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The DE Recession Scorecard: Summary Table and Charts July 18, 2008

2. Outline. The Recession Scorecard (Page 3) Is It Really a Recession? (Page 4) LEI (Page 5) Consumer Sentiment (Page 6) Retail Sales (Page 7) Employment (Page 8) Initial Claims (Page 9) Housing Starts (Page 10) ISM (Page 11) Yield Curve (Page 12) Corporate Quality Spreads (Page 13) Equity Prices (Page 14) Crude Oil Prices (Page 15).

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The DE Recession Scorecard: Summary Table and Charts July 18, 2008

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    1. M. Cary Leahey Senior Managing Director Decision Economics cleahey@pdeeco.com The DE Recession Scorecard: Summary Table and Charts July 18, 2008

    2. 2 Outline The Recession Scorecard (Page 3) Is It Really a Recession? (Page 4) LEI (Page 5) Consumer Sentiment (Page 6) Retail Sales (Page 7) Employment (Page 8) Initial Claims (Page 9) Housing Starts (Page 10) ISM (Page 11) Yield Curve (Page 12) Corporate Quality Spreads (Page 13) Equity Prices (Page 14) Crude Oil Prices (Page 15)

    3. 3 DE recession scorecard has deteriorated. The financial market variables have worsened—the equity market continues to slide and the high yield spread has moved back into recession territory, even before Freddie and Fannie blew up. So 8 of 11 components are in recession territory (compared to a peak of 7 in June and 4 in December). Retail sales has improved but June was not as strong as May. Consumer sentiment is holding to near 30-year lows, with a near-30 year high on 1-year inflation expectations, characteristic of the stagflation-lite situation at present. Oil prices have finally come down.

    4. 4 Many analysts think there has been no recession since GDP growth has not turned negative. But the recession designation is based on monthly data, of which payrolls is the most important. The six-month change in payrolls has turned negative and every time it has turned negative, a recession has developed. Given past experience we may not know we are “officially” in a recession until after the recession is over.

    5. 5 The LEI is approaching the -3% to -4% range that usually denotes a recession. In deep downturns, the year-ago growth rate could fall to -10%.

    6. 6 Both indexes of consumer confidence and sentiment have taken another downward lurch and are just in the mid-to lower end of recession ranges. Confidence has fallen to 50 in a deep recession.

    7. 7 Real retail sales growth has rebounded beyond consensus expectations in response to the rebate. Real retail sales are just at the upper end of the recession range. The timing of the rebate from May to September will skew spending measures and make interpreting any potential pickup in consumption difficult. Real retail sales could fall to a -8% year-ago growth rate if things get really bad.

    8. 8 Employment losses are stabilizing at 65K per month, a pace of declines far less than past downturns. The “mild” 2001 recession contained job losses of 150K per month for a time. This suggests that firms are holding the line on jobs cuts which may prevent the recession from “truly” unraveling. The risk, however, is that the slowdown will lead to further jobs declines and perhaps contribute to another round of financial stress—the so called “negative feedback loop” central bankers fret about.

    9. 9 Initial claims may be stabilizing around the lower end of the recession range of 375K. In the deep 1982 downturn, initial claims peaked at 650K plus. In the last two downturns, claims rose to “only” 500K.

    10. 10 Housing starts are well within recession ranges now. Starts bottomed at 800K during two of three last downturns. Are starts finally bottoming well before the expected bottoming in home prices?

    11. 11 The national ISM remains well above the upper end of the typical recession range and may even be bottoming. The index fell to 30 during the deep 1975 and 1982 downturns and to only 40 in the previous two downturns.

    12. 12 The funds rate has moved below the level of 10-year notes in late January. A steepening yield curve is an important ingredient of a recovery. The curve tends to steepen to 200 bps by the end of the recession.

    13. 13 High yield spreads entered the lower end of recession-like territory in February. In the past two recessions, spreads peaked at +1000 bps. However, the absolute level of corporate yields is low compared to the past two downturns. The equity rally and subsequent bust mean that spreads left and then re-entered recession territory.

    14. 14 Equity prices have rebounded and then sunk again and are 20% from the highs. Declines of 20% are typical during recessions.

    15. 15 Crude oil prices are definitely in recession territory at or near record highs after inflation. They MAY have finally peaked in the wake of the Fannie/Freddie debacle. (Note: This crude oil price is refiners acquisition cost which runs about $10 below WTI).

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