Economic Outlook September, 2001 Yield curve story remains same. Based on historical analysis, pickup at end of 3rd quarter. Slow recovery likely. Volatility of the business cycle has likely decreased with increased U.S. role in world trade (economic diversification).

Exhibit 0

Yield Curve Inverts Before Last Five Recessions (5-year Treasury bond - 3-month Treasury bill) % Real annual GDP growth Yield curve Recession Correct 2 Recessions Correct Recession Correct Recession projected over by end 3rd Quarter Recession Correct Data though August 2001 Exhibit 1 Annual GDP growth or Yield Curve

Recent Annualized 1-Quarter Growth Data (10-year and 5-year Yield Curves) % Real one-quarter GDP growth Exhibit 2 Annualized 1-quarter GDP growth or Yield Curve Both curves invert 2000Q3 10-year 5-year Data though August 2001

High Yield at recession levels...but have they peaked? (ML High Yield Master Index minus 10-year Treasury) % Real annual GDP growth High Yield Exhibit 3 4-quarter GDP growth or Yield Spread Data though August 2001

Oil Prices associated with 4/5 last recessions....but oil might be off peak Oil Price GDP West Texas Recession 2 Recessions Recession Exhibit 4 4-quarter GDP growth Data though August 2001

3-and 6-month moving averages of Industrial Production growth (annual rates) MA6 MA3 Recession 2 Recessions Recession Exhibit 5 Growth Nine straight monthly declines In the ball park of but no where near as severe as other past episodes Next announcement Sept. 14, 9:15AM Data though August 2001

Consumer Sentiment turns corner, increases in May, June and July Michigan Index GDP Michigan Consumer Sentiment Recession 2 Recessions Recession Exhibit 6 4-quarter GDP growth Data though August 2001

Stock Price Performance: Normal versus Inverted Yield Curve January 1970-August 2001 Average Annual US$ Return Source: Dahlquist and Harvey (2001) Normal yield curve Inverted yield curve Exhibit 7