Gathering Momentum at Last

Stephen SliferNumberNomicswww.NumberNomics.com

The Highlights

The Highlights1. GDP growth gradually accelerating to 3.3% in 2014.

The Highlights1. GDP growth gradually accelerating to 3.3% in 2014.

2. All four sectors will contribute to growth pickup.

The Highlights1. GDP growth gradually accelerating to 3.3% in 2014.

2. All four sectors will contribute to growth pickup.

3. Debt ceiling. Obamacare.

The Highlights1. GDP growth gradually accelerating to 3.3% in 2014.

2. All four sectors will contribute to growth pickup.

3. Debt ceiling. Obamacare.

4. The Fed will begin to alter policy for first time in 7 yrs

The Highlights1. GDP growth gradually accelerating to 3.3% in 2014.

2. All four sectors will contribute to growth pickup.

3. Debt ceiling. Obamacare

4. The Fed will begin to alter policy for first time in 7 yrs

5. No recession until 2018 at earliest.

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6.0%

GDP (Real)Year-over-year

GDP (Real)

GDP growth is expected to accelerate to 3.3%in 2014.

Consumption60%

Government15.0%

Trade10.0%

Investment15%

Chart TitleGDP Components

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Recession

The consumer is feeling good and isjustified in feeling that way.

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Stock prices are currently at a record high leveldespite higher long-term interest rates.

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Home Prices

Year-Over-Year (R)

Case Shiller Home Price Index

Home prices have risen steadily for the past two years.

In fact, in the past year home prices have risen 13.6%.

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$35.0

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$45.0

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$55.0

$60.0

$65.0

$70.0

$75.0 Consumer Net Worth (Trillions $)

Between the rising stock market and higherhome prices consumer net worth has risen toa record high level.

These developments bolster confidence.

1980Q1 1982Q3 1985Q1 1987Q3 1990Q1 1992Q3 1995Q1 1997Q3 2000-Q1 2002-Q3 2005-Q1 2007-Q3 2010-Q115.0%

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

18.5%

19.0%

Financial Obligations Ratio

Trend

Consumers have paid down enormous amounts of debt in the past several years.Their debt in relation to income is at a record low level.

Consumers clearly have the abilityto pick up their pace of spendingif they choose to do so.

Won’t higher mortgage ratesand higher home prices

slow the housing market?

Won’t higher mortgage ratesand higher home prices

slow the housing market?

Not much.

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30-year Mortgage Rate

While 30-year mortgage rates have risen 1.0% since Juneto 4.5% they are the lowest mortgage rates in 50 years.

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Case Shiller Home Price Index

While home prices have risen 13.6% in the past yearhome prices remain 21% lower than they wereat the peak of the housing market back in 2006.

2007 2008 2009 2010 2011 2012 2013-Jan. 2013-Nov.100

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Housing Affordability Index

Housing is far less affordable today thanit was at the beginning of the year.

However, consumers still have 70% more income than is necessary to buya median priced home.

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3,800,000

4,300,000

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Existing Home Sales

Sales surged in the summer as borrowers raced to close beforemortgage rates rose.

Many of those sales were borrowedfrom the fall.

The trend has not changed much.

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13Inventory of Unsold Existing Homes

As sales have quickened, a shortageof available homes for sale has emergedin many parts of the country which...

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Sep 2013-2.3%

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0.7%

1.7%

2.7%

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Home Prices

Year-Over-Year (R)

Case Shiller Home Price Index

…is why home prices have risen 13.6% in the past yearand will continue to climb.

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Housing Starts

Trend

Housing Starts

We need 1.3 million new homes or apartments each year to keep pace with growth in the population.

Builders are only providing about 1.0 million.

Demand continues to far exceed supply.Thus, home prices will continue to rise.

1. Stock market climb boosts confidence.

2. Net worth is at a record high level.

3. Debt burden is quite comfortable.

4. Interest rates are near record low levels.

5. Housing is in short supply. Sales and prices rising.

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Consumption spending

Year-over-Year

Consumption Spending (%)

Despite all these positive factorsconsumer spending has been growingat a moderate 2.0% pace for some time.

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Private Employment

Private Employ.3-mo. average

Typically in good times we expectemployment to rise 225thousand per month.

We are seeing almost 200 thousandbut...

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16.5%

17.0%

17.5%

18.0%

18.5%

19.0%

19.5%

20.0% Part Time Workers (% Total)

…many of those jobs are part timepositions and temps.

Also, many of those jobs are in thelow paying food and beverage industryand in retail.

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Real Disposable Income

Because many jobs are in low payingindustries or part-time positionsincome is growing but only about 1.0%.

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-153.0

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Unemployment Rate

Full Employment

As the economy gathers momentumand jobs become more plentiful theunemployment rate will continue to fall.

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250Labor Force

The unemployment rate is declining rapidly because the labor force is shrinking.

But why is the labor force declining?

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Discouraged Workers

The labor force is shrinking because thebaby boomers are retiring.

They were born between 1946-1964.They will retire between 2011-2039.

Thus, the drop in the unemployment rate is legitimate.

The labor force is not shrinkingbecause long-term unemployed workershave given up looking for employment.

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-148.5

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Unemployment Rate -- 16-24 yearsAs the labor market tightens firms will increasinglyturn to sectors where unemployment is highto find workers.

The unemployment rate amongst our youth is 13.5%,double the official rate of 6.7%.

By the end of this year it might fall to 11.5% whichis where it was at the beginning of the recession.

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16.5%

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19.5%

20.0%Part Time Workers (% Total)

At the same time some of thosepart time workers could be offeredfull time positions.

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Consumption spending

Year-over-Year

Consumption Spending (%)

If jobs growth climbs above 200 thousandper month and the quality of jobs improves,consumer spending can easily quicken from 2.0% to 2.6%.

Consumption60%

Government15.0%

Trade10.0%

Investment15%

Chart TitleGDP Components

Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-1349

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U.S. CEO Confidence

Despite fiscal policy and healthinsurance worries, CEO’s remainrelatively upbeat.

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Rising stock prices allow many firmto raise capital by issuing more stock.

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Corporate Profits with IVA and CC

Corporate ProfitsYear-over-yearCorporations are not only

making record profits, growth in profits continuesat a 5.7% pace.

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Corporate Bond Rates

Aaa

Baa

Even with the recent backup, corporateborrowing rates are as low as theyhave been anytime in the past 50 years.

Low rates allow firms to re-finance debtwhich lowers costs and increases profit.

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C & I Loans (L)Year-Over-Year (R)

C & I Loans (%)

Credit is fairly readily available.

Bank loans to businesses aregrowing at a relatively robust8.0% pace.

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Corporate Cash / Assets (%)

Firms have plenty of cash availablefor investment.

1. CEO’s feel relatively confident.

2. Profits are soaring.

3. Interest rates are near record low levels.

4. Credit is readily available.

5. Firms have accumulated a mountain of cash.

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Nonresidential Invest.Year-over-year

Nonresidential Investment

Investment spending has been growing,but at about a 2.0% pace.

Firms continue to be cautious.

Why are firms being so cautious?

Why are firms being so cautious?

1. Recession

Why are firms being so cautious?

1. Recession2. Health Care

Why are firms being so cautious?

1. Recession2. Health Care3. Fiscal Gridlock

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Nonresidential Invest.Year-over-year

Nonresidential Investment

Having said all that, we expect investmentspending to pick up from a 2.0% pacecurrently to 7.0% in 2014.

Consumption60%

Government15.0%

Trade10.0%

Investment15%

Chart TitleGDP Components

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Net Exports

The trade deficit has been steadily shrinking.

It is all oil related and has been caused byimprovements in technology –

Hydraulic fracturing and horizontal drilling.

Production of crude oil and gas is exploding.

By 2040 91.6% of our energy needs will beproduced domestically -- 76% today.

Far less reliant on OPEC sources to satisfy oil needs.

The U.S. will surpass Saudi Arabia and Russia tobecome the world’s largest oil producer.

Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-1348

51

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Global IndexEuropean Union

European Union Confidence

Business confidence in Europe is nowmore in line with other regions.

Europe at last appears to be emerging from recession.The E.U. economy is bigger than the U.S.

Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-1346.0

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Japanese Confidence

Japan’s economy has been in a slump for 20 years.Prime Minister Obe’s decision to pursue a Fed-likemonetary policy has turned the economy around.

Japan is the world’s 3rd largest economy.

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Nikkei 225

The Japanese stock market has risen75% in the past 14 months.

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-470.000

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-440.000

-430.000

-420.000

-410.000

-400.000

-390.000

-380.000Net Exports

The trade deficit has been steadily shrinkingand should continue to do so in 2014.

Consumption60%

Government15.0%

Trade10.0%

Investment15%

Chart TitleGDP Components

2007q1

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2013q2-17.0%

-12.0%

-7.0%

-2.0%

3.0%

8.0%

13.0%

Federal GovernmentYear-over-year

Federal Government

Federal government spending -- defensespending in particular -- has been fallingfor the past two years because

The U.S. winds down of two wars.The sequester has further reduced spending.

2011q1 2011q2 2011q3 2011q4 2012q1 2012q2 2012q3 2012q4 2013q1 2013q2 2013q31.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%GDP Growth vs. Private Sector

Government spending hasreduced GDP growth by about0.4% in each of the past 2 years.

In 2014 we expect govt.spending to be essentiallyunchanged versus a dropof 1.2% last year.

2013-2014 Forecasts2012 2013

2014GDP 2.0% 2.7%

3.3%Unemploy. Rate 7.8% 6.7% 6.0%Inflation Rate 1.9% 1.8%

1.9%Fed Funds Rate 0.1% 0.1%

0.1%10-year Note 1.7% 2.9% 3.6%30-year Mortgage 3.4% 4.4%

5.0%

Default on our Debt?

Default on our Debt?

Absolutely Not!

Our policy makers will not let that happen.

Our policy makers will not let that happen.

Debt ceiling increased 14 times since 2001.

Our policy makers will not let that happen.

Debt ceiling increased 14 times since 2001.

Never once has the Treasury defaulted.

Won’t Obamacare Ruin Everything?

Won’t Obamacare Ruin Everything?

No.

Lots of Countries Have Universal Health Care.

1. Germany2. France3. Italy4. U.K.5. Canada

Lots of Countries Have Universal Health Care.

1. Their stock markets continue to climb.

Lots of Countries Have Universal Health Care.

1. Their stock markets continue to climb.2. Their economies continue to grow.

Lots of Countries Have Universal Health Care.

1. Their stock markets continue to climb.2. Their economies continue to grow.3. Their standards of living continue to rise.

Obamacare is Causing Major Dislocations

Obamacare is Causing Major Dislocations

1. Firms want to have fewer than 50 workers.

Obamacare is Causing Major Dislocations

1. Firms want to have fewer than 50 workers.2. Firms try to cut hours to less than 30 hours.

Obamacare is Causing Major Dislocations

1. Firms want to have fewer than 50 workers.2. Firms try to cut hours to less than 30 hours.3. Many policy holders are losing coverage.

Obamacare is Causing Major Dislocations

1. Firms want to have fewer than 50 workers.2. Firms try to cut hours to less than 30 hours.3. Many policy holders are losing coverage.4. Annual premiums are rising.

Economy is Adjusting to the Law.

Obamacare is a Tradeoff

Obamacare is a Tradeoff

Good: Universal Health Care Coverage

Obamacare is a Tradeoff

Good: Universal Health Care CoverageBad: Much Bigger Government Sector

Government is Inherently Inefficient.

Countries with Universal Health End Up With

Countries with Universal Health End Up With

1. Slower growth in productivity2. Slower GDP growth3. Less employment4. Slower growth in income.

19801981

19821983

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FranceGermanyItalyU.S.Canada

Standards of Living

U.S.That means slower growth in theirstandards of living (GDP per capita).

Obamacare is moving the U.S.in that direction.

Consumption60%

Government15.0%

Trade10.0%

Investment15%

Chart TitleGDP Components

2013-2014 Forecasts2012 2013

2014GDP 2.0% 2.7%

3.3%Unemploy. Rate 7.8% 6.7% 6.0%Inflation Rate 1.9% 1.8%

1.9%Fed Funds Rate 0.1% 0.1%

0.1%10-year Note 1.7% 2.9% 3.6%30-year Mortgage 3.4% 4.4%

5.0%

When Will the Fed Change Policy?

It Will Be a 2-step Process

It Will Be a 2-step Process

1. Reduced bond purchases. Long rates rise.December 2013

It Will Be a 2-step Process

1. Reduced bond purchases. Long rates rise.December 2013

2. Fed begins to raise short rates.Mid-2015

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1

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Fed Funds Rate

Pre-2008 the way to gauge Fed policywas to look at the funds rate.

Once that rate dropped to 0% the Fed had to do something else.

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10-year Treasury and Mortgage Rates10-year Treasury Note

30-year mortgages

It decided to push long term interest rates lower.It has been relatively successful.

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Sep 20130

500

1,000

1,500

2,000

2,500 Excess ReservesThe Fed buys a security and pays for itby putting money in a bank’s checking accountat the Fed.

Excess reserves have climbed from $2 billionIn 2008 to $2.4 trillion currently.

Excess reserves represent the supply of fundsavailable to the banking system to lend.

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500

1,000

1,500

2,000

2,500

3,000 Excess Reserves -- Projected

If the Fed slows its pace of bond purchasesit is not “tightening”.

It is merely slowing its pace of easing.

The Fed is currently buying $75 billion ofbonds every single month.

The Fed continues to steadily ease monetarypolicy.

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10-year Treasury and Mortgage Rates

10-year Treasury Note

30-year mortgages

As the Fed slows its pace of bond buyinglong rates will rise.

Expect 10-year note to yield 3.6% by end of 2014 (versus 2.9%). 30-year mortgage rate of 5.0% (versus 4.5%).

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4.0 Spread -- 10-year vs. Fed Funds

Long rates rarely exceed short rates by more than 3.5%.

By yearend 2014 10-year rate = 3.6%, funds = 0.1%. Difference = 3.5%.

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Fed Funds Rate

The funds rate today is 0%.

It would be “neutral” when it is about 4.25%.

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Unemployment Rate

Full Employment

Fed has said it will not begin to raise the fundsrate until the unemployment rate has declined“well beyond” 6.5%.

6.0%?? 5.5%??

Given a moderate pace of economic expansionthat should occur by mid-2015.

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Fed Funds Rate

If the Fed begins to alter is policy in mid-2015it will take until mid-2017 for the funds rateto return to “neutral”.

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5.0

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15.0

20.0 Fed Funds Rate

The U.S. economy has never goneinto recession unless the funds ratehas been higher than “neutral”.

Earliest date for a recession? 2018?

In Conclusion

In Conclusion1. GDP growth gradually accelerating to 3.3% in 2014.

In Conclusion1. GDP growth gradually accelerating to 3.3% in 2014.

2. Monetary policy will remain very accommodative.

In Conclusion1. GDP growth gradually accelerating to 3.3% in 2014.

2. Monetary policy will remain very accommodative.

3. Profits will continue to climb.

In Conclusion1. GDP growth gradually accelerating to 3.3% in 2014.

2. Monetary policy will remain very accommodative.

3. Profits will continue to climb.

4. Stock market will rise.

In Conclusion1. GDP growth gradually accelerating to 3.3% in 2014.

2. Monetary policy will remain very accommodative.

3. Profits will continue to climb.

4. Stock market will rise.

5. Unemployment rate will continue to decline.

In Conclusion1. GDP growth gradually accelerating to 3.3% in 2014.

2. Monetary policy will remain very accommodative.

3. Profits will continue to climb.

4. Stock market will rise.

5. Unemployment rate will continue to decline.

6. No recession for at least another 4 years.

What’s Not To Like!

Stephen SliferNumberNomicswww.NumberNomics.com