From the Great Recession to the New Normal MARK ZANDI, CHIEF ECONOMIST FROM MOODY’S ECONOMY.COM

2 The Great Recession Is Over Recessions since World War II Sources: NBER, BEA, FRB, BLS, Moody’s Economy.com Duration in MonthsPeak-to-Trough % ChangeJobless Rate PeakTrough Recession Peak to Trough Expansion Trough to Peak Real GDP Industrial Production Nonfarm EmploymentLowHighChange Dec-07Aug %-19.2%-6.2%4.4%10.3%5.9% Mar-01Nov %-6.3%-2.0%3.8%6.3%2.5% Jul-90Mar %-4.3%-1.5%5.0%7.8%2.8% Jul-81Nov %-9.5%-3.1%7.2%10.8%3.6% Jan-80Jul %-6.2%-1.3%5.6%7.8%2.2% Nov-73Mar %-14.8%-2.7%4.6%9.0%4.4% Dec-69Nov %-5.8%-1.4%3.4%6.1%2.7% Apr-60Feb %-6.2%-2.3%4.8%7.1%2.3% Aug-57Apr %-12.7%-4.4%3.7%7.5%3.8% Jul-53May %-9.0%-3.3%2.5%6.1%3.6% Nov-48Oct %-8.6%-5.1%3.4%7.9%4.5% Average %-8.3%-2.7%4.4%7.6%3.2%

FROM MOODY’S ECONOMY.COM3 Policymakers Stabilize the Banking System… Bear hedge funds liquidate Bank funding problems Difference between 3-mo Libor and Treasury bill yields Bear Stearns collapse Lehman failure Fannie/Freddie takeover TARP fails to pass Congress No asset purchases Stress tests

FROM MOODY’S ECONOMY.COM4 …And the Stimulus Provides a Meaningful Boost Source: Moody’s Economy.com Contribution to real GDP growth, ppt

FROM MOODY’S ECONOMY.COM5 U.S. Households Are Fixing Their Finances... Contribution to personal saving rate, 4-qtr MA Source: Moody’s Economy.com

FROM MOODY’S ECONOMY.COM6 …With Some Success Number of trades days delinquent, mil Sources: Equifax, Moody’s Economy.com

FROM MOODY’S ECONOMY.COM7 Layoffs Abate, but Hiring Remains Dormant… Source: BLS Ths, 3-mo MA

FROM MOODY’S ECONOMY.COM8 Source: BLS y = -0.48x R2 = Q2 Unemployment rate=9.3% Natural rate=5.3% Compensation growth=1.5% …Threatening to Undermine Compensation 1985Q1-2009Q2

FROM MOODY’S ECONOMY.COM9 The Foreclosure Crisis Continues to Mount Ths of first mortgage loans Sources: Equifax, Moody’s Economy.com

FROM MOODY’S ECONOMY.COM10 Commercial Real Estate Boom and Bust Sources: Moody’s Investors Service, REAL, Fiserv Repeat-sales indices: 2000Q4=100

FROM MOODY’S ECONOMY.COM11 State and Local Government Revenues Collapse Source: BEA State and local tax revenue, % change yr ago

FROM MOODY’S ECONOMY.COM12 Credit Markets Remain Dysfunctional Bond issuance, $ bil, annualized Source: Thomson Reuters

FROM MOODY’S ECONOMY.COM13 The Federal Reserve Will Remain Aggressive… Federal funds rate Sources: Federal Reserve, Moody’s Economy.com

FROM MOODY’S ECONOMY.COM14 …Even Committing to More Credit Easing… Sources: Freddie Mac, Federal Reserve Fed holdings of Fannie and Freddie MBS, $ bil (R) Difference between Freddie mortgage rate and 10-year Treasury yield (L)

FROM MOODY’S ECONOMY.COM15 …And Fiscal Policymakers Are Not Finished »More aid to unemployed workers—extended benefits and COBRA payments. »Another round of help to financially stressed state and local governments—FMAP and educational programs. »Extend higher conforming loan limits and housing tax credit for first- time homebuyers. Mortgage modifications with principal write-down. »Extend accelerated depreciation and NOL carryback for businesses. Direct lending to small businesses by the SBA.

FROM MOODY’S ECONOMY.COM16 The Wrongs Will Be Slowly Righted Vacant homes for sale and rent, ths Housing supply=600,000 Single-family=450,000 Multifamily=100,000 Manufactured=50,000 Housing demand=1,300,000 HH formations=750,000 Obsolescence=350,000 Second homes=200,000 Trend Actual

FROM MOODY’S ECONOMY.COM17 Confidence Will Be Restored Source: Moody’s Economy.com Business confidence diffusion index Lehman Bear Stearns Iraq invasion

FROM MOODY’S ECONOMY.COM18 An Inflection Point for U.S. Consumers… Saving vs. wealth, 1960-present 09Q2 07Q2

FROM MOODY’S ECONOMY.COM19 …But Global Customers Will Pick Up the Slack Source: Moody’s Economy.com ExpansionRecoveringModerating recessionIn recession

FROM MOODY’S ECONOMY.COM20 Tough Job Market for Years to Come… Sources: BLS, Moody’s Economy.com Jobs, mil (L) Jobless rate (R)

FROM MOODY’S ECONOMY.COM21 …But Businesses Will Eventually Need to Hire Trend labor productivity growth, % change yr ago 2% 4% 0%

FROM MOODY’S ECONOMY.COM22 Fiscal Austerity Dead Ahead... Federal debt-to-GDP ratio under the president’s budget Source: CBO

FROM MOODY’S ECONOMY.COM23 …But Progress Is Being Made Consumer price inflation, 12-mo MA, % change yr ago

FROM MOODY’S ECONOMY.COM24 Economic Timeline Source: Moody’s Economy.com 09Q109Q2 09Q309Q410Q110Q2 10Q4 11Q111Q2 11Q311Q4 Stock market trough Extraordinary bank failures end Home sales bottom Housing starts bottom Employment bottoms House prices bottom Foreclosures peak Jobless rate peaks House prices resume rising Economic downturn ends Self-sustaining expansion begins Banking system stabilizes Retailing firms 10Q3 Securities markets up and running Fed raises rates Inflation accelerates Fiscal pressures intensify

FROM MOODY’S ECONOMY.COM25

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