What’s Ahead For The Economy?

The Economic Outlook Group, LLC475 Wall Street

Princeton, New Jersey (609) 529-1300

Bernard BaumohlChief Global Economist

www.EconomicOutlookGroup.com

The Lodging Conference 2013September 18, 2013

Scenario A

Scenario B

Scenario CGDP growth exceeding 3%

Economy slips into recession

Growth less than 2.5%Economic cycle peaked

Dec. 2007

2008 - 2009 recession

Recession ends June 2009

Lodging Conference

What’s next for the economy? Three possible paths in 2014.

2012

2013

The Economic Outlook Group

Scenario A: Recession Average life span of recovery is just 4.8 years. Sequester will do more damage.

Market interest rates keep climbing. Consumers & businesses pull back;

The comeback of Europe, China and emerging markets is just wishful thinking. >> Federal Reserve: Ramps up quantitative easing.

Scenario B: Dull Growth: Less than 2.5%.US economy stuck in low gear. Higher market rates to restrain growth.Europe “staggers” out of recession.

China avoids hard landing, but is beset with debt problems. U.S. confidence vacillates; Spending remains lacklusterEmployment: a miserly 100K/month>> Federal Reserve: No increase in QE, but may postpone tapering.

Scenario C: Stronger Recovery: 3% or better US economy gains more traction.

Higher confidence fuels both consumer & business spendingEurope emerges from recession. “Worst is over.” Private capital returns to EZ

Chinese leaders succeed in achieving growth target, even as it seeks reforms U.S. employment enters in 200K - 300K/month range

>> Fed: On track to end QE mid-2014; Higher rates will NOT imperil the recovery.The Economic Outlook Group

Scenario A: Recession Average life span of recovery is just 4.8 years. Sequester will do more damage.

Market interest rates keep climbing. Consumers & businesses pull back;

The comeback of Europe, China and emerging markets is just wishful thinking. >> Federal Reserve: Ramps up quantitative easing.

Scenario B: Dull Growth: Less than 2.5%.US economy stuck in low gear. Higher market rates to restrain growth.Europe “staggers” out of recession.

China avoids hard landing, but is beset with debt problems. U.S. confidence vacillates; Spending remains lacklusterEmployment: a miserly 100K/month>> Federal Reserve: No increase in QE, but may postpone tapering.

Scenario C: Stronger Recovery: 3% or better US economy gains more traction.

Higher confidence fuels both consumer & business spendingEurope emerges from recession. “Worst is over.” Private capital returns to EZ

Chinese leaders succeed in achieving growth target, even as it seeks reforms U.S. employment enters in 200K - 300K/month range

>> Fed: On track to end QE mid-2014; Higher rates will NOT imperil the recovery.

15%

35%

50%

The Economic Outlook Group

The consumer is key to the economic outlook!

Three main drivers of household spending: 1. Labor market conditions. Is the job market improving? Yes…slowly.

2. Household balance sheets. Have family debt burdens eased? Yes!

3. Household wealth. Have Americans seen their wealth increase? Yes!

The Economic Outlook Group

The Economic Outlook GroupSource: BLS

Peaked at 10% Oct. 2009

7.3%August 2013

Forecast: 6.5% by 2015

Biggest employersLeisure and hospitalityRetail Temporary workConstructionEnergy

Unemployment rate has been dropping (….but at an agonizingly slow pace)

Monthly change in non-farm payrolls

The Economic Outlook GroupSource: Federal Reserve

New applications for unemployment benefits keep falling

4-week moving average

2013

The Economic Outlook GroupSource: Federal Reserve

Sources: Federal Reserve, University of Michigan, Conference Board, Bloomberg PLC

Motor vehicle sales

Are Consumers Upbeat and Spending?

• Conference Board: Latest consumer confidence near 5½yr high.

• University of Michigan: Consumer sentiment is just below a 6 yr. peak.

• Are households spending more on big-ticket items? Yes! Purchases of consumer durable goods accelerated in the last quarter. (IIQ)

Retail sales, ex-vehicles

New single-family home “lots” sold

The Economic Outlook Group

August new orders to service firms are the highest in more than two years!

August new orders to manufacturers were the

highest in more than 2 yrs!

New orders are accelerating to manufacturers and service firms;It portends greater output and faster hiring in coming months.

Orders expanding

Orders shrinking

Source: Institute for Supply Management (ISM)

The Economic Outlook GroupSource: Federal Reserve

Bank credit is becoming more easily available;Assets of U.S. commercial banks, in billions

Residential real estate loans

Business loans

Consumer loans

Sources: Federal Reserve, Institute for Supply Management The Economic Outlook Group

Business Confidence

• Homebuilder sentiment (NAHB) in August: Confidence surged to an 8-year high!

• Small business confidence (NFIB): Optimism rose in July to 2nd highest in a year.

• Quarterly CEO confidence survey by Conference Board (conducted in July): Sentiment highest in more than a year!

Real (inflation-adjusted) U.S. exports of goods and services

STARTS of single-family home construction

PERMITS filed for single-family home construction

Homebuilders are struggling to keep up with permits filed for SFH

Private non-residential construction spending improving.Public non-residential construction spending is shrinking!

Debt ceiling crisis / fiscal cliff fears

The Economic Outlook Group

The Economic Outlook Group

• Democrats & Republicans still butt heads over the budget. Q: Will the lack of an agreement imperil growth? A: No! The deficit is shrinking at the fastest pace since WW II. • Deficit in 2014 to drop to 3.4% of GDP, avg. of the last 30 yrs. Debt ceiling: No chance House will allow U.S. to default.

-12

-10

-8

-6

-4

-2

0

2

4

2000 2 4 6 8 2010 12 14 16 18 2020

U.S. budget deficit as % of GDP

Forecast

Source: CBO, The Economic Outlook Group

• WHO SUCCEEDS BEN BERNANKE? Janet Yellen? Donald Kohn? Larry Summers? George Clooney? Makes little difference. Tapering to commence soon regardless. 10-yr. Treasury yields will hover 3.2% - 4.2% in 2014.Fed funds rate to remain 0% - ¼% until late 2015. The normalization of interest rates is a good sign!

• GLOBAL MONETARY EASING IS DRAWING TO A CLOSE: More than 500 interest rate cuts have occurred worldwide since June 2007. The payoff: Faster growth in 2014 - 2015

• WHO IS THE NEWEST EMERGING COUNTRY? IT IS THE UNITED STATES! > Energy revolution = It will have a profound impact on aviation, travel, tourism, manufacturing and the dollar. OPEC and Russia to be losers. > U.S. to regain competitive advantage. Outsourcing becomes much less attractive. > Capital of innovation = iPhone, Google Glass, Tesla, 3-D printing, Robotics, Genomics.

• EMERGING COUNTRIES NOW DEALING WITH “GROWTH PAINS”: > 3.5 BILLION PEOPLE will move from rural areas to cities in the next 5 to 10 years; $20 TRILLION to be spent on infrastructure to support this massive migration. > MORE THAN 50% of global GDP growth in the next 10 years will STILL come from emerging economies.

• BRACE FOR MORE SERIOUS EXOGENOUS SHOCKS: Middle East, Asia, global terrorism, cyberwar ––– all pose great threats to business. Yet few firms perform stress tests to evaluate their vulnerabilities!!

The most important forces that will shape the global economy

The Economic Outlook Group

The Economic Outlook Group