1. Economic Outlook: Transitioning to Expansion
National Marine Bankers Association
September 28, 2004
Gina Martin
Wachovia Economics

2. 2004/2005 Focus + _ Economic Growth Transition – Business Spending
Employment
Consumer Income _
Three “I”d Monster:
Interest Rates
Oil/Inflation
Terror
Politics

3. Spot vs Real Price of a Barrel of Oil
Oil – How Bad Is It?
Personal Consumption of Gasoline and Oil as a Percent of Disposable Income
Spot vs Real Price of a Barrel of Oil

4. Personal Consumption of Gasoline and Oil as a Percent of Disposable Income
Consumers complain about the $2 psychological level
What is going on?
Low margins strained capacity expansion – inefficient refineries closed down over the last 2 decades (321 in 1981 vs 149 today), though expansions have begun, supply is still tight. As a result, we’re importing more gasoline from abroad. Risk – these imports slow in response to tighter mandates for cleaner gasoline (raises cost of production),

5. “Crack” Spread – Oil and Gasoline

6. Inflation – Long Term Trends Remain
CPI – Goods vs. Services
Import prices popped in April, reflecting gasoline +4.6%
Core cpi less core ppi still negative (2.9%) (both 5.1% in 1Q)
Commodities? 2003: Steel 30%, iron 36%, lead 22%, but China mfd goods prices –5-10%, more expensive commodities favor resource rich nations
Net – supply still exceeds demand, tech/pro business politics of last 20 years has helped industries b/c better at providing goods & services, transportation and communication more reliable and real time
Core = Excluding Food and Energy
Both Series are Year to Year Percent Changes

7. The Fed is On the Move At a “Measured Pace” of Course Neutral is 5%
Greenspan watching – wage pressures as productivity slows
Wage&Salaries 5.8% over last 3 months alone, 5.0 percent higher than last year
Nom GDP up 6.7% in 1Q, maybe 7.5% in 2Q
2003 productivity nonfarm 4.4%, ULC –1.2 percent, real hourly compensation just 0.9%

8. What About Long Term Rates?
10-Year and Inflation
10-Year and Growth
3 forces on rates in 90s: globalization, technology, competition
Low rates increased capacity faster than stimulated demand – recovery over last 3 years
Late 1800s industrial revolution – 30 years if 4%+ gdp growth and mild deflation
Other – fed holding nearly $1 trillion of treasuries for foreign central banks – was $600 billion in mid-2002 – this holding down treasury rates (big demand)

9. A Little Help?
Net Purchases of U.S. Treasuries by the Rest of the World
1Q - $170 billion
4 Quarter Moving Average, Billions of Dollars

10. Home Sales and Interest Rates – Connection?
Home price bubble? 7.6% 2002, 8.4% 2003, LT is closer to 5%
Adjustable rate mortgages – 40% (not as high as prior periods, 60%, 80s nearly 70%

11. Growth Transition – Recovery to Expansion
Real GDP (Volume Growth)
Bars = Seasonally Adjusted Compound Annual Rates

12. Yield Curve Signals

13. Business Spending is Back
Components of Final Demand
Recovery broadened to include all sectors
Business spending playing catchup (2004 strongest since 1999)
-5% in 2001, 3% in 2002, 5% in 2003
Businesses know that spending on equipment is key to competition, employment costs are 75-80% of cost structure

14. Both Series Are Year over Year % Change
Businesses Have Cash To Burn
Reality: profits rocking, even domestic mfg… domestic industries in 2003: mfg +23.3%, nonfin business 75.7%, all domestics +89.3%
Financing gap: +350B to –100B, lots of cash to spend
Both Series Are Year over Year % Change
Corporate is Net Cash Flow with Inventory Valuation and Capital Consumption Adjustments, 12 quarter moving average

15. Employees are Pricey!
Employment Cost Index

16. Steady Employment Gains This Year
Nonfarm Employment Growth
144,000
Thanks, Bonnie and Charlie!!
24 million jobs added in 1990s after last “jobless recovery”
More than 1 million so far this year, even manufacturing industries show job growth of 91K since trough in jan
Quality jobs are indeed growing. This issue is not in job creation, but is who is left behind…
10 industries over the avg of $15.64 per hour added 1,068,000 over last year (75% of all new jobs), 2.8% growth in last three months
Below average industries (retail, leis&hospitality, nondur goods mfg, other services)
Monthly Change, In Thousands, Seasonally Adjusted

17. Future Job Growth in the U.S.
Percent Change in Employment
BLS Occupational Outlook Handbook
Office of Occupational Statistics and Employment Projections
21.6 million jobs created by 2012 – 20.8 million in service-providing industries (96%)

18. Longer Term Troubles Remain
Unemployment Rate by Education Level
Unemployment Rate by Job Function
Perception: job losses widespread
Reality: “lost workers”
Labor shortages in auto mechanics, nurses, mechanical techs, truckers, heating and air contractors

19. Manufacturing and the U.S. Economy

20. More Income Keeps Consumers Spending
Personal Income and Spending
Higher wages & more compensation caused surge in consumer spending in 1Q
Est. $1BB loss in consumer expenditures for every 1cent increase in price of gas at pump
Even if oil price unchanged, gas prices increase 4-5 cents in summer time
Distinguish – average hourly earnings vs wages and salary growth.
Both Series Are Year over Year % Change
of 3 Month Moving Average

21. Consumers Indeed Better Off
Household Net Worth, Billions of Dollars
2000 Peak: $43.6 Trillion
Current: $45.9 Trillion

22. Consumer Debt Mix Change Q1 2003-Q2 2004 ($ Billions)
Mortgage $7 Trillion, Credit $2 Trillion

23. Election Year Issues and Economics
Federal Budget Deficit
Health Care Reform
Social Security Reform