Consumer Credit Trends: If I Securitized It, Will You Pay? Consumer wealth and credit-worthiness. January 2006 Stephen Gallagher US Chief Economist

2 Fed Risks Yield Curve to Invert as Fed Resumes Rate Hikes An inverted yield curve has preceded US recessions by several months. Significant fed rate hikes (100bp) are likely to invert Treasury curve.

3 Fed Risks Yield Curve to Invert as Fed Resumes Rate Hikes An inverted yield curve has preceded US recessions by several months. Significant fed rate hikes (100bp) are likely to invert Treasury curve. A flat curve has been consistent with solid growth, but not an inverted curve.

4 US Consumer Leverage at record high

5 US mortgage lending rates Lowest rate in decades not the whole story

6 US Consumer Near record wealth position

7 Consumer Demand Wealth fuels demand– Consumption Growth soft relative to Wealth A cushion? Even with a wealth erosion of 7.3%, the consumption to wealth ratio would return to long-term norm. If wealth loss were just in housing, a 14% value drop would re-establish the long-term ratio. Of course, an abrupt asset price drop would weigh on psychology and heightened risk biases against debt financing.

8 US Consumer Delinquency Rates remained low through falling equity market

9 US Housing Boom Very Recently a more mixed picture Home prices have recently outstripped income gains Lately new home prices have slowed appreciably as home-builders clear inventories

10 US Housing Boom Even with surging home prices, owner costs are in line with income