The Economic Outlook Presented by: Augustine Faucher Director of Macroeconomics Presented by: Augustine Faucher Director of Macroeconomics October 24, 2007

2 Source: BLS Average monthly change in payroll employment, ths Growth, but Slow Growth... Trend

3 Sources: BEA, Moody's Economy.com Real GDP growth, % change year ago...Through This Time Next Year December 2006 outlook October 2007 outlook Potential growth

4 TED spread, difference between 3 mo. Euro $ and T-bill The Subprime Financial Shock Is a Major Event... Gulf war Subprime financial shock Peso crisis LTCM Tech bust Orange County Thai baht

5 TED spread, difference between 3 mo. Euro $ and T-bill...And It Continues to Reverberate... Subprime financial shock

6 $ mil, Source: Moody’s Economy.com...And May Not Be Over...

7 Residential RE assets of large commercial banks Source: FRB $ bil (L) Share of assets % (R)...Given the Risk in the Banking System

8 CMBS inv grade to 10-yr Treasury spread, percentage points Sources: Lehman, FRB Average The Cost of Capital Has Risen...

9...And Credit Is Less Ample Source: Lehman Brothers High-yield bond issuance, $ bil MA

10 Bond Issuance, $bil, annualized The Subprime Financial Shock Spooks Investors...

11...Inducing a Mortgage Lending Crunch... Sources: Senior Loan Officer Survey, Moody's Economy.com Net % of banks tightening mortgage loan standards

12...In These Housing Markets... Non-conforming share of 2006 originations, U.S. = 50% Sources: 2006 HMDA, Moody's Economy.com >=60% 60% - 40% =<40%

13 Housing Demand Slumps... Sources: Realtors, Census Home sales, ths, SAAR

14...And Mortgage Loan Defaults Soar... Sources: Equifax, Moody's Economy.com Default rate, % of residential mortgage debt, $

15...In Much of the Country... Change in mortgage default rate, 2005Q4-2007Q3, ppt. Sources: Equifax, Moody's Economy.com >=0.7% 0.3% - 0.7% =<0.3% U.S. = 0.54%

16...And More Are Coming Mortgage debt outstanding facing first payment reset, $ bil Source: First American LP

17 # of excess housing units, ths Sources: Census, Moody's Economy.com Already Swollen Inventories Will Swell More...

18 Job growth Baseline outlook What it would take to reach a bottom by year-end Forcing Lower Construction and House Prices... Peak-trough % price decline

19...In Much of the Country Projected peak-to-trough % decline Source: Moody’s Economy.com -15 < -5% -5 < 0% No correction < -15%

20 House-price growth 6 mo. lead (L) Core retail sales growth 3 mo. MA (R) Sources: Realtors, Census, Moody's Economy.com Negative Housing Wealth Effects Kick In...

21...As Equity Withdrawal Fades... Gross equity extraction, $ bil, Source: Moody's Economy.com

22 Source: Moody's Economy.com...Weighing on Lower-Mid Income Homeowners… Homeowner no HELOC Renter Homeowner HELOC Personal saving rate

23 Source: BLS …Who Will Pack It in If the Job Market Weakens Change in employment, 3 mo. MA Housing related Non-housing related

24 Businesses Remain Highly Profitable... Corporate profit margin Source: BEA

25...And Highly Liquid Ratio of liquid assets to short-term liabilities, nonfinancial corporations Source: Federal Reserve Board

26 Trade Swings from Negative to Positive Trade balance contribution to real GDP growth

RecoveryExpansion StrugglingRecession Annualized % change NOTE: Size reflects relative GDP % change year ago Czech Republic Denmark France Italy Netherlands Norway Portugal Russia Spain U.K. Sweden Belgium Hungary Germany Euro Zone U.S. Canada Argentina Australia Brazil Chile India Japan Korea Mexico New Zealand Colombia Malaysia Philippines China Hong Kong Real GDP growth, 2007Q2 …As Global Growth Remains Broad-Based Europe North America Asia South America

28 Business confidence, 4 wk. MA, diffusion index Confidence Doing Better in Asia, South America U.S. South America Asia Pacific Europe

29 Industrial production, 4 mo. MA, % change year ago China and India Still Going Strong India China

30 Real GDP, % change year ago, 2007H1 Growth Strong But Variable Across Europe

31 Federal funds future contract for December 2007 Policymakers Respond Source: CBOT

32 Commercial paper outstanding, $ bil Watch the CP Market... Source: Federal Reserve Board

33 Source: MBA...The ARM Share... ARM share of originations, %

34 Source: Moody's Economy.com Iraq invasion Global confidence, present conditions diffusion index...Business Confidence... Subprime financial shock

35 ABC/Washington Post consumer survey, index...Consumer Confidence...

36 Source: BLS...And UI Claims Initial UI claims, ths, 4 wk. MA