2006 Economic Outlook

John Kim, CFAPresident Prudential Retirement

January 5, 2006

2

2006 Economic Forecast

1. U.S. Economy will be in Transition

3

U.S. Economy in Transition

4.2

3.5

2.5

0

1

2

3

4

5

2004 2005 2006

%

%

%

U.S. GDP

F

4

2006 Economic Forecast

1. U.S. Economy will be in Transition

2. Underlying Fundamentals will Remain Healthy

5

Healthy Underlying Fundamentals

• Highly flexible and resilient economy

• Efficient and competitive business sector

• Controlled wage and price inflation

• Strong corporate balance sheets

• Strong financial system

• Expanding business capital investments

6

2006 Economic Forecast

1. U.S. Economy will be in Transition

2. Underlying Fundamentals will Remain Healthy

3. Energy Prices will Decline

7

Energy Prices: Unsustainable Spikes

'96 '97 '98 '99 '00 '01 '02 '03 '04 '050

2

4

6

8

10

12

14

16

©FactSet Research SystemsSource: FactSet Research Systems

Natural Gas PricesHenry Hub, Spot, USD/MMBtu

8

2006 Economic Forecast

1. U.S. Economy will be in Transition

2. Underlying Fundamentals will Remain Healthy

3. Energy Prices will Decline

4. Consumer Spending will Finally Slow

9

'59 '62 '65 '68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04-2

0

2

4

6

8

10

12

14

16

Source: FactSet Research Systems

Personal Savings RatePercent of Disposable Personal Income

Personal Saving Rate, PercentFive-Year Average

A “Consuming” Consumer

10

2006 Economic Forecast

1. U.S. Economy will be in Transition

2. Underlying Fundamentals will Remain Healthy

3. Energy Prices will Decline

4. Consumer Spending will Finally Slow

5. Housing Cycle Downturn is Happening

11

Historic Real Estate Busts

'76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '040

2

4

6

8

10

12

14

16

18

20

Source: FactSet Research Systems, SIRG

Mortgage Rates Vs House Price AppreciationOFHEO National House Price Index; Percent Change, Year AgoConventional Mortgage Rate, Percent

12

Historic Real Estate BustsPrice At Top Year Price At Bottom Year Percent Loss

Austin$109,000 1986 $81,200 1990 -25.8

Detroit$63,700 1981 $55,900 1984 -12.2

Honolulu$268,600 1994 $225,500 1999 -16.0

Los Angeles$222,200 1990 $176,300 1996 -20.7

New York$213,100 1989 $197,500 1991 -7.3

Phoenix$106,200 1987 $100,700 1990 -5.1

San Francisco$286,600 1990 $261,000 1994 -9.6

Source: CNN, September 2005

13

2006 Economic Forecast

1. U.S. Economy will be in Transition

2. Underlying Fundamentals will Remain Healthy

3. Energy Prices will Decline

4. Consumer Spending will Finally Slow

5. Housing Cycle Downturn is Happening

6. Federal Reserve Tightening will End in 1st Quarter

14

Path of Fed Policy is Much More Uncertain

..an energy shock presents complex choices for monetary policy. It reduces output and employment for a time, which calls for easier policy, but it also temporarily raises inflation, which calls for tighter policy. Moreover, the size of these two effects is difficult to gauge in advance.

--Janet L. Yellen, San Francisco Fed President

September 8, 2005

Fed Fund Futures ContractsImplied Rate

As of 10/27/2005

3.6

3.8

4.0

4.2

4.4

4.6

4.8

3.6

3.8

4.0

4.2

4.4

4.6

4.8February-06

April-06

July-06

January-06

Source: Bloomberg

15

New Fed Chairman Adds to Uncertainty

• Continuity of policy?

• More dovish than predecessor?

• Politically savvy? Too blunt?

• Moves toward inflation targeting?

• Unconventional policy measures?

Prices of Futures Contracts on New Chairman

36.8

18 16.4 15

6

0

5

10

15

20

25

30

35

40

45

50

Bernanke Feldstein Hubbard Lindsey Kohn

Source: The Economist

Prices as of 10/13/2005

Quotes from Intrade Exchange

16

2006 Economic Forecast

1. U.S. Economy will be in Transition

2. Underlying Fundamentals will Remain Healthy

3. Energy Prices will Decline

4. Consumer Spending will Finally Slow

5. Housing Cycle Downturn is Happening

6. Federal Reserve Tightening will End in 1st Quarter

7. Dis-inflationary Bias will Renew

17

Few Signs of Energy Inflation Passing through to Core

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '050

1

2

3

4

5

6

7

Source: FactSet Research Systems

Consumer Price IndexPercent Change Year Ago

Headline CPI Core CPI

'80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05-4

-2

0

2

4

6

8

10

12

14

Source: FactSet Research Systems

Unit Labor CostsPercent Change, Year Ago

Non Farm Business SectorNon-Financial Sector

18

2006 Economic Forecast

1. U.S. Economy will be in Transition

2. Underlying Fundamentals will Remain Healthy

3. Energy Prices will Decline

4. Consumer Spending will Finally Slow

5. Housing Cycle Downturn is Happening

6. Federal Reserve Tightening will End in 1st Quarter

7. Dis-inflationary Bias will Renew

8. Corporate Profit Growth will Decelerate

19

U.S. Corporate Profits

Source: Bloomberg

20

2006 Economic Forecast

1. U.S. Economy will be in Transition

2. Underlying Fundamentals will Remain Healthy

3. Energy Prices will Decline

4. Consumer Spending will Finally Slow

5. Housing Cycle Downturn is Happening

6. Federal Reserve Tightening will End in 1st Quarter

7. Dis-inflationary Bias will Renew

8. Corporate Profit Growth will Decelerate

9. Global Economy will Slow

21

Global Economic Growth: Solid, Yet Slowing

Source: IMF WEO, September 2005

IMF World Economic Outlook Projections

Current Projections

2004 2005 2006World Output 5.1 4.3 4.3Advanced Economies 3.3 2.5 2.7

United States 4.2 3.5 3.3 Euro Area 2.0 1.2 1.8 Japan 2.7 2.0 2.0 UK 3.2 1.9 2.2

Emerging/developing economies 7.3 6.4 6.1 China 9.5 9.0 8.2

22

2006 Economic Forecast

1. U.S. Economy will be in Transition

2. Underlying Fundamentals will Remain Healthy

3. Energy Prices will Decline

4. Consumer Spending will Finally Slow

5. Housing Cycle Downturn is Happening

6. Federal Reserve Tightening will End in 1st Quarter

7. Dis-inflationary Bias will Renew

8. Corporate Profit Growth will Decelerate

9. Global Economy will Slow

10. Baby Boomers will Finally Grow Up

23

Boomers Turn 60

• Famous Boomer Birthdays Diane Keaton – January 5 Cher – May 20 Donald Trump – June 14 George W. Bush – July 6 Bill Clinton – August 19 Suzanne Somers – October 16 Jimmy Buffett – December 25

• Looming Crisis in Retirement and Healthcare• Grass roots sentiment for structural change

Happy New Year!