John Silvia – Chief EconomistFebruary 2, 2004

Presentation to: Paris GIC Conference

Club Horizon Stratégie 2004 Outlook

Economics as Information

Getting Beyond the Bloomberg Headline

Where are we now?

20032002200120001999

10%

8%

6%

4%

2%

0%

-2%

10%

8%

6%

4%

2%

0%

-2%

REAL GDP GROWTHQuarter/Quarter Percent Change, Seasonally Adusted Annual Rate

4th Quarter 2003@ 4.0%

03020100999897

15%

10%

5%

0%

-5%

-10%

15%

10%

5%

0%

-5%

-10%

FINAL DOMESTIC DEMAND COMPONENTS(Year-on-Year Growth)

Blue Line = Consumer SpendingRed Line = Government Spending

Green Line = Business Fixed Investment

Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2

7%

6%

5%

4%

3%

2%

1%

0%

-1%

7%

6%

5%

4%

3%

2%

1%

0%

-1%

NON-FARM PRODUCTIVITY and REAL GDPYear-over-Year Percent Change

Bars = Non-Farm Productivity, 3Q @ 5.0%

Line = Real GDP, 4Q @ 4.3%

2001 2002 2003

200

0

-200

-400

-600

-800

-1000

200

0

-200

-400

-600

-800

-1000

Non-Farm EmploymentNet Quarterly Change, in Thousands

4Q @ 144K

2001 2002 2003

Where are we going?• Outlook – Is the Recovery Picking Up Momentum?• Not Your Father’s Economic Recovery.

200420032002

500

450

400

350

300

500

450

400

350

300

INITIAL JOBLESS CLAIMSIn Thousands

Blue Line = 4-Week Moving Average @ 346.00

January 24

Green Line = Weekly Figure @ 342.00

0301999795939189878583

140000

130000

120000

110000

100000

90000

140000

130000

120000

110000

100000

90000

Employment - Payroll vs. HouseholdThousands of Persons

Household (left) Payrolls (right)

2003200220012000

139000

138500

138000

137500

137000

136500

136000

135500

133000

132500

132000

131500

131000

130500

130000

129500

Employment - Payroll vs. HouseholdThousands of Persons

Household (left) Payrolls (right)

03020100999897

70

65

60

55

50

45

40

35

70

65

60

55

50

45

40

35

ISM COMPOSITE INDEXDiffusion Index

December @ 66.2

03020100999897

70

65

60

55

50

45

40

35

70

65

60

55

50

45

40

35

ISM NON-MANUFACTURING INDEXBUSINESS ACTIVITY INDEX

December@ 58.6

Seasonally Adjusted

Consumer Fundamentals:• Income• Sentiment• Credit• Outlook – Better

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6%

5%

4%

3%

2%

1%

0%

6%

5%

4%

3%

2%

1%

0%

INCOME & SPENDING GROWTHYear to Year Percent Change, 12 Month Moving Average

Real Spending (Green Line) @ 3.1%Real, Disposable Income (Blue Line) @ 2.5%

November

Personal Consumption Expenditures6%

7%

3%

13%

5%

8%

13%5%

4%

4%

14%

4%

14%

Motor Vehicles and Parts

Furniture and Household Equipment

Other Durable Goods

Food

Clothing and Shoes

Other Nondurable Goods

Housing

Energy Goods and Services

Other Household Operation

Transportation

Medical Care

Recreation

Other Services

2002

Investment Spending:• Orders• Capacity Utilization • Financial Depth• Outlook - Improving

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20%

10%

0%

-10%

-20%

-30%

20%

10%

0%

-10%

-20%

-30%

MANUFACTURERS' NEW CAPITAL GOODS ORDERSNON-DEFENSE, EXCLUDING AIRCRAFT

December

Year-to-Year Percent Change @ 9.9%

Series is a 3-Month Moving Average

200320022001

20%

10%

0%

-10%

-20%

20%

10%

0%

-10%

-20%

REAL BUSINESS EQUIPMENT & SOFTWARE SPENDINGSeasonally Adusted Annual Rate

4th Quarter 2003@ 10.0%

Inventories Under Control

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1.60

1.50

1.40

1.30

1.60

1.50

1.40

1.30

TOTAL INVENTORY TO SALES RATIO

@ 1.35November

Housing:• Household Income• Employment• Credit• Outlook - Positive

030199979593918987

1.8

1.6

1.4

1.2

1.0

0.8

0.6

12%

11%

10%

9%

8%

7%

6%

5%

SINGLE FAMILY HOUSING STARTSSeasonally Adjusted Annual Rate - in Millions

Mortgage Rate @ 5.88%

(Right Scale)

(Left Scale)

Green Line

Single-Family Starts @ 1.66Blue Line

December

030199979593918987

50%

40%

30%

20%

10%

0%

-10%

-20%

50%

40%

30%

20%

10%

0%

-10%

-20%FHLMC/FNMA House Price Index

SAN JOSE MSA HOME PRICESQuarterly Percent Change, Annual Rate

Third Quarter 2003

Blue Bar = Qtrly Change @ 0.0%Red Line = Yr/Yr Change + 1.0%

Inflation:• Commodity Prices• Dollar• Energy• Productivity• Outlook - Creeping Up

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6%

4%

2%

0%

-2%

-4%

6%

4%

2%

0%

-2%

-4%

U.S. CPI - SERVICES VS "CORE" COMMODITIESYear to Year Percent Change

December@ 2.8%Line is Services

Bars are Commodities, ex. Food & Energy @ - 2.5%

039995918783

7%

6%

5%

4%

3%

2%

1%

0%

390

360

330

300

270

240

210

180

CPI and Commodities PricesGreen Line is CRB Price Index (right)

Blue Line is Yr/Yr change in CPI (left)

0301999795939189878583

7%

6%

5%

4%

3%

2%

1%

0%

90

81

72

63

54

45

36

27

CPI and ISM Prices

Green Line is ISM Price Index (right)Blue Line is Yr/Yr change in CPI (left)

0301999795939189878583

7%

6%

5%

4%

3%

2%

1%

0%

90

87

84

81

78

75

72

69

CPI and Capacity Utilization

Green Line is Capacity Utilization (right)

Blue Line is Yr/Yr change in CPI (left)

0301999795939189878583

7%

6%

5%

4%

3%

2%

1%

0%

16%

14%

12%

10%

8%

6%

4%

2%

CPI and Unemployment

Green Line is Unemployment Rate (right)

Blue Line is Yr/Yr Change in CPI (left)

International• Outlook - Weak Driven By Weakness Abroad

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5%

4%

3%

2%

1%

0%

5%

4%

3%

2%

1%

0%

EUROZONE REAL GDP GROWTHYear-to-Year Percent Change

3Q 2003@ 0.3%

0201009998

10%

8%

6%

4%

2%

0%

-2%

10%

8%

6%

4%

2%

0%

-2%

REAL GDP GROWTHSource: IMF

2002

Blue Line = China @ 8.0%Red Line = Japan @ 0.3%

Jan.Nov.Sept.JulyMayMar.Jan.

105

100

95

90

85

80

105

100

95

90

85

80

FED'S "MAJOR CURRENCY" AND"OTHER IMPORTANT TRADING PARTNERS" CURRENCY INDICES

2003

Blue Line = Major Currency Index

Green Line = OITP Index

2004

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$800

$600

$400

$200

$0

$800

$600

$400

$200

$0

U.S. EXTERNAL INDICATORSIn Billions of Dollars

Blue Line = Current Account DeficitGreen Line = Private Capital Inflows

Public Policy:• Monetary Policy• Fiscal Policy• Regulation• Trade

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12%

10%

8%

6%

4%

2%

0%

-2%

12%

10%

8%

6%

4%

2%

0%

-2%

REAL FEDERAL FUNDS RATEVS. M2 MONEY GROWTH

Green Line = Real Fed Funds Rate*,Blue Line = M2 Growth, Yr/Yr % Change, December @ 4.3%

* Fed Funds Rate minus "Core" Consumer Price Index

December @ - 0.2%

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23%

22%

21%

20%

19%

18%

17%

16%

15%

23%

22%

21%

20%

19%

18%

17%

16%

15%

FEDERAL SPENDING vs. REVENUEAs Percent of GDP

December '03

15.9%

SPENDING

REVENUE

19.4%

Latest 12 months:

Spending $ 2,190 TrillionRevenue $ 1,796 Trillion

(Blue Line)

(Green Line)

Financial MarketsIs The Bond Market Still

Overbought?

JuneMar.Dec.Sept.JulyJuneMayApr.Mar.Feb.

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

FORWARD RATES90-Day Euro-Dollar Futures

Blue Line = CurrentRed Line = Two Weeks Ago

2004

Green Line = 6-Months Ago

2005

0403020100999897

9%

8%

7%

6%

5%

4%

3%

9%

8%

7%

6%

5%

4%

3%

10-YEAR TREASURY VS. BAA CORPORATE BOND YIELD

Green Line = BAA Yield @ 6.45%

January

Blue Line = 10-Yr Treasury @ 4.15%

A Profits Rebound?• Revenue• Costs

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$1200

$1000

$800

$600

$400

$200

$1200

$1000

$800

$600

$400

$200

CORPORATE PROFITSIn Billions of Dollars, SAAR

3rd Quarter 2003@ $1124.2 B

Adjusted for Inventory Valuation & Capital Consumption

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6%

4%

2%

0%

-2%

-4%

6%

4%

2%

0%

-2%

-4%

PRODUCTIVITY AND UNIT LABOR COSTS (TOTAL NON-FARM)Yr-to-Yr Percent Change (4 Qtr. Moving Average)

3rd Qtr.

Productivity @ 4.1%

Unit Labor Cost @ -1.4%

(Blue Line)

(Green Line)

Uncommon Wisdom

Tyrannosaurus Rex

Big One Day, Dead the Next

0402009896949290888684828078

600

500

400

300

200

100

0

5000

4000

3000

2000

1000

0

S&P 400 MIDCAP INDEX VS. NASDAQJanuary

Blue Line = S&P 400 Midcap, left scaleGreen Line = Nasdaq, right scale

Uncommon Wisdom

“Whether you get soaked depends on proper

balance”

40%

30%

20%

10%

0%

40%

30%

20%

10%

0%

Total Return(Year-to-Date, January-2003 thru December 2003)

Gov't T-Bills

Wilshire

Corporate

High Yield

LBML 3-MoRussellRussellS&P 500

15%

10%

5%

0%

-5%

-10%

15%

10%

5%

0%

-5%

-10%

CAPITAL MARKETS PERFORMANCE SUMMARY5-Year Returns as of December 2003

Stocks BondsS&P 400

MSCIEAFE

LBIntermediate

G/C

NCREIFProperty

Index

Midcap

RealEstate

1000 Growth 2000 T-Bills Aggregate

Russell1000 Value

Economic Forecast*(Qtr/Qtr% Change, Annual Rate)

2001 2002 2003 2004

Real GDP* 0.5% 2.2% 3.1% 5.1%

Personal Consumption*

2.5% 3.4% 3.1% 3.8%

Equipment & Software*

-5.2% -2.8% 5.4% 17.2%

CPI (YoY) 2.8% 1.5% 2.3% 1.6%

Corporate Profits (YoY)

-5.8% 17.4% 16.9% 17.4%

10-Yr T-Note 4.98% 4.30% 3.89% 4.59%

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