CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Copyright (c) 2008 Standard & Poor’s, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. The Economic Outlook: Fasten Your Seatbelts David Wyss Chief Economist Standard & Poor’s March 27, 2008

2. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. The U.S. Is In Recession The economy has moved into recession. Housing has been in recession for two years, subtracting over a percentage point from GDP growth in But that was offset by strength in nonresidential construction and the closing of the trade gap, each of which added back over a half point. Weaker overseas growth will mean less benefit from the trade deficit, despite the declining dollar. Nonresidential construction is beginning to decline The fiscal stimulus package will cause the fiscal 2008 deficit to more than double, and could beat the 2004 record. But it should boost the economy in Q3. The Fed has cut rates sharply. Recession seems nearly certain. But it should be relatively short and mild because of the fiscal and monetary stimulus.

3. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Home Prices Were Too High (Ratio of average home price to average household disposable income) Source: BEA, Census

4. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Bubbles Were Almost Everywhere (Percent increase in home prices, ) Source: Mortgage Bankers’ Association and S&P

5. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Most Weakness Is In The Bubble Cities Source: Standard & Poor’s, RealtyTrac (S&P/Case-Shiller Home Price Indexes)

6. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. (Percent) The Fed Will Continue To Cut Rates Source: Federal Reserve

7. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Foreign Money Is Coming Into Private Bonds Source: US Treasury. (Net inflows of long-term capital, Millions of dollars)

8. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Quality Spreads Are Widening From Record Lows (Spread over Treasury yields, percentage points) Source: Standard & Poor’s Global Fixed Income Research

9. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. World Growth Remains Strong (Real GDP, % change) Source: Global Insight and S&P

10. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. And Comes Mostly From Asia (IMF purchasing power weights, 2006) Percent of World GDP Percent of World Growth Source: IMF

11. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Can the Consumer Keep Spending? Consumer spending has led the expansion But wealth is down because home prices declined and Stock are weak Borrowing is more difficult, and home equity loans much less available Confidence has dropped Consumers are likely to save more But rebates will provide some quick cash Most of which will be spent

12. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Oil Prices Hit New Records ($/barrel, WTI and deflated by CPI; household energy purchases as percent of disposable income) Source: BEA

13. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. No Savings, But Lots of Debt (Percent of after-tax income) Source: BEA and Federal Reserve

14. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Aging Populations Will Boost Government Spending (Ratio of over 65 population to labor force) Source: OECD

15. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Borrowing Against Your Home Source: Freddie Mac

16. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Advertising Helped By Olympics And Election Source: Universal McCann, S&P projection

17. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Bottom Line: The Economy Will Recover Slowly The recession is expected to be short and mild But fiscal policy stimulus will end If financial markets remain locked up Home prices continue to fall And oil prices continue to rise This could turn into a “W”-shaped recession But could be better if productivity stays stronger Financial markets regain confidence And oil prices fall

18. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Risks to the Economy (Real GDP, percent change year ago) Source: BEA, S&P projections