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Presented by:Sara L. Johnson

Managing DirectorGlobal Macroeconomics Group

DRI-WEFA

August 7, 2001

The U.S. Economic Outlook:Turbulent Times

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1991-2000 Was a Great Decade

The unemployment rate fell from 7% to 4%. Core inflation subsided from 5.5% to 2.5%. Productivity and real wage growth accelerated. Household net worth doubled. The federal budget shifted from deficit to surplus. Potential real GDP growth surged to 4%, its fastest

pace since the mid-1960s.

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The U.S. Economy’s Potential Growth Rate Doubled in the 1990s

-2

0

2

4

6

8

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Actual Real GDP Potential Real GDP

(Percent change)

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4

Business Investment’s Share of GDP

0

3

6

9

12

15

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Structures Equipment & Software

(Nominal investment as a percent of GDP)

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5

Productivity Growth Reached Unsustainable Rates

0

1

2

3

4

5

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Total Factor Productivity Full-Employment Labor Productivity

(Year-over-year percent change)

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The Good Times Are Over--for Awhile

The stock market is down. Energy prices are up. Household debt is at a record high, while

saving is at a record low. Internet companies are crashing. Business investment is falling. The U.S. has a huge trade deficit.

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A U. S. Rebound Will Take Time

Monetary and fiscal stimulus is in place. But lower interest rates won’t eliminate the excess

capacity that is depressing business investment. A strong dollar and weakening global economy are

reducing exports. Yet, consumers refuse to become discouraged. An end to inventory decumulation will help to

revive economic growth.

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The U.S. Economy’s Growth Has Stalled and Unemployment Is Rising

0

1

2

3

4

5

6

7

8

1997 1998 1999 2000 2001 2002 2003 2004

0

1

2

3

4

5

6

7

8

Real GDP Growth Unemployment Rate

(Percent change, 1996$) (Percent)

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Manufacturing Production Is in Recession

-8-6

-4-2

02

46

810

1997 1998 1999 2000 2001 2002 2003 2004

(Percent change, annual rate)

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U.S. Inflation Will Subside as Unemployment Rises

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-1

0

1

2

3

4

5

1997 1998 1999 2000 2001 2002 2003 2004 2005

CPI Producer Price Index Employment Cost Index

(Year-over-year percent change)

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Crude Oil Prices Will Decline

0

10

20

30

40

50

60

70

1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Current Dollars 2001 Dollars

(Refiners’ acquisition cost, dollars per barrel)

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The Federal Reserve Has Lowered Rates Quickly

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4

5

6

7

8

9

1997 1998 1999 2000 2001 2002 2003 2004

Federal Funds Rate 10-Year Treasury Yield Mortgage Rate

(Percent)

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The Technology Bubble Has Burst:Nasdaq and S&P 500 Indexes

0

1000

2000

3000

4000

5000

1995 1996 1997 1998 1999 2000 2001

0

600

1200

1800

2400

3000

Nasdaq S&P 500

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From Bull Market to Bear Market: Returnson S&P 500 Stocks and Treasury Bonds

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-6

0

6

12

18

24

30

36

1990 1992 1994 1996 1998 2000 2002 2004

Stock Market Return 10-Year Treasury Bond Yield

(Percent)

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15

0

2

4

6

8

10

12

1980 1983 1986 1989 1992 1995 1998 2001 2004

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Saving Rate Net Worth/Disposable Income

(Percent of disposable income)

The Personal Saving Rate Plummeted asHousehold Net Worth Soared

(Ratio)

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16

200

300

400

500

600

700

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

10

11

12

13

14

15

Weekly Initial Unemployment Claims Debt Service Burden

(Thousands of persons)

The Rising Household Debt Service Burden

(Percent of disposable income)

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Consumer Spending Outpaced Disposable Income Growth in 1999-2000

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0

1

2

3

4

5

6

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Consumer Spending Disposable Income

(Percent change, chained 1996 dollars)

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A Mild Downturn in Sales of Light Vehicles

0

4

8

12

16

20

1972 1976 1980 1984 1988 1992 1996 2000 2004

Light Trucks Cars

(Millions of units)

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0.0

0.4

0.8

1.2

1.6

2.0

1980 1984 1988 1992 1996 2000 2004

Single-Family Multi-Family

(Housing starts, millions of units)

Falling Interest Rates Support Home-Building

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Computers and Electronics Lead the Decline in Capital Goods Orders

0

200

400

600

800

1000

1994 1995 1996 1997 1998 1999 2000 2001

Total Nondefense Computers & Electronics Other

(Billions of dollars, annual rates)

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A Retrenchment in Business Fixed Investment

-15-10-505

10152025

Structures Computers Software Communic.Equipment

2000 2001 2002 2003

(Percent change, current dollars)

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Venture Capital Investments Have Retreated

0

20

40

60

80

100

120

1994 1995 1996 1997 1998 1999 2000 2001*

(Billions of dollars)

* First half, annual rate

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Most U.S. Venture Capital Still Goes to Information and Communications Industries (Percent of total, first half of 2001)

Internet-Specific

32%

Computers & Electronics

14%

Computer Software

20%

Communi- cations

15%

Biomedical & Health11% Other

8%

Source: National Venture Capital Association and Venture Economics

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Which States Are at Risk as Communications and Information Technologies Consolidate?(Percent of employment in communications and IT, 2000)

4.9 to 6.63.0 to 4.42.1 to 2.91.2 to 1.9

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Global Uncertainties in 2001

U.S. - A pause in growth or a recession? Latin America - What if Argentina devalues? Europe - Part of the problem or part of the

solution? Japan - Another decade of stagnation? Asia - After initial progress, is Asia relapsing?

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The World Economy’s Growth Is Weakening

-101234567

Canada Mexico SouthAmerica

Europe Japan Other Asia

2000 2001 2002

(Percent change in real GDP)

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Real U.S. Exports and Imports Are Cyclical

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0

4

8

12

16

1996 1997 1998 1999 2000 2001 2002 2003 2004

Real Exports Real Imports

(Year-over-year percent change)

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Western and Southern States Will Achieve the Fastest Employment Growth (Annual percent change, 2000 to 2005)

1.58 to 4.031.07 to 1.580.91 to 1.070.54 to 0.91