1. Can the World Survive the US Downturn?1
Goldman Sachs
Can the World Survive the US Downturn?
Gavyn Davies
Chief International Economist
Enron Advisory Council
Houston
11th April 2001

2. 2
Main Topics
Models to estimate the statistical probability of recession.
The economic cycle and financial market risk premia - the importance of leading indicators.
Goldman Sachs “main case” forecast for GDP.
Downside risks - ICT spending; US domestic demand; oil.
The downside case for economic activity.
Interest rates for currencies.

3. Probability of Recession Model3
Probability of Recession Model
February
Indicator
Observation
Coefficient
T-Statistic
Rank1
Univ. of Michigan Consumer Sentiment
- 2.79 2
Consumer Price Index - Energy
12.88
0.027
1.59 7
Inventory / Shipment Ratio - Mfg.
0.07
4.037
2.56 3
Ratio of Unsold to Sold Homes
0.34
8.266
5.46 6
10-Year / Fed Funds Spread
- 0.39
- 5.65 1
Real M2
1.30
0.264
2.17 4
Corporate Yield Spread
0.77
0.83
2.13 5
1 Importance in recent rise in probability of recession.
Source: Our Calculations.

4. US: Probability of Recession4
US: Probability of Recession
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Probability of recession*
L:\shared\ventura7\wklyanal\graphs\cu0101.grf 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00
Probability of recession starting within the following 12 months based upon a probit model using 7 real and financial indicators.

5. Probability of Recession: OECD ex. USA*5
Probability of Recession: OECD ex. USA*
0.0
0.2
0.4
0.6
0.8
1.0
1.2
L:\shared\world\global\special\probrec.grf
Line = yellow
Bar chart = blue
No animation 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01
*Probability of a recession occurring within the following 12 months.
Shaded regions indicate actual periods of recession.

6. Euroland GDP Growth Probabilities
One Year Ahead 6
110 %
100 90 80
<2% 70
L:\shared\ppt\Dwalton\dw2001\nichart.grf
2% = yellow
0% = blue 60 50 40 30
<0% 20 10 92 93 94 95 96 97 98 99 00 01

7. Japan: Probability of Recession*7
Japan: Probability of Recession* 10 20 30 40 50 60 70 80 90
100 %
L\shared\world\japan\recess.grf 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
* Probability of the economy entering a recession over the next 12 months.

8. UK: Probability of Recession*8
UK: Probability of Recession* 10 20 30 40 50 60 70 80 90 86 87 88 89 91 92 93 94 95 96 97 98 99 00 01 02 %
Economy
In Recession
L:\shared\world\UK\ukspot\graphs\spt379\spt379a.grf
Line = yellow
bar = blue
*Probability of negative annual GDP growth in one year's time.

9. 9 Relative Performance of World Equities vs Bonds
& OECD Leading Indicator
-40
-30
-20
-10 10 20 30 40 -8 -6 -4 -2 2 4 6 8 12 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
% yoy
OECD Leading
Indicator
World Equity Returns
minus Bond Returns in US$
L:\shared\world\global\strategy\novoo.grf
OECD Leading Indicator = Blue
World Equity Returns - yellow
no animation

10. OECD Leading Indicator and World Equity Risk Premium10
OECD Leading Indicator and World Equity Risk Premium -6 -4 -2 2 4 6 8 10
0.5 1
1.5
2.5 3
3.5 90 91 92 93 94 95 96 97 98 99 00 01 02
OECD LI
% yoy
%, 3m
Mov. Av
World ERP
(inverted)
L/shared/ventura_1/global_2/gew0112/livs.graph
OECD = blue
World ERP = yellow

11. OECD Leading Indicator and US Corporate Bond Spread11
OECD Leading Indicator and US Corporate Bond Spread -8 -6 -4 -2 2 4 6 8 10 12
0.5 1
1.5
2.5 3
3.5
4.5 5 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
OECD LI
% yoy
%, 3m
Mov. Av.
US Baa Corporate
Bond Spread
(inverted)
L/shared/ventura_1/global_2/gew0112/livs.graph
OECD = blue
US Baa = yellow

12. 12 Relative Performance of Emerging Market vs
World Equities & OECD Leading Indicator
-80
-60
-40
-20 20 40 60 80 -8 -6 -4 -2 2 4 6 8 10 12 86 88 90 92 94 96 98 00 02
% yoy
Emerging Market minus
World Equity Returns
in US$
OECD Leading
Indicator
L:\shared\world\global\strategy\novoo.grf
OECD Leading Indicators = Blue
Emerging Markets = yellow
no animation

13. Lead/lag of OECD Leading Indicators at Turning Points13
Lead/lag of OECD Leading Indicators at Turning Points
Turning Point in OECD LI
Peak
Lead in months over...
OECD 4
Ind. Prodn
Bond Sprd.
Emg. Mkt. 8
Spread 1
US Corp.
World Equity
Risk Premium
Average
4.4
- 2.7
0.3
0.2
- 4
Sep-97
Jan-00
Trough 6
- 2
Oct-98 9 2
Oct-92
- 14
- 5
- 7
Jun-96 7
- 12
- 3
Jan-95 3 —
Jan-89
TYPE
Date

14. Correlation between OECD Leading Indicators & Other Variables14
Correlation between OECD Leading Indicators & Other Variables
Variable
Correlation with Leading Indicators x months ahead*
Months -6 -4 -2
0.854 -7
0.50
0.21
0.15
0.12 —
0.893 -1
0.854 -6
0.47
0.24
0.26
0.17
0.809
0.891 +2 +4 +6 +2
0.811 -3
0.05
-0.05
0.10
0.16
0.749
0.855
US Corp. Spread
0.45
0.48
0.35
0.20
Emg. Mkt. Bond Spread
-0.09
0.04
0.25
0.17
World Equity Risk Premium
0.04
0.13
0.19
0.07
US Equity Risk Premium
-0.03
0.04
0.18
0.16
Months -9 -8 -5 -4
OECD Ind. Prod.
0.838
0.847
0.849
0.835
OECD GDP
0.726 — — —
Months -4 -3 +1
GS LI
0.888
0.891
0.887
0.873
* Month of highest correlation in bold.

15. Turning Points in “OECD” Longer Leading Indicator and Other Indicators15
Turning Points in “OECD” Longer Leading Indicator and Other Indicators
Turning Point
Trough
Lead of “OECD” LLI in months over... 7
Average
6.4
May-98
Dec-00
Peak 5
Jun-99
Oct-94 6
Feb-97 3
Dec-95 17
Oct-92
OECD LI 11
10.9 9 4 10 20
OECD IP
TYPE
“OECD” LLI
Aug-87 .

16. Leading Indicators of OECD Economic Activity16
Leading Indicators of OECD Economic Activity
0.90
0.95
1.00
1.05
1.10
1.15 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
Ratio to
trend
f'cst
values
OECD's Leading
Indicator
*Constructed from the components of the OECD's indicator that have
historically had a long lead on economic activity at turning points.
"Longer" Leading
Indicator ("OECD" LLI)*
L:/users/wahhaz/lendind/lichart.grf
Longer Leading = blue
OECD Leading = yellow

17. Leading Indicators of OECD Economic Activity17
Leading Indicators of OECD Economic Activity
0.90
0.95
1.00
1.05
1.10
1.15
Ratio to
trend
OECD's Leading
Indicator
GS Leading
L:/users/wahhaz/lendind/lichart.grf
GS Leading = blue
OECD Leading = yellow
Indicator (GS LI)*
f'cst
*Based on an econometric model to predict
values
changes in the OECD's indicator. 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

18. Main Six Economies 18 12 16 11 10 12 9 Leading Indicator 8 8 7 6 5 4 4
% yoy 11
% yoy 10 12 9
Leading Indicator 8 8 7 6 5 4
L:\shared world\leadin\gdplead 4 3 2 1 -4 -1 -8 -2
Industrial Production -3 -4
-12 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01

19. Global GDP Forecasts 19 % Change on Year Earlier 1999 2000 2001 2002
USA
4.2
5.0
1.4
2.5
Euroland
2.5
3.4
2.4
2.7
Japan
0.8
1.7
1.5
1.4
OECD Total
3.0
3.7
1.8
2.5
Non Japan Asia
6.5
7.2
5.1
5.8
Latin America
0.0
4.2
3.4
4.3
Emerging C. Europe
3.1
4.0
3.7
4.2
Emerging World
4.2
6.1
4.6
5.3
World
3.5
4.6
2.7
3.4

20. Estimates of G6 Output Gap20
Estimates of G6 Output Gap 3
% yoy 2
Goldman
Sachs 1
L:\shared\world\global\glbchrt.grf
no animation
GS = yellow
IMF = blue
OECD = green -1 -2
OECD
IMF -3 -4 -5 80 82 84 86 88 90 92 94 96 98 00 02

21. OECD Headline & Core Inflation21
OECD Headline & Core Inflation
1.0
1.5
2.0
2.5
3.0 96 97 98 99 00 01 02 03
% yoy
Headline CPI
Core CPI
L:\shared\world\global\glbchrt.grf
Core CPI = blue
Headline CPI = yellow
no animation

22. US Hardware & Communications22
US Hardware & Communications
Equipment Spending
-10 10 20 30 40 50 80 82 84 86 88 90 92 94 96 98 00 02
% yoy
Investment
Spending
Orders, 3mma
L:\users\wahhaz\ict\usdata.grf
Orders = blue
Investment spending = yellow
no animation

23. ICT Spending Projections123
ICT Spending Projections1
ICT Spending
Hit to GDP2
(% Growth)
(% pts)
1999
2000F
2001F
2001F US
15.4
22.9
- 2.4
- 1.0
Japan
5.1
20.1
10.6
- 0.5
Germany
6.4
9.6
4.3
- 0.1
France
16.2
24.1
10.8
- 0.4 UK
4.0
6.0
2.7
- 0.1 G5
11.6
19.6
2.3
- 0.7
1 Assuming level of orders remains unchanged at average level between
Dec '00 and Jan '01 throughout 2001.
2 Direct impact on nominal spending. Total impact on real GDP will be higher.

24. 24
Oil Price Forecast 72 74 76 78 80 82 84 86 10 15 20 25 30 35 99 00 01 02
(Million Barrels)
WTI
Global
Global supply
US$/bl
Forecast
demand
L:\shared\world\global\oil3.grf
WTI = blue
Global Demand & supply = yellow
no animation

25. Terms-of-trade or balance of25
Impact of Oil Price Change on Terms-of-Trade
Terms-of-trade or balance of
payments loss* US
Japan
Euroland
OECD
1.0
2.6
3.0
1.9
2.5
3.7
3.8
3.2
0.6
0.9
0.8
0.7
% of GDP
* Negative figure indicates a terms-of-trade gain. The terms-of-trade loss is calculated by multiplying the
percentage increase in the dollar price of oil by the share of oil and gas imports in GDP. We assume the
price of brent oil rises from $13.1bbl in 1998 to $26.5bbl in 2001.

26. US Real Financial Conditions Index26
US Real Financial Conditions Index 95
95.5 96
96.5 97
97.5 98
98.5 99
99.5
100 94 00 01 02
Tighter
Easier
L:\shared\world\global\usfcid.grf
no animation

27. US Saving Rate at Record Low27
US Saving Rate at Record Low -2 2 4 6 8 10 12 14
4.0
4.5
5.0
5.5
6.0
6.5 80 82 84 86 88 90 92 94 96 98 00 02 %
Household
Saving Rate
Net Worth/Disposable
Income Ratio
Ratio,
inverted Q1
estimate
L:\shared\world\global\ussav.grf
Net worth = blue
Household saving = yellow
no animation

28. US Personal Saving Rate (% of Disposable Income)28
US Personal Saving Rate
(% of Disposable Income)
Change, Predicted
Change, Predicted
Change, Predicted
Change, Actual
(wealth stays flat)
(wealth rises 5%)
(wealth rises 10%)
00Q1
- 1.3
- 1.1
- 1.1
- 1.1
00Q2
+ 0.1
- 0.8
- 0.8
- 0.8
00Q3
- 0.5
+ 0.5
+ 0.5
+ 0.5
00Q4
- 0.6
+ 0.1
+ 0.1
+ 0.1
01Q1
+ 0.9
+ 0.9
+ 0.9
01Q2
+ 0.9
+ 0.7
+ 0.5
01Q3
+ 0.8
+ 0.5
+ 0.1
01Q4
+ 0.9
+ 0.5
+ 0.1
Source: Department of Commerce. Our Calculations.

29. US: A Stable Capital Stock Share = Collapse in ICT Investment29
US: A Stable Capital Stock Share =
Collapse in ICT Investment 2 4 6 8 5 6 7 8 9 10 11 12 13
% of
% of
GDP
GDP
L\shared\world\usa\global\global2.grf
ICT Capital Stock = yellow
ICT Business = blue
Assuming = white
Assuming No Growth = green
ICT Capital Stock
ICT Business Fixed Investment
Assuming Growth*
Assuming No Growth** 90 91 92 99 94 95 96 97 98 00 01

30. US - Financial Balances30
US - Financial Balances 8 7
% of GDP 6 5 4
Private Sector 3
Balance
Fiscal Balance 2 1
L:\shared\world\global\glbchrt.grf
Private Sector = yellow
Fiscal Balance - white
Current account = blue
no animation
Current Account -1 -2 -3 -4 -5 -6 -7 -8 83 85 87 89 91 93 95 97 99 01 03

31. Impact on GDP of Possible Global Shocks in 200131
Impact on GDP of Possible Global Shocks in 2001
Impact on GDP
Direct Hit
From US
Gain from
Collapse in
Recession
Collapse in
Tech
Total GDP
% of GDP
Via Exports1
Oil Prices2
Spending3
Effect US
- 2.0
- 2.3
0.5
- 0.8
Japan
- 0.2
0.0
0.7
- 0.5
Euroland
- 0.1
0.2
0.6
- 0.2
Main OECD Countries
- 0.8
0.5
- 0.5
- 0.8
1 This column shows the direct trade hit from a decline of 6% in exports to the US. This would likely
happen if US domestic demand dropped by 3% in 2001 (relative to our main case forecast).
The drop in US GDP would be around 2%.
2 This assumes average oil prices in 2001 drop by $10/barrel compared with our main case
assumption of $22/barrel.
3 This assumes a drop in ICT investment in line with recent orders data. US tech spending
decelerates from 22% growth in 2000 to 1% in 2001.

32. Euroland: Industrial Production32
Euroland: Industrial Production -2 2 4 6 8 10 97 98 99 00 01 02
Industrial
Production
(YoY Chg)
% YoY
GS Leading
Indicator
Simulations
L:\shared\europe\graphs\emu11\surveys\leading\leadingC
Industrial Production = blue
GS Leading Indicators = yellow
no animation

33. Japan - Financial Balances33
Japan - Financial Balances 83 85 87 89 91 93 95 97 99 01 03
-10 -8 -6 -4 -2 2 4 6 8 10 12
% of GDP
Fiscal Balance
Current Account
Private Sector
Balance
L:\shared\world\global\glbchrt.grf
Private Sector = yellow
Current Account = blue
Fiscal Balance = white
no animation

34. Central Case & Downside Scenario
Outlook for 2001:
Central Case & Downside Scenario 34
GDP - annual average
CPI - yoy, end-year
% Change
Downside
Downside
Central Case
Scenario
Central Case
Scenario US
1.4
-0.6
2.4
1.1
Japan
1.5
0.8
-0.1
-0.2
Euroland
2.4
1.7
1.4
1.0 UK
2.2
1.6
1.5
1.2
OECD
1.8
0.6
1.6
0.9
OECD ex US
2.1
1.5
1.0
0.7

35. G7: GSWIRE Scenarios 35 GS Forecasts Actual/Forwards Baseline Boom%
GS Forecasts
Actual/Forwards
Baseline
L:\shared\v7\wklyanal\graphs\bd0101 or ask Fiona
Boom
Bust

36. Euro / US$ 36 +1 Standard Error Spot -1 Standard Error 02 EXCEL LINKED
Excel file = L:/shared/world/gsdeer/gderrors.xls
converted to = L:/shared/world/gsdeer/gserrors_ppt.xls
this slide is linked
GSDEER
-1 Standard Error 02

37. US: BAA Corporate Bond Spread*37
US: BAA Corporate Bond Spread* %
Actual
GS-Spread**
Projections
*Moody’s Baa-30 year Treasury
**Out of Sample