US Macro Overview

1. US Macro Overview Richard W. Peach Federal Reserve Bank of New York November 16, 2010

2. Overview • Growth of real GDP slowed to just 1.9% (annual rate) over 2010Q2 and 2010Q3, the unemployment rate stopped declining, and trend inflation slowed further. • The Federal Reserve has announced that it will engage in a second round of large scale asset purchases (QEII), prompting a significant improvement in overall financial conditions. • While downside risks for growth and inflation remain significant, very recent data has surprised to the upside, increasing confidence that the natural healing process for the economy is far along.

3. Unemployment and Labor Force Participation Rates Subtitle Text Percent Percent Participation Rate (Right Axis) Unemployment Rate (Left Axis) X-Axis Text Contact Person Text Source: Bureau of Labor Statistics

4. Total and Core CPI Subtitle Text % Change - Year to Year % Change - Year to Year Total CPI Core CPI X-Axis Text Contact Person Text Source: Bureau of Labor Statistics

5. Actual and Expected Fed Funds Target Subtitle Text Percent Percent Actual April 23 September 22 November 11 X-Axis Text Contact Person Text Source: Federal Reserve Board

6. FOMC Statement: November 3, 2010 • “To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. • “…will maintain its existing policy of reinvesting principal payments from its securities holdings.” • “…intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.” • “…will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information…” • “The Committee will maintain the target rate for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

8. A General Improvement in Financial Conditions

9. Banks Tightening Terms and Standards for Business Loans to Large and Mid-Sized Firms Subtitle Text Net Percentage Net Percentage Standards Demand Spreads X-Axis Text Contact Person Text Source: FRB Senior Loan Officer Opinion Survey

10. C&I Loans: All Commercial Banks Subtitle Text % Change – 13-week AR % Change – 13-week AR X-Axis Text Contact Person Text Source: Federal Reserve Board

11. TIPS Implied Inflation: 2-3, 4-5, and 5-10 Year Horizons Subtitle Text Percentage Points Percentage Points November 9: 2.86 5-10 Years 4-5 Years 2-3 Years November 9: 2.15 November 9: 1.87 X-Axis Text Contact Person Text Source: Federal Reserve Board Note: Carry-adjusted.

12. Real Federal Funds Rate Subtitle Text Real Federal Funds Rate = Nominal Federal Funds Rate – 12 Month % Change of the Core CPI Percent Percent X-Axis Text Contact Person Text Source: Bureau of Labor Statistics

13. Real Federal Funds Rate Subtitle Text Real Federal Funds Rate = 2-Year Treasury – TIPS Implied 2-3 Year Inflation Percent Percent X-Axis Text Contact Person Text Source: Federal Reserve Board

14. Real PCE, Disposable Income and Personal Saving Rate Subtitle Text % Change - Year to Year Percent Real Disposable Income (left axis) Real PCE (left axis) Personal Saving Rate (right axis) X-Axis Text Contact Person Text Note Text Source: Bureau of Economic Analysis

15. Personal Saving Rate and Household Net Worth Subtitle Text Percent Percent 2010Q3 2009Q2 2006-2007 2008Q2 X-Axis Text Contact Person Text Households’ Net Worth as a Percent of Disposable Income Source: Bureau of Economic Analysis and Federal Reserve Board Note: Fitted line is from 1983Q1 to 2005Q4.

16. Household Financial Obligation Ratio Subtitle Text Ratio Ratio Household Financial Obligation Ratio X-Axis Text Contact Person Text Source: Federal Reserve Board

17. Ratio of Housing Starts to Population Single-Family Homes Starts per 1,000 people Starts per 1,000 people X-Axis Text Contact Person Text Source: Census Bureau

18. Excess Supply of Housing Subtitle Text Thousands of Units Thousands of Units Excess Units: Total Renter (For Rent) Held Off Market Owner (For Sale) X-Axis Text Contact Person Text Source: Federal Reserve Board Note: Shading represents NBER recessions.

19. LoanPerformance National Home Price Index Index Index Includes Distressed Sales Excludes Distressed Sales X-Axis Text Contact Person Text Source: LoanPerformance/Haver Analytics

20. Private Employment and Hours Worked Subtitle Text % Change – 3-month Annual Rate % Change – 3-month Annual Rate Aggregate Hours Employment X-Axis Text Contact Person Text Source: Bureau of Labor Statistics Note: Both series are private industries only.

21. ISM Indices Subtitle Text Level Level Nonmanufacturing Index Manufacturing Index X-Axis Text Contact Person Text Source: Institute of Supply Management Note: Above 50 = Increasing

22. Nondefense Capital Goods Excluding Aircraft Subtitle Text % Change - Year to Year % Change - Year to Year New Orders Shipments X-Axis Text Contact Person Text Source: Census Bureau

23. Real Exports of Goods and Services (Series Set to 1.00 at NBER Peak) Subtitle Text Y-Axis Left Text Y-Axis Right Text Ratio Ratio 1990-91 Cycle 1973-75 Cycle Current Cycle 2001 Cycle 1981-82 Cycle Quarters Since NBER Peak Contact Person Text Source: Bureau of Labor Statistics

24. Blue Chip Consensus Forecast for the US Economy November ‘10 (July ’10) 2009 2010 2011 Q4/Q4 growth rate 0.2 2.4 (2.9) 2.9 (3.0) GDP 1.7 (1.7) 1.0 (1.0) 1.5 Total CPI Inflation 10.0 9.6 (9.5) 9.1 (8.8) Unemployment (End of Period Level)