2006 Economic Outlook John Kim, CFA President Prudential Retirement January 5, 2006

Economic Forecast 1.U.S. Economy will be in Transition

2 U.S. Economy in Transition % % % U.S. GDP F

Economic Forecast 1.U.S. Economy will be in Transition 2.Underlying Fundamentals will Remain Healthy

4 Healthy Underlying Fundamentals Highly flexible and resilient economy Efficient and competitive business sector Controlled wage and price inflation Strong corporate balance sheets Strong financial system Expanding business capital investments

Economic Forecast 1.U.S. Economy will be in Transition 2.Underlying Fundamentals will Remain Healthy 3.Energy Prices will Decline

6 Energy Prices: Unsustainable Spikes

Economic Forecast 1.U.S. Economy will be in Transition 2.Underlying Fundamentals will Remain Healthy 3.Energy Prices will Decline 4.Consumer Spending will Finally Slow

8 A “Consuming” Consumer

Economic Forecast 1.U.S. Economy will be in Transition 2.Underlying Fundamentals will Remain Healthy 3.Energy Prices will Decline 4.Consumer Spending will Finally Slow 5.Housing Cycle Downturn is Happening

10 Historic Real Estate Busts

11 Historic Real Estate Busts Price At TopYearPrice At BottomYearPercent Loss Austin $109, $81, Detroit $63, $55, Honolulu $268, $225, Los Angeles $222, $176, New York $213, $197, Phoenix $106, $100, San Francisco $286, $261, Source: CNN, September 2005

Economic Forecast 1.U.S. Economy will be in Transition 2.Underlying Fundamentals will Remain Healthy 3.Energy Prices will Decline 4.Consumer Spending will Finally Slow 5.Housing Cycle Downturn is Happening 6.Federal Reserve Tightening will End in 1st Quarter

13 Path of Fed Policy is Much More Uncertain..an energy shock presents complex choices for monetary policy. It reduces output and employment for a time, which calls for easier policy, but it also temporarily raises inflation, which calls for tighter policy. Moreover, the size of these two effects is difficult to gauge in advance. --Janet L. Yellen, San Francisco Fed President September 8, 2005

14 New Fed Chairman Adds to Uncertainty Continuity of policy? More dovish than predecessor? Politically savvy? Too blunt? Moves toward inflation targeting? Unconventional policy measures? Source: The Economist Prices as of 10/13/2005 Quotes from Intrade Exchange

Economic Forecast 1.U.S. Economy will be in Transition 2.Underlying Fundamentals will Remain Healthy 3.Energy Prices will Decline 4.Consumer Spending will Finally Slow 5.Housing Cycle Downturn is Happening 6.Federal Reserve Tightening will End in 1st Quarter 7.Dis-inflationary Bias will Renew

16 Few Signs of Energy Inflation Passing through to Core

Economic Forecast 1.U.S. Economy will be in Transition 2.Underlying Fundamentals will Remain Healthy 3.Energy Prices will Decline 4.Consumer Spending will Finally Slow 5.Housing Cycle Downturn is Happening 6.Federal Reserve Tightening will End in 1st Quarter 7.Dis-inflationary Bias will Renew 8.Corporate Profit Growth will Decelerate

18 U.S. Corporate Profits Source: Bloomberg

Economic Forecast 1.U.S. Economy will be in Transition 2.Underlying Fundamentals will Remain Healthy 3.Energy Prices will Decline 4.Consumer Spending will Finally Slow 5.Housing Cycle Downturn is Happening 6.Federal Reserve Tightening will End in 1st Quarter 7.Dis-inflationary Bias will Renew 8.Corporate Profit Growth will Decelerate 9.Global Economy will Slow

20 Global Economic Growth: Solid, Yet Slowing Source: IMF WEO, September 2005 IMF World Economic Outlook Projections Current Projections World Output Advanced Economies United States Euro Area Japan UK Emerging/developing economies China

Economic Forecast 1.U.S. Economy will be in Transition 2.Underlying Fundamentals will Remain Healthy 3.Energy Prices will Decline 4.Consumer Spending will Finally Slow 5.Housing Cycle Downturn is Happening 6.Federal Reserve Tightening will End in 1st Quarter 7.Dis-inflationary Bias will Renew 8.Corporate Profit Growth will Decelerate 9.Global Economy will Slow 10.Baby Boomers will Finally Grow Up

22 Boomers Turn 60 Famous Boomer Birthdays  Diane Keaton – January 5  Cher – May 20  Donald Trump – June 14  George W. Bush – July 6  Bill Clinton – August 19  Suzanne Somers – October 16  Jimmy Buffett – December 25 Looming Crisis in Retirement and Healthcare Grass roots sentiment for structural change

Happy New Year!