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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 September 4, 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 late this year. The Fed has cut rates sharply. The recession should be mild because of the fiscal and monetary stimulus But probably long. And a deeper recession is possible if the financial markets remain locked up, oil prices continue to rise, and home prices continue to drop.

3. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. The Housing Bubble Housing was too affordable, thanks to low mortgage rates But what happened when rates went up? Ratio of home price to income hit a record high in 2006, Which could not be maintained at higher interest rates We built too many houses at too high prices Starts and sales have dropped sharply Defaults and foreclosures have soared, cutting back on willingness to lend Prices are down 15% from their peak We expect to hit bottom on starts this summer But prices probably won’t hit bottom until early 2009.

4. 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

5. 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

6. 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, Census Bureau (S&P/Case-Shiller Home Price Indexes)

7. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Home Price Declines 0% to -3% 0% to +3% -3% or worse (1-year change in home prices, First quarter) +3% or more Source: OFHEO

8. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. (Percent) The Fed Is Done Cutting Source: Federal Reserve

9. 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)

10. 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

11. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. The World Is Ignoring The U.S. Sniffles World growth remains solid Slower growth in the US and Europe is offset by stronger growth in Asia The train has more engines attached And the world is thus less dependent on US growth We expect a slight slowdown in world growth, to 4.2% from 5.4% in 2007 But the big trade and capital imbalances are a risk And higher oil prices could still slow growth more

12. 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

13. 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

14. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. The Future Looks Bleak (Government debt as % of GDP) Source: S&P

15. 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

16. 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 Stocks 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

17. 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

18. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. The World Is More Energy Efficient (Tonnes of oil equivalent per $1000 dollars (2000 dollars) of real GDP) Source: OECD

19. 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

20. 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

21. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Stock Market Looks Low Relative To Bonds (Earnings yield on stocks vs 10-year Treasury) Source: S&P and Census Bureau

22. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Sluggish Ad Revenue (Annual percent change) Source: McCann Universal, S&P projections

23. 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 mild but long But fiscal policy stimulus will end, keeping the recovery slow If financial markets remain locked up Home prices continue to fall And oil prices continue to rise This could turn into a deeper recession But we could still avoid recession if Financial markets regain confidence And oil prices fall

24. 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

25. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. For subscription information or to inquire about a trial, contact To help evaluate your strategic portfolio positioning, develop your investment ideas and identify potential gaps and opportunities, Standard and Poor's Global Fixed Income Research provides top down information on: –Global credit trends –Macroeconomic conditions –Sector-specific developments that impact the global capital markets including ratings transitions and anomalies –Distressed, default and recovery research Global Fixed Income Research will be available through RatingsDirect, the online source for Standard and Poor's Credit Ratings and Research.

26. CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process.