1. Making the Transition From Recovery to Expansion AUGUSTINE FAUCHER, DIRECTOR OF MACROECONOMICS FROM MOODY’S ECONOMY.COM

2. 2 The Great Recession Is Over… Recessions since World War II Sources: NBER, BEA, FRB, BLS, Moody’s Economy.com Duration in MonthsPeak-to-Trough % ChangeJobless Rate PeakTrough Recession Peak to Trough Expansion Trough to Peak Real GDP Industrial Production Nonfarm EmploymentLowHighChange Dec-07Aug-092073-3.9%-19.2%-6.2%4.4%10.6%6.2% Mar-01Nov-018120-0.4%-6.3%-2.0%3.8%6.3%2.5% Jul-90Mar-91892-1.3%-4.3%-1.5%5.0%7.8%2.8% Jul-81Nov-821612-2.9%-9.5%-3.1%7.2%10.8%3.6% Jan-80Jul-80658-2.2%-6.2%-1.3%5.6%7.8%2.2% Nov-73Mar-751636-3.1%-14.8%-2.7%4.6%9.0%4.4% Dec-69Nov-7011106-1.0%-5.8%-1.4%3.4%6.1%2.7% Apr-60Feb-611024-1.3%-6.2%-2.3%4.8%7.1%2.3% Aug-57Apr-58839-3.8%-12.7%-4.4%3.7%7.5%3.8% Jul-53May-541045-2.7%-9.0%-3.3%2.5%6.1%3.6% Nov-48Oct-491137-1.7%-8.6%-5.1%3.4%7.9%4.5% Average1057-2.0%-8.3%-2.7%4.4%7.6%3.2%

3. FROM MOODY’S ECONOMY.COM3 …With Some Areas Expanding As of October 2009 Expansion At Risk Recovery In Recession Moderating Recession

4. FROM MOODY’S ECONOMY.COM4 Policymakers Stabilize the Banking System… Bear hedge funds liquidate Bank funding problems Difference between 3-mo Libor and Treasury bill yields Bear Stearns collapse Lehman failure Fannie/Freddie takeover TARP fails to pass Congress No asset purchases Stress tests

5. FROM MOODY’S ECONOMY.COM5 …And Fiscal Stimulus Provides a Vital Boost Source: Moody’s Economy.com Contribution to real GDP growth, %

6. FROM MOODY’S ECONOMY.COM6 Job Creation Craters… Rate of job creation and destruction, % Job Creation Source: BLS Job Destruction

7. FROM MOODY’S ECONOMY.COM7 Source: BLS y = -0.48x + 3.40 R2 = 0.32 2009Q3 Unemployment rate=9.6% Natural rate=5.4% Compensation growth=1.5% …Threatening to Undermine Compensation… 1985Q1-2009Q3

8. FROM MOODY’S ECONOMY.COM8 …But Fiscal Policymakers Are Responding »Recently passed: $45 billion in more aid to unemployed workers, extension and expansion of homebuyer tax credit, extended higher conforming loans limits, and NOL. »High odds of passage: $100 billion in aid for workers losing jobs in 2010. »Better than even odds of passage: $50 billion in more SBA lending, job tax credit, weatherization program. »Even odds of passage: $50 billion in another round of help to financially stressed state and local government for FMAP.

9. FROM MOODY’S ECONOMY.COM9 More House Price Declines Are Coming… Case Shiller ® Home Price Index: 2000Q1 = 100 Sources: Equifax, Moody’s Economy.com -38% U.S. Vermont

10. FROM MOODY’S ECONOMY.COM10 …In Much of the Country Projected home price correction from current (2009Q2) to trough, % Sources: Fiserv, FHFA, Moody’s Economy.com > 0% 0% to -10% -10% to -15% < -15% U.S. = -11%

11. FROM MOODY’S ECONOMY.COM11 Foreclosures Are Key to Pricing… Sources: Fiserv, Equifax, Moody’s Economy.com House price growth, % change (R) Foreclosure share of sales, % (L)

12. FROM MOODY’S ECONOMY.COM12 Sources: Equifax, Moody's Economy.com …And Foreclosures Continues to Mount… Ths of loans

13. FROM MOODY’S ECONOMY.COM13...Especially on the Coasts First mortgage delinquency rate, change 2006Q3 to 2009Q3, ppt Sources: Equifax, Moody’s Economy.com <2.00 2.00 to 3.25 3.25 to 7.00 >7.00

14. FROM MOODY’S ECONOMY.COM14 Millions of Homeowners Sink Underwater… Number of underwater homeowners, ths Sources: Equifax, Moody’s Economy.com

15. FROM MOODY’S ECONOMY.COM15 …And Strategic Defaults Are on the Rise 90 Days and Over Delinquency Rate, % of #, by CLTV, 30-35% DTI Sources: Equifax, Moody’s Economy.com

16. FROM MOODY’S ECONOMY.COM16 The Modification Plan May Need Modification

17. FROM MOODY’S ECONOMY.COM17 Credit Markets Remain Dysfunctional… Bond issuance, $ bil, annualized Source: Thomson Reuters

18. FROM MOODY’S ECONOMY.COM18 …But the Fed Will Remain Aggressive… Sources: Federal Reserve, Moody’s Economy.com

19. FROM MOODY’S ECONOMY.COM19 …Even Committing to More Credit Easing Sources: Freddie Mac, Federal Reserve Fed holdings of Fannie and Freddie MBS, $ bil (R) Difference between Freddie mortgage rate and 10-year Treasury yield (L)

20. FROM MOODY’S ECONOMY.COM20 Can We Change This Forecast? Federal debt-to-GDP ratio under the president’s budget Source: CBO

21. ImprovingExpanding SlippingContracting Annualized 3 mo. % change on 3 mo. MA NOTE: Size reflects relative employment % change year ago, October 2009, 3 mo. MA Middle Atlantic New England South Atlantic Vermont Is Outperforming U.S. and Northeast… One-year vs. 3-month performance Northeast States New York Pennsylvania New Jersey Massachusetts Connecticut New Hampshire Maine Rhode Island Vermont Maryland District Of Columbia Delaware U.S.

22. FROM MOODY’S ECONOMY.COM22 …But Will Lag In The Recovery Sources: BLS, Moody’s Economy.com Employment, % change year ago U.S. Vermont

23. FROM MOODY’S ECONOMY.COM23 Economic Timeline Source: Moody’s Economy.com 09Q109Q2 09Q309Q410Q110Q2 10Q4 11Q111Q2 11Q311Q4 Stock market trough Extraordinary bank failures end Home sales bottom Housing starts bottom Employment bottoms House prices bottom Foreclosures peak Jobless rate peaks House prices resume rising Economic downturn ends Self-sustaining expansion begins Banking system stabilizes Retailing firms 10Q3 Securities markets up and running Fed raises rates Inflation accelerates Fiscal pressures intensify

24. FROM MOODY’S ECONOMY.COM24 www.economy.com

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