Some economic data that I have collected

1. ECONOMIC UPDATE
VOLATILITY & UNCERTAINTY
1

2. Draft, Subject to
Equity Markets: Volatility amid uncertainty
ECONOMIC UPDATE
Revision
1,800
World Equity Index (MWOD)
S&P 500
1,600
1,400
1,200
1,000
800
600
 Equity markets are swinging day‐to‐day in line with the economic outlook of the moment as
markets try to price in what they know
 Markets rallied in Q1 following the avoidance of Greek default and expectations for further
Fed action, but Europe concerns are resurfacing
Sources: MSCI and Standard and Poors. Data as of August 16, 2012.
2

3. Executive sentiment on the global economy is also mixed…but
ECONOMIC UPDATE
trending negatively
 1/3 of executives feel we will
be in roughly the same place
economically as we are today
 Nearly 50% of executives
believe we will be in a worse
position
Source: McKinsey & Co., Economic Conditions Snapshot, June 2012
3

4. U.S. Economists are similarly uncertain…
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Economist’s responses to the question: “How do you assess the overall condition of
the U.S. economy right now”:
Source: Kaufman Economic Outlook: First Quarter 2012
4

5. This uncertainty is set against the backdrop of the slowest
ECONOMIC UPDATE
economic recovery in U.S. history
Note: the annual GDP growth for the four years following each recession
Great Depression 1980s Current Recovery
14% 13.1%
12% 10.9%
10% 8.9%
8% 7.2%
6% 5.1%
4.5% 4.1%
4% 3.5%
2.4% 2.0% 2.3%
1.8%
2%
0%
1934 1935 1936 1937 1983 1984 1985 1986 2010 2011 2012E 2013E
1947 – 2007, average annual growth was 3.4%
1977 – 2007, average annual growth was 3.0%
Source: Bureau of Economic Analysis, Wall Street Journal: Edward P. Lazear
5

6. Worldwide debt load is contributing to long‐term uncertainty
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Government Debt
180% % of GDP, 2012 Projection
160%
140% 153%
120%
123%
100% 113% 112% 107%
80% 89% 88%
60% 79% 79%
68% 65%
40%
20% 22% 8%
0%
Source: IMF
 U.S. debt is at the highest level since WWII
 U.S. debt excludes the unfunded liabilities of Social Security, Medicare, and Medicaid
which adds a further $66 trillion at the same present value basis
 Including these liabilities, the debt totals 530% of GDP
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7. Mounting U.S. Public Debt
ECONOMIC UPDATE
U.S. Public Debt Outstanding
$ Trillions
$18
$16
$14
$12 Dec ‘01 – Dec ‘08 CAGR = 8.8%
$10
$8 Dec ‘08 – Jun ‘12 CAGR = 11.7%
$6
$4
$2
$0
Dec‐01
Jun‐02
Dec‐02
Jun‐03
Dec‐03
Jun‐04
Dec‐04
Jun‐05
Dec‐05
Jun‐06
Dec‐06
Jun‐07
Dec‐07
Jun‐08
Dec‐08
Jun‐09
Dec‐09
Jun‐10
Dec‐10
Jun‐11
Dec‐11
Jun‐12
Source: Treasury Direct
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8. U.S. debt is at the highest point since WWII
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Source: Treasury Direct
 This excludes the unfunded liabilities of Social Security, Medicare, and Medicaid which adds
a further $66 trillion at the same present value basis
 Including these liabilities, the debt totals 530% of GDP
Source: PIMCO
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9. While debt mounts, the U.S. is also experiencing a recent
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slowdown in GDP growth
U.S. Real GDP
2007 ‐ Q2 2012, $ Trillions
$14
Avg. Quarterly Growth
$14 = 0.62%
$13
$13 Avg. Quarterly Growth
= 0.47%
$13
$13
$13
$12
$12
Source: Bureau of Economic Analysis
 In July, the IMF revised expected U.S. GDP growth down to just 2.0% annual growth, a
decline of 0.1% and the second downgrade this year
 FOMC revised 2012 estimates down in July to a range of 1.9% to 2.4%
 Q2 annualized GDP growth totaled just 1.5%
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10. The U.S. economy is fueled by consumption – jobs and real
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income growth are needed to resume GDP growth
U.S. GDP Components: Q1'12
$16
($ Trillions) Other
Financial Services
11%
7% Durable goods
14%
$14
Government Food services
Expenditures 6%
$12 and Investment
Recreation services Nondurable goods
Private 4% 22%
Domestic
$10 Investment
Transportation Health care
services 16% Housing and
$8 3% utilities
17%
$6
Personal
Consumption
$4  71% of U.S. GDP is consumption
$2
 Housing and utilities are the largest
component of consumption spending,
$0 representing 12% of total GDP
Nex Exports
‐$2
Source: Bureau of Economic Analysis
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11. U.S. unemployment is persistently high and recovering slowly
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U.S. Unemployment Rate
18% Oct ‘09: 17.2%
16% 15.0%
14% Under‐employment
12%
Oct ‘10: 10.0%
10%
8.3%
8%
Unemployment
6%
4%
Dec‐04
May‐05
Dec‐09
May‐10
Jan‐02
Jun‐02
Apr‐03
Oct‐05
Mar‐06
Aug‐06
Jan‐07
Jun‐07
Apr‐08
Oct‐10
Mar‐11
Aug‐11
Jan‐12
Jun‐12
Nov‐02
Sep‐03
Feb‐04
Jul‐04
Nov‐07
Sep‐08
Feb‐09
Jul‐09
Source: Bureau of Labor Statistics
 As consumer spending comprises 71% of U.S. GDP, job growth is fundamental to economic
recovery
 Fed Chairman Bernanke foresees “frustratingly slow” job recovery
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12. The U.S. is running a big jobs deficit
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Total Job Gain/Loss
(Thousands)
600
400 7.6M jobs lost from 2008 ‐ 2010
200
0
‐200
2.7M jobs added
‐400
‐600
‐800
‐1000
2006 2007 2008 2009 2010 2011 2012
Source: Bureau of Labor Statistics
 From Q1’11 – Q1’12 an average of 166k jobs were being added each month
 Q2’12 averaged just 73k jobs added per month, less than the 130k average added in Q2’11
 At 75k per month it will take 5 ½ years to overcome the losses since 2008
 Even at 200k per month we are looking at a two year recovery
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13. Corporate Profits and Layoffs are highly correlated
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Corporate Profits and Layoff Claimants
1,800 1000
Layoff Claimants (thousands)
900
Corporate Profits ($ Billions)
1,600
1,400 800
1,200 700
600
1,000
500
800
400
600 300
400 Corporate Profits After Taxes
200
200 Layoff Claimaints 100
‐ 0
Sources: Bureau of Economic Analysis
 Increasing profits have resulted in fewer layoff claims
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14. Corporate Profits weakened in Q1 and downgrades dominated
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earnings guidance in Q2
S&P 500 Index vs. Corporate Profits After
Taxes ($ Billions)
1,800
1,600 Corporate Profits
1,400
1,200
S&P 500
1,000
800
600
400
200
‐
Q1'02
Q3'02
Q1'03
Q3'03
Q1'04
Q3'04
Q1'05
Q3'05
Q1'06
Q3'06
Q1'07
Q3'07
Q1'08
Q3'08
Q1'09
Q3'09
Q1'10
Q3'10
Q1'11
Q3'11
Q1'12
Sources: Bureau of Economic Analysis, Standard and Poors
 Profits of U.S. companies declined during Q1’12 after reaching all‐time highs in Q4’11
 The number of S&P companies issuing profit warnings was four times that of upside
revisions in Q2
 Further profit weakness could lead to slower job recovery and increasing layoffs
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15. Median Net Worth and Real Income levels have taken a BIG hit
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in the last decade
Real Median Household Income
($ Thousands)
$54
$53
$53
$52
$52
$51
$51
$50
$50
$49
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
 Median net worth has declined 39% since 2007, or at a level last seen in 1992
 Loss of home equity is the largest contributing factor to Net Worth declines as median
home equity fell by 42%
 Real median incomes are now 7% lower than they were one decade ago
Sources: Federal Reserve, U.S. Census Bureau
15

16. As household income declines, consumer spending follows
ECONOMIC UPDATE
Real Median Household Income and Consumer Spending
Consumer Spending, % YoY
Real Median Household Income, $ Thousands
$54 8%
$53
6%
$53
$52 4%
$52
2%
$51
$51 0%
$50
‐2%
$50
$49 ‐4%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Census Bureau, Bureau of Labor Statistics
 Consumer spending declined considerably beginning in 2008 from the highs experienced in
the middle of the decade
 Retail sales have declined for three consecutive months – the first time that has happened
since 2010
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17. And then there is the rapidly approaching Fiscal Cliff
ECONOMIC UPDATE
% GDP Growth
3%
2%
1% 2.3%
CBO estimates that falling off the
0%
Fiscal Cliff could equate to a 3.5%
‐1% ‐1.2% contraction of GDP
Fall back into recession
‐2%
‐3%
‐4%
2006 2007 2008 2009 2010 2011 2012E 2013E 2013E
What is it?
• Expiring tax cuts and automatic spending cuts that would reduce the deficit by ~$600B, thus slowing GDP growth
• Reaching the debt ceiling yet again (last time meant a downgrade to U.S. credit rating)
Why does it matter?
• The CBO estimates that the expiring tax cuts and spending cuts would cut GDP by 3.5 percentage points
How does one avoid falling off the cliff?
• Stop tax cuts from expiring, extend spending
• BUT political capital is at stake and this is an election year
Sources: IMF, RBS, Congressional Budget Office, Bureau of Economic Analysis
17

18. The Fiscal Cliff threatens to stall growth
ECONOMIC UPDATE
Source: Bloomberg, Gallup, Labor Department
 Both consumer confidence and jobs growth stalled during the last debate over increasing
the debt ceiling
 The consensus is that Washington will not act until after the election and could create
further uncertainty and market volatility
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19. Draft, Subject to
Recent U.S. economic indicators are not promising
ECONOMIC UPDATE
Revision
Growth slowed in two consecutive quarters
GDP Fed and IMF revised GDP estimates downward in July
Unemployment Jobs growth is decelerating: Rate of job growth in Q2
averaged just 73k per month, down from 225k in Q1
Corporate Profits Four times as many S&P companies downgraded their ROY
profit estimates as raised them during Q2
Consumer Confidence June saw the first decline in 9 months but July confidence
increased slightly
Housing Starts declined in July but permits increased
Housing Foreclosure starts up in July – third straight month
Manufacturing Manufacturing declined for the first time in 3 years
Retail sales declined in Q2 – the largest quarterly decline
Retail Sales since 2009
19

20. Despite a rebound in 2010, European growth has faltered
ECONOMIC UPDATE
Europe GDP Growth
% YoY
8%
6%
4%
2%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
‐2%
Euro Area Germany
‐4% Italy Spain
Greece U.K.
‐6%
‐8%
Source: IMF
 After a rebound in 2010, Greece, Italy, and Spain are acting to dampen recovery
 2012 GDP is expected to contract by 0.3%
20

21. European borrowing rates are diverging as investors question
Draft, Subject to
ECONOMIC UPDATE
whether peripheral countries can honor their obligationsRevision
European Debt – 10 Year Rate
Portugal
Spain
Italy
UK France
Germany
Source: Capital IQ, August 14, 2012
 Recent widening in rate markets indicate that Spain and Italy are renewed worries
 Rates in Germany and France driven to new lows as investors flee to perceived safe havens
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22. European equity markets have similarly diverged as investors
ECONOMIC UPDATE
seek safe‐havens
European Equity Markets – 3 Yr. Return
Germany DAX
STOXX Europe 600
Spain MSCI
Source: Capital IQ, July 23, 2012
 European markets are down 11% from their April 2011 highs; Germany not immune as DAX
down 16% in the same period
 July saw the largest decline in the Stoxx Europe 600 index since April 2010 on fears of Spain
needing a bailout and that Greece might default
22

23. European unemployment is now 11.1%
ECONOMIC UPDATE
Current European Unemployment Youth Unemployment
Germany 6% Germany 9%
Italy 10% Euro area 21%
France 10% France 23%
Euro area 11% Italy 29%
Ireland 15% Ireland 29%
Portugal 15% Portugal 30%
Greece Greece 44%
23%
Spain 46%
Spain 25%
0% 10% 20% 30% 40% 50%
0% 5% 10% 15% 20% 25% 30%
Source: Eurostat
 Unemployment in Europe is currently 11.1% and is expected to rise in Q3 to 11.2%; Spain
unemployment is nearly 25%
 Youth unemployment (under 25s) approaching 50% in Greece and Spain
23

24. Europe: A sobering summary
ECONOMIC UPDATE
Est. 2012 GDP Est. 2013 GDP
Unemployment
Growth Growth
Germany 5.4% +1.0% +1.4%
France 10.1% +0.3% +0.8%
U.K. 8.0% +0.2% +1.4%
Spain 24.8% (1.5%) (0.6%)
Italy 10.8% (1.9%) (0.3%)
Portugal 15.4% (3.3%) +0.3%
Greece 23.1% (4.7%) 0.0%
Sources: GDP: IMF; Unemployment: Eurostat
24

25. While the West struggles to grow, the BRICs have provided a
ECONOMIC UPDATE
decade of solid economic growth
Avg. Annual
BRIC GDP Growth Growth
2000‐2010
20%
% YoY China 10.3%
India 7.3%
15% Russia 5.4%
Brazil 3.7%
China
10%
Brazil
5% India
0%
Russia
‐5%
‐10%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: IMF
China’s GDP grew in excess of 10% annually in the last decade
China is already the second largest economy in the world and projected to be larger than the
U.S. before 2020
Growth in the developing world is projected to moderate but still grow well in excess of the
developed economies
25

26. Pocket of Growth: BRICs are projected to continue their growth
ECONOMIC UPDATE
but at a slowing rate
BRIC GDP Growth
20%
% YoY Avg. Annual Growth
2000‐2007 2008‐2010 2011‐2017
China 10.5% 9.8% 8.6%
15% India 7.1% 7.8% 7.3%
Russia 7.2% 0.6% 4.0%
Brazil 3.5% 4.1% 3.7%
10%
5%
0%
Brazil China
‐5%
India Russia
‐10%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: IMF
 China’s large export economy largely depends on the consuming nations of the West to
fuel continued growth—investment in infrastructure and manufacturing
 The IMF reduced their growth forecasts in July for China and the other BRIC countries
26

27. The fundamentals are working in favor of developing countries
ECONOMIC UPDATE
have more economic influence
Avg. GDP Growth 2012 ‐ 2017
9%
8% 8.5%
7%
7.3%
6%
5%
4%
3.9% 3.9%
3%
2.9%
2%
1%
1.2%
0%
China India Russia Brazil U.S. Euro Zone
Source: IMF
 China is projected to become the largest economy in
the world by 2020
 Europe becoming less of an influence
Source: Euromonitor
27

28. Economic Takeaways
ECONOMIC UPDATE
GDP growth is slowing; ‘12 & ’13 forecasts being revised downward
The approaching Fiscal Cliff could slow growth further
Job and real income growth are key to recovery
Conditions in Europe are unstable and performance is diverging
Developing nations still offer long‐term opportunity
28

29. Considerations
ECONOMIC UPDATE
The near‐term outlook should invoke a healthy dose
of cynicism in all of us
• Reviewing assumptions for ROY is prudent
We need to be contemplating a number of scenarios
• Growth is by no means certain in the near‐ to medium‐term
Europe is the greatest near‐term worry and is likely to
be challenging for years to come
• Particular attention should be given to European growth plans and assumptions need to be
tested
Continue to look for growth where the dynamics are
still favorable
• BRICs
• Other emerging economies
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