7E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#3. The housing drag more containedSelected GDP measures (percent change from four quarters earlier)
Source: US Department of Commerce
0
1
2
3
4
5
6
91 93 95 97 99 01 03 05 070
1
2
3
4
5
6
Real GDP excluding residential construction
Real GDP
8E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#4. The housing ATM not such a big dealHome equity extracted ($ billions) Real consumer spending (% ch vs four quarters earlier)
Sources: US Department of Commerce; Federal Reserve Board
0
200
400
600
800
1,000
1,200
1,400
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08-1
0
1
2
3
4
5
6
7
Real consumer spending
Net mortgage equity withdrawn
9E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#5. Employment weaker …Employment and real GDP (percent change from four quarters earlier)
Sources: US Department of Commerce; US Department of Labor
-2
-1
0
1
2
3
4
5
6
7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-2
-1
0
1
2
3
4
5
6
7
Nonfarm payrollsHousehold employment
Blue shaded zone is real GDP growth (line is forecast)
10E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… and unemployment up more than usualUnemployment rate (percent of the labor force)
Sources: US Department of Commerce; US Department of Labor
-2
-1
0
1
2
3
4
5
6
7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-2
-1
0
1
2
3
4
5
6
7
Unemployment rate
Grey shaded zone is real GDP growth from four
quarters earlier
11E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#6. Education matters more than usualUnemployment rate by maximum educational level achieved (percent of the labor force)
Source: US Department of Labor
0
1
2
3
4
5
6
7
8
9
10
1999 2000 2001 2002 2003 2004 2005 2006 2007 20080
1
2
3
4
5
6
7
8
9
10
Lines:High school dropouts
High school grad, no collegeSome college
Bachelors degree or higher
National unemployment rate (blue shaded area)
12E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#7. Productivity surprisingly robust for a slowdownLabor productivity (percent change from four quarters earlier)
Sources: US Department of Labor
-2
-1
0
1
2
3
4
5
6
7
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08-2
-1
0
1
2
3
4
5
6
7
13E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#8. Profit margins remain near recordsProfits (percent of Gross Domestic Income)
Sources: NBER recession bars; US Department of Commerce; Standard & Poor’s
0
1
2
3
4
5
6
7
8
9
10
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 20070
1
2
3
4
5
6
7
8
9
10
After-tax S&P 500 operating earnings
After-tax GDP profits from current production
14E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#9. Inexplicable oil surgeGlobal oil demand (millions of barrels daily) Oil prices (dollars per barrel)
Sources: US Department of Energy; American Petroleum Institute
30343842465054586266707478828690
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 20070
20
40
60
80
100
120
140Global petroleum demand in $ billions (left)Petroleum price per barrel (right)
15E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#10. Despite rising inflation “readings” …Oil ($/barrel) Inflation (percent change from 12 months earlier)
Sources: NBER recession bars; US Department of Commerce
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100
1
2
3
4
5
6
7
8
9
10
Petroleum, shaded area (left)
Lines:Chain PCE prices (right)Core chain PCE prices (right)
16E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… a more sanguine investor community10-year inflation expectations (percent)
Sources: Bloomberg; Federal Reserve Board
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00
2000 2001 2002 2003 2004 2005 2006 2007 20081.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00
17E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Key issues in the outlook …
18E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#1. The housing debacle …
19E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Inflated valuations are largely history …Nominal income per household and house prices (ratio to 1970 Q1 level)
Sources: Standard & Poor’s; US Department of Commerce
0
1
2
3
4
5
6
7
8
9
10
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 140
1
2
3
4
5
6
7
8
9
10Existing house prices (Case-Shiller national index)Ofheo purchase only indexGross nominal income per household
2001 Q2
20E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… that’s why price declines are slowingSelected measures of existing house prices (percent change from 12 months/4 quarters earlier)
Sources: Standard & Poor’s; Ofheo; Census
-20
-15
-10
-5
0
5
10
15
20
25
2001 2002 2003 2004 2005 2006 2007 2008-20
-15
-10
-5
0
5
10
15
20
25Freddie Mac
OFHEO (purchase only)
OFHEO (purchase only), quarterly
Census-HUD
NAR median
Nar median, single family
Radar Logic
Case-Shiller national index
Case-Shiller 20 metropolitan areas
Case-Shiller 10 metropolitan areas
21E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
The GSE rescue broke the ice in credit markets30-year mortgage rate (percent)
Source: Bank Rate Monitor
5.0
5.2
5.4
5.6
5.8
6.0
6.2
6.4
6.6
Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 085.0
5.2
5.4
5.6
5.8
6.0
6.2
6.4
6.6
22E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Builders still have some wood to chop …Housing starts (thousands at an annual rate) Unsold new single family houses (thousands)
Source: Census Department
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 090
100
200
300
400
500
600
700
Starts of new (single- and multifamily) houses (left)
Cancelled sales of new single family units (right)Unsold single family houses (right)
Forecast
23E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… maybe another year of “slow” ... Housing starts (thousands at an annual rate) Unsold new single family houses (months’ supply)
Source: Census Department
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 090
2
4
6
8
10
12
14
16
Starts of new (single- and multifamily) houses (left scale)
Canceled sales of newly built single-family units (right)Unsold new single family houses (right)
Forecast
24E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
What building takes, exports giveContribution of selected sectors to growth (pct points contribution to year-over-year real GDP growth)
Source: US Department of Commerce
-1.50
-1.25
-1.00
-0.75
-0.50
-0.25
0.00
0.25
0.50
0.75
1.00
1.25
1.50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-1.50
-1.25
-1.00
-0.75
-0.50
-0.25
0.00
0.25
0.50
0.75
1.00
1.25
1.50Exports
Residential construction
25E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#2. The oil spasm …
26E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Population and oil demandOil demand
Population (mln bbl daily)
United States 300,000,000 20.0
India 1,400,000,000 6.5
China 1,300,000,000 2.5
There’s always a fundamental logic
27E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
But market signals have the last word …Petroleum, WTI ($/gallon) Pump price of gasoline ($/gallon)
Source: Baker Hughes
0.00
0.25
0.500.75
1.00
1.25
1.501.75
2.00
2.25
2.50
2.753.00
3.25
3.50
1999 2000 2001 2002 2003 2004 2005 2006 2007 20080.90
1.15
1.401.65
1.90
2.15
2.402.65
2.90
3.15
3.40
3.653.90
4.15
4.40
Pump price of regular gasoline (left scale)
Crude petroleum (right scale)
28E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… when demand and supply respondGasoline consumption (billions of 2000 dollars) Gasoline prices (chain price index)
Source: US Department of Commerce
50
70
90
110
130
150
170
190
210
45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 080
20
40
60
80
100
120
140
160
180
200
Real gasoline consumption (left)
Chain PCE index for gasoline (right)
29E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
It’s about the future, not the now, and that’s what specs doGlobal oil demand (millions of barrels daily) Petroleum, WTI (dollars per barrel)
Source: American Petroleum Institute
30343842465054586266707478828690
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 20070
20
40
60
80
100
120
140Global petroleum demand in $ billions (left)Petroleum price per barrel (right)
30E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Why oil matters in the short run … some scenariosContribution to real GDP growth (contribution to percent change from four quarters earlier)
Sources: US Department of Commerce; JPMorgan Chase &Co.
-1.5
-1.0
-0.5
0.0
0.5
1.0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-1.5
-1.0
-0.5
0.0
0.5
1.0Oil prices fall back to $65 per barrelOil prices hold at $130 per barrel
Oil prices rise to $200 per barrel
31E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#3. The food debacle …
32E C
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O O
K
I S S
U E
S,
W A
S H
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G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
This was “Made-in-Congress”, not ChinaCorn prices received by farmers (dollars per bushel)
Source: US Department of Agriculture
0
1
2
3
4
5
6
7
8
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 090
1
2
3
4
5
6
7
8
Energy Policy Act of 2005 (August 8, 2005)
Energy Independence and Security Act of 2007 (December 19, 2007)
33E C
O N
O M
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O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Retail food prices (percent change at an annual rate over the most recent two years)
Source: US Department of Commerce; US Department of Agriculture; JPMorgan Chase & Co.
0
1
2
3
4
5
6
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 20090
1
2
3
4
5
6
Corn's contribution to retail food inflation (if corn prices stabilize at $6 per bushel)Other food costs (assumed to rise 2.5% annually)
CPI for food
When Washington wants to fix the problem, run for the hills
Note: 9 billion gallons of ethanol (the 2008 mandate) requires 3.27 billion bushels of corn
which requires 20 million acres of farmland
34E C
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O U
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O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#4. Inflation, or not …
35E C
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O M
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O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
When it’s about oil, not aggregate demand …Oil ($/barrel) Inflation (percent change from 12 months earlier)
Sources: NBER recession bars; US Department of Commerce
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100
1
2
3
4
5
6
7
8
9
10
Petroleum, shaded area (left)
Lines:Chain PCE prices (right)Core chain PCE prices (right)
36E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… it’s a relative price event, not inflationSelected CPI indexes (percent change from 12 months/four quarters earlier)
Source: US Department of Labor
0
1
2
3
4
5
6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
1
2
3
4
5
6
CPI, all items
Ex. (direct) energy
Ex. all energy*
* Indirect energy in core CPI assumed to be 35% of direct energy contribution
37E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
A clue: what is a COLA?Private sector workers who belong to a union (percent of the labor force)
Source: US Department of Labor
1970s Today
United States (Private Sector) 35.7 7.5France 21.7 8.3Republic of Korea 12.6 11.2Poland 53.1 14.7Spain 12.9 16.3Switzerland 28.9 17.8Japan 35.1 19.7Hungary 63.4 19.9New Zealand 55.2 22.1Netherlands 36.5 22.3Germany 32.0 22.6Australia 50.2 22.9European Union 37.8 26.3Czech Republic 78.8 27.0Canada 31.5 28.4United Kingdom 44.8 29.3Italy 37.0 33.7Ireland 53.2 35.3Austria 62.8 35.4Slovak Republic 78.7 36.1Norway 56.8 53.3Belgium 42.1 55.4Denmark 60.3 70.4Finland 51.3 74.1Sweden 67.7 78.0
38E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
The more we pay for energy, the less for other thingsHourly wage gains (percent change from 12 months earlier)
Source: US Department of Labor
0
1
2
3
4
5
6
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 20080
1
2
3
4
5
6
Average hourly earnings (line)
ECI for private wages and salaries
39E C
O N
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O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Wall Street knows all about this, even if its pundits don’t10-year inflation expectations (percent)
Sources: Bloomberg; Federal Reserve Board
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00
2000 2001 2002 2003 2004 2005 2006 2007 20081.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00
40E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#5. For US consumers, the end of an era …
41E C
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T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
US consumers were blessed …Consumer spending (percent of GDP)
Source: US Department of Commerce
0.55
0.60
0.65
0.70
0.75
47 52 57 62 67 72 77 82 87 92 97 02 070.55
0.60
0.65
0.70
0.75
42E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… and saving fell because savings rose … that was thenHousehold saving (percent of income) Net worth (ratio to income)
Sources: US Department of Commerce; Federal Reserve Board
-4
0
4
8
12
16
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20103.8
4.0
4.2
4.4
4.6
4.8
5.0
5.2
5.4
5.6
5.8
6.0
6.2
6.4Ratio of net worth to income (right)
Saving rate, the line (left)
43E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
They borrowed more because they could … that was thenMonthly financial obligations (percent of income) Household debt (ratio to income)
Source: Federal Reserve Board
0
5
10
15
20
25
1960 1965 1970 1975 1980 1985 1990 1995 2000 20050.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
Debt service (homeowners' financial obligations) (left)
All household debt (right)
44E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Paying for health care this way costs us moreLabor compensation share (percentage of Gross Domestic Income)
Source: US Department of Commerce
0.40
0.44
0.48
0.52
0.56
0.60
0.64
69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 070.40
0.44
0.48
0.52
0.56
0.60
0.64
Compensation
Wages and salaries
45E C
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O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#6. Securitized under siege …
46E C
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O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
A bad bet won’t jeopardize securitized financeAssets held at financial intermediaries (share of all assets held at financial intermediaries)
Source: Federal Reserve Board
0
10
20
30
40
50
60
70
80
90
100
50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07
Life Insurance Companies
Pension Funds
Brokers and Dealers, Finance,Mortgage, and Other InsuranceCompanies, and FundingCorporations
Money Market Mutual Funds
Mutual Funds, Closed-End Funds,Exchange-Traded Funds, and REITs
Government-Sponsored Enterprises,Federally Related Mortgage Pools,and Issuers of Asset-BackedSecurities
Banks, Savings Institutions, andCredit Unions
47E C
O N
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O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
#7. The Great Economic Awakening …
48E C
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O U
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O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
The birth of economic miracles …US current account balance (percent of GDP)
Source: US Department of Commerce
-7
-6
-5
-4
-3
-2
-1
0
1
2
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010-7
-6
-5
-4
-3
-2
-1
0
1
2
49E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… lights turning on all around us …Global real GDP (percent change from four quarters earlier)
Source: JPMorgan Chase & Co.
-1
0
1
2
3
4
5
6
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010-1
0
1
2
3
4
5
6
50E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… in dark corners of the world …Real GDP in selected regions (percent change from four quarters earlier)
Source: JPMorgan Chase & Co.
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
US (black)EU-11 (blue)Japan (gold)
Emerging economies in Asia, Eastern Europe and Latin America
51E C
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O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… because the earth is not flatChina’s real per capita GDP (percent of the US level)
Source: JPMorgan Chase & Co.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
52E C
O N
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O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
What it means for the future …Real GDP in selected regions (chained US dollars)
Source: JPMorgan Chase & Co.
0
100,000
200,000
300,000
400,000
500,000
600,000
2007 2017 2027 2037 2047
OtherIndiaChinaCurrent developed (North America, Japan, Western Europe)
53E C
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O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… activity will be more proportional to populationShare of global real GDP (percentage)
Source: JPMorgan Chase & Co.
0.00
0.20
0.40
0.60
0.80
1.00
2007 2017 2027 2037 2047
Other
India
China
Current developed (North America, Japan, Western Europe)
54E C
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O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Conclusion
55E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Central banks shifting to “accommodative” …Federal funds rate (percent) Unemployment rate (percent)
Sources: NBER recession bars; Federal Reserve Board; US Department of Labor
-2.75-2.50-2.25-2.00-1.75-1.50-1.25-1.00-0.75-0.50-0.250.000.250.500.751.00
-1 0 0.2 0.5 1 2 3 4 5 6 7 8 9 10-2.75-2.50-2.25-2.00-1.75-1.50-1.25-1.00-0.75-0.50-0.250.000.250.500.751.00
Europe
Japan
US
Normalized--versus 10-year rate--swap yield curves
Years to Maturity
56E C
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K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
It’ll be that way unemployment turns back down …Federal funds rate (percent) Unemployment rate (percent)
Sources: NBER recession bars; Federal Reserve Board; US Department of Labor
0
1
2
3
4
5
6
7
8
9
10
11
12
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 100
1
2
3
4
5
6
7
8
9
10
11
12
Unemployment rate (orange shaded area)
Federal funds rate
targetUnemploy ment
rate forecast
57E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… and it doesn’t compromise inflationFederal funds rate and inflation (percent)
Sources: NBER recession bars; Federal Reserve Board; US Department of Labor
0
4
8
12
16
20
60 65 70 75 80 85 90 95 00 05 100
4
8
12
16
20
Core PCE chain price inflation ( % ch. from 12 months earlier)
Nominal federal funds rate
FOMC
forecast
58E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Alternatively, a steep curve for a whileFederal funds rate less 10-year rates (percentage points)
Sources: NBER recession bars; Federal Reserve Board
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
1960 1970 1980 1990 2000 2010-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
Versus TreasuriesVersus swaps
59E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Lower natural level of interest ratesNominal and real 10-year Treasury yield (percent)
Sources: NBER recession bars; Federal Reserve Board; US Department of Commerce
0
2
4
6
8
10
12
14
16
50 55 60 65 70 75 80 85 90 95 00 050
2
4
6
8
10
12
14
16
Real 10-year Treasury yield (nominal less 1-year trailing core chain PCE inflation rate)
Nominal 10-year Treasury yield
60E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
After the “Runs of August” …Selected borrowing costs (percent)
Source:s Federal Reserve Board; Bloomberg; JPMorgan Chase & Co.
0
3
6
9
12
15
2002 2003 2004 2005 2006 2007 20080
3
6
9
12
15
10-year noninvestment grade debt
Jumbo mortgage rateBBB-rated corporate debt30-year conventional mortgage rate
10-year Treasury yield
Federal funds rate target
61E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… investors will demand more protectionHigh yield debt yield less 10-year Treasury yield (basis points)
Source: JPMorgan Chase & Co.
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008200
300
400
500
600
700
800
900
1,000
1,100
1,200
Ibbotson Associates JPMorgan Securities Inc.
62E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
If it’s global, the dollar will go upReal trade weighted dollar index (March 1973 = 100)
Source: Federal Reserve Board
75
85
95
105
115
125
135
1965 1970 1975 1980 1985 1990 1995 2000 200575
85
95
105
115
125
135
Nominal trade-weighted dollar
index versus G10 countries (1972-76
= 100)
Broad real trade-weighted dollar index
63E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… because others are slowing tooPercent change since July 21, 2005 (China’s revaluation)
Source: Federal Reserve Board
-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
2005 2006 2007 2008-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
Broad nominal trade weighted dollar index
Versus other important currencies
Versus industrial countries
64E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
Stocks, where we discount eternity … patience …Wilshire 5000 index of all publicly traded stocks (index)
Source: Bloomberg
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 080
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
65E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
… to undo the “stagflation” tradeWilshire 5000 index of all publicly traded stocks (index)
Source: Bloomberg
0.40
0.60
0.80
1.00
1.20
1.40
1.60
2007 2008 20090.40
0.60
0.80
1.00
1.20
1.40
1.60
Energy (Bloomberg IXE)
Wilshire 5000
Builders (Bloomberg HXG)Banks (Bloomberg BKX)
66E C
O N
O M
I C
O U
T L
O O
K
I S S
U E
S,
W A
S H
I N
G T
O N
A
S S
O C
I A
T I O
N
O F
M
O N
E Y
M
A N
A G
E R
S,
S E
P T
E M
B E
R
1 7,
2
0 0
8
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