Copyright © 2003 Global Insight, Inc.1 Presented by: James Diffley US Regional Services Global Insight March 12, 2003 The Economic Recovery: Still Waiting

Copyright © 2003 Global Insight, Inc.2 What Kind of Recovery is This? Clear Spending Gains..But less than Capacity (says the labor market) And now a Soft Patch Why the continued “Growth Recession”? 1.No business hiring 2.Delay in investment recovery. esp business construction and telecoms 3.Confidence crisis of Stock Market Capitalism 4.War Jitters– oil prices, sentiment and equities

Copyright © 2003 Global Insight, Inc.3 Baseline – Short War Short war (two months or less) starts in March Minimal coalition casualties No major oil disruption Oil prices spike to $40 per barrel, but average $31.50 in Q1 and $25.30 for the whole year The dollar falls gradually, losing 4% of its value against industrial country currencies during 2003 Falling confidence and stock prices hamper growth, but rebound after successful conclusion of war Tax cuts plus additional $50 billion in defense spending help to sustain the recovery 60% probability

Copyright © 2003 Global Insight, Inc.4 Victory Without War Either a war that lasts less than a week or a regime change in Iraq without a war Sanctions against Iraq lifted quickly Oil prices drop below $20 per barrel, but recover gradually as world demand strengthens A rebound in confidence and equity markets, along with lower oil prices, boost growth worldwide Weaker defense spending in the U.S. is offset by stronger growth in consumer and business expenditures 20% probability

Copyright © 2003 Global Insight, Inc.5 No War/ No Resolution No war but uncertainty over Iraq continues throughout the year Geopolitical tensions remain high Oil prices remain high (averaging $30 per barrel for the year) and volatile Consumer and business confidence, along with the stock market, remain depressed Global growth, especially outside of North America and non-Japan Asia, remains weak Less than 10% probability

Copyright © 2003 Global Insight, Inc.6 Long War War drags on for six months or more with higher coalition casualties Confidence falls further and remains depressed longer Oil prices spike to $50 per barrel and average above $30 per barrel in 2003 Defense spending rises by $70 billion The dollar falls by 10% on a trade-weighted basis The Fed cuts interest rates by another 50 basis points Less than 10% probability

Copyright © 2003 Global Insight, Inc.7 Bad War The war escalates into a regional conflict Oil prices spike to $60 per barrel, because of supply disruptions, and average $40 per barrel in 2003 Consumer and business confidence plunge Consumers retrench and capital spending falls once again A double-dip in the U.S. and world economies The dollar falls by 20% in trade-weighted terms Less than 2% probability

Copyright © 2003 Global Insight, Inc.8 World Growth (Percent change, annual rate)

Copyright © 2003 Global Insight, Inc.9 Longer War: Sentiment and Stock Market Hits

Copyright © 2003 Global Insight, Inc.10 Iraq War and Pessimistic Scenario Pessimistic—Longer War 2Q war stalemate at first Sentiment drops 16 pts 2Q Oil prices $7bbl higher 2Q. Stock prices 25% lower Extra military spending $87 bio through yearend No new tax cut Longer War Economic Effects 2 Qtrs down GDP, 2003 avg growth 2.2% less, growth higher in 04 Quick War with Iraq Ground action within month. Oil price spikes further before kickoff-- then falls quickly on favorable result Consumer sentiment/ stocks drop further then recover quickly Extra military spending, $70 billion

Copyright © 2003 Global Insight, Inc.11 Conclusions WEAK RECOVERY TAKES OFF Government spending huge, earlier tax cuts Interest rates highly expansionary—housing Early inventory boost fading, consumer soft patch Peace boost early, then jobs, investment turn mid 2003, strong by yearend Exports in 2004 RISKS Hiring lags—weak income Extended war uncertainties-bad results Further Stock Market collapse Other consumer/house wealth Major dollar decline (long term only)

Copyright © 2003 Global Insight, Inc.12 Employment Change % for 12 months ending 12/02

Copyright © 2003 Global Insight, Inc.13 Unemployment Rates December 2002

Copyright © 2003 Global Insight, Inc.14 Change in Financial Centers (FIRE Employment )

Copyright © 2003 Global Insight, Inc.15 % Change in non-Mfg. Employment 3/01 to 12/02

Copyright © 2003 Global Insight, Inc.16 % Change in Mfg. Employment 3/01 to 12/02

Copyright © 2003 Global Insight, Inc.17 Regional Retrospective : Recession Job Loss

Copyright © 2003 Global Insight, Inc.18 Median Existing Home Price Inflation ( Annual Percent Change)

Copyright © 2003 Global Insight, Inc.19 Forecast: Job Growth by State Annual Growth Rates