John Silva Presentation in Paris, February 2004

Presentation to:

Paris GIC Conference Club Horizon Stratégie

2004 Outlook

John Silvia – Chief Economist February 2, 2004

Economics as Information Getting Beyond the Bloomberg Headline

Where are we now?

REAL GDP GROWTH

Quarter/Quarter Percent Change, Seasonally Adusted Annual Rate

10%

10% 4th Quarter 2003 @ 4.0%

8%

8%

6%

6%

4%

4%

2%

2%

0%

0%

-2%

-2%

1999

2000

2001

2002

2003

FINAL DOMESTIC DEMAND COMPONENTS 15%

(Year-on-Year Growth)

15%

Green Line = Business Fixed Investment

10%

10%

5%

5%

0%

0%

-5%

-5%

-10%

Red Line = Government Spending Blue Line = Consumer Spending

97

98

99

00

01

02

03

-10%

NON-FARM PRODUCTIVITY and REAL GDP 7% 6%

Year-over-Year Percent Change

Line = Real GDP, 4Q @ 4.3%

7% 6%

5%

5%

4%

4%

3%

3%

2%

2%

1%

1%

0%

0%

-1%

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

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2001 2002 2003

-1%

Non-Farm Employment Net Quarterly Change, in Thousands

200 0

200 0

-200

-200 4Q @ 144K

-400

-400

-600

-600

-800

-800

-1000

-1000

2001

2002

2003

Where are we going?

•

Outlook – Is the Recovery Picking Up Momentum?

• Not Your Father’ s Economic Recovery.

INITIAL JOBLESS CLAIMS 500

In Thousands

Blue Line = 4-Week Moving Average @ 346.00 Green Line = Weekly Figure @ 342.00

January 24

450

500

450

400

400

350

350

300

300

2002

2003

2004

Employment - Payroll vs. Household Thousands of Persons

140000

140000

130000

130000

120000

120000

110000

110000

100000

100000 Household (left)

90000

83

85

87

89

91

93

Payrolls (right)

95

97

99

01

03

90000

Employment - Payroll vs. Household Thousands of Persons

139000

Household (left)

133000

Payrolls (right)

138500

132500

138000

132000

137500

131500

137000

131000

136500

130500

136000

130000

135500

129500

2000

2001

2002

2003

ISM COMPOSITE INDEX Diffusion Index

70

70

December @ 66.2 65

65

60

60

55

55

50

50

45

45

40

40

35

35

97

98

99

00

01

02

03

70

ISM NON-MANUFACTURING INDEX BUSINESS ACTIVITY INDEX December @ 58.6

65

70 65

60

60

55

55

50

50

45

45

40

40

35

Seasonally Adjusted 97

98

99

00

01

02

03

35

Consumer Fundamentals: • Income

• Sentiment • Credit • Outlook – Better

INCOME & SPENDING GROWTH

Year to Year Percent Change, 12 Month Moving Average

6%

6%

November 5%

5%

4%

4%

3%

3%

2%

2%

1%

1%

0% 92

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

94

96

98

00

02

0%

Personal Consumption Expenditures 6% 14%

2002

7% 3%

Motor Vehicles and Parts

4%

Furniture and Household Equipment Other Durable Goods Food Clothing and Shoes

13%

Other Nondurable Goods Housing

14%

Energy Goods and Services Other Household Operation Transportation Medical Care

5%

Recreation Other Services

4% 8%

4% 5% 13%

Investment Spending: • Orders

• Capacity Utilization • Financial Depth • Outlook - Improving

MANUFACTURERS' NEW CAPITAL GOODS ORDERS 20%

NON-DEFENSE, EXCLUDING AIRCRAFT

20%

December 10%

10%

0%

0%

-10%

-10% Year-to-Year Percent Change @ 9.9%

-20%

-20% Series is a 3-Month Moving Average

-30% 93 94 95 96 97 98 99 00 01 02 03

-30%

REAL BUSINESS EQUIPMENT & SOFTWARE SPENDING 20%

Seasonally Adusted Annual Rate

20%

4th Quarter 2003 @ 10.0% 10%

10%

0%

0%

-10%

-10%

-20%

-20%

2001

2002

2003

Inventories Under Control

TOTAL INVENTORY TO SALES RATIO

1.60

1.60

November @ 1.35 1.50

1.50

1.40

1.40

1.30 92 93 94 95 96 97 98 99 00 01 02 03 1.30

Housing: • Household Income

• Employment • Credit • Outlook - Positive

SINGLE FAMILY HOUSING STARTS 1.8

Seasonally Adjusted Annual Rate - in Millions

December Single-Family Starts @ 1.66 Blue Line (Left Scale)

1.6

12% 11% 10%

1.4

9% 1.2 8% 1.0

7% Mortgage Rate @ 5.88% Green Line (Right Scale)

0.8 0.6 87

89

91

93

95

97

99

6% 01

5% 03

SAN JOSE MSA HOME PRICES 50%

Quarterly Percent Change, Annual Rate

Third Quarter 2003

50%

40%

40%

30%

30%

20%

20%

10%

10%

0%

0%

-10% -20% 87

-10%

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

89

91

93

95

97

99

FHLMC/FNMA House Price Index

01

03 -20%

Inflation: • Commodity Prices

• Dollar • Energy • Productivity • Outlook - Creeping Up

U.S. CPI - SERVICES VS "CORE" COMMODITIES 6%

Year to Year Percent Change

Line is Services @ 2.8%

6%

December

4%

4%

2%

2%

0%

0%

-2%

-2% Bars are Commodities, ex. Food & Energy @ - 2.5%

-4%

97

98

99

00

01

02

03

-4%

7%

CPI and Commodities Prices Green Line is CRB Price Index (right)

390

6%

360

5%

330

4%

300

3%

270

2%

240

1%

210

0% 83

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

87

91

95

99

03 180

CPI and ISM Prices

7%

90

6%

81

5%

72

4%

63

3%

54

2%

45

1%

36

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

0% 83

85

87

89

91

93

95

97

99

01

03 27

CPI and Capacity Utilization

7%

90

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

6%

87

5%

84

4%

81

3%

78

2%

75

1%

72 Green Line is Capacity Utilization (right)

0% 83

85

87

89

91

93

95

97

99

01

03 69

7%

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

16%

6%

14%

5%

12%

4%

10%

3%

8%

2%

6%

1%

4%

0% 83

Green Line is Unemployment Rate (right)

85

87

89

91

93

95

97

99

01

03 2%

International • Outlook - Weak

Driven By Weakness Abroad

EUROZONE REAL GDP GROWTH Year-to-Year Percent Change

5%

5%

3Q 2003 @ 0.3%

4%

4%

3%

3%

2%

2%

1%

1%

0%

0%

98

99

00

01

02

03

REAL GDP GROWTH Source: IMF

10%

10% 2002

8%

8%

6%

6%

4%

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

4%

2%

2%

0%

0%

-2%

98

99

00

01

02

-2%

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

105

Green Line = OITP Index

105

100

100

95

95

90

90

85

85 Blue Line = Major Currency Index

80 Jan. Mar. May July Sept. Nov. Jan. 2003 2004

80

U.S. EXTERNAL INDICATORS In Billions of Dollars

$800

$800

$600

$600

$400

$400

$200

$200

$0

95

96

Green Line = Private Capital Inflows Blue Line = Current Account Deficit 97 98 99 00 01 02 03

$0

Public Policy: • Monetary Policy

• Fiscal Policy • Regulation • Trade

12% 10%

REAL FEDERAL FUNDS RATE VS. M2 MONEY GROWTH Blue Line = M2 Growth, Yr/Yr % Change, December @ 4.3% Green Line = Real Fed Funds Rate*, December @ - 0.2%

12% 10%

8%

8%

6%

6%

4%

4%

2%

2%

0%

0% * Fed Funds Rate minus "Core" Consumer Price Index

-2% 92 93 94 95 96 97 98 99 00 01 02 03 -2%

FEDERAL SPENDING vs. REVENUE As Percent of GDP

23%

December '03

22%

20% 19%

22%

SPENDING (Blue Line)

21%

21%

19.4%

20%

Latest 12 months: Revenue $ 1,796 Trillion Spending $ 2,190 Trillion

19%

18%

18%

17%

17%

REVENUE (Green Line)

16% 15% 87

23%

16%

15.9% 89

91

93

95

97

99

01

03 15%

Financial Markets Is The Bond Market Still Overbought?

FORWARD RATES

3.5% 3.0%

90-Day Euro-Dollar Futures

Green Line = 6-Months Ago Blue Line = Current Red Line = Two Weeks Ago

3.5% 3.0%

2.5%

2.5%

2.0%

2.0%

1.5%

1.5%

1.0% Feb. Mar. Apr. May June July Sept. Dec. Mar. June 1.0% 2004 2005

9%

10-YEAR TREASURY VS. BAA CORPORATE BOND YIELD

9%

January 8%

8%

7%

7%

6%

6%

5%

5%

4%

4%

3%

Green Line = BAA Yield @ 6.45% Blue Line = 10-Yr Treasury @ 4.15%

97

98

99

00

01

02

03

04

3%

A Profits Rebound?

• Revenue

• Costs

CORPORATE PROFITS In Billions of Dollars, SAAR

$1200

$1200

3rd Quarter 2003 @ $1124.2 B

$1000

$1000

$800

$800

$600

$600

$400

$400

$200

Adjusted for Inventory Valuation & Capital Consumption

90

92

94

96

98

00

02

$200

6% 4%

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

Productivity @ 4.1% (Blue Line)

6% 4%

3rd Qtr. 2%

2%

0%

0%

-2% -4%

Unit Labor Cost @ -1.4% (Green Line)

98

99

00

-2%

01

02

03

-4%

Uncommon Wisdom Tyrannosaurus Rex Big One Day, Dead the Next

S&P 400 MIDCAP INDEX VS. NASDAQ 600

January

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

5000 4000

400 3000 300 2000 200 100

1000

0 78 80 82 84 86 88 90 92 94 96 98 00 02 04 0

Uncommon Wisdom “ Whether you get soaked depends on proper balance�

Total Return

40%

30%

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

40%

Wilshire

High Yield

30%

20%

20%

10%

10%

Corporate Gov't

0%

T-Bills

0%

CAPITAL MARKETS PERFORMANCE SUMMARY 15%

5-Year Returns as of December 2003

Stocks S&P 400 Midcap

10% 5%

Real Estate

Bonds LB Intermediate G/C

Russell 1000 Value

0%

MSCI EAFE

Russell 1000 Growth

10% 5%

NCREIF Property Index

-5% -10% S&P 500

15%

Russell 2000

ML 3-Mo T-Bills

LB Aggregate

0% -5% -10%

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%

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%

CPI (YoY)

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