PastPast TheThe WorstWorst PointPoint

Northeast Trade and Transportation Conference 2011

March 23, 2011

Dr. Walter Kemmsies, Chief EconomistMoffatt & Nichol

• ENR Top 100 company, founded in 1945 in Long Beach, California

Moffatt & Nichol BackgroundMoffatt & Nichol Background

• Offices: US, Guam, Canada, Europe, Middle East, Latin America and the Pacific Rim

• More than 500 Employees

• M&N combines the expertise of technical and commercial specialists gained over 65 years of planning  and engineering experience on over 6,000 projects:• Coastal engineering• Coastal engineering

• Port and waterside construction (marinas)

• Terminal design for all types of freight and passenger movement

• Surface transportation connectivity• Surface transportation connectivity 

• Railroads and capacity expansion

• Pay‐go highway improvements

• Strategic development plans• Strategic development plans

• Economic analyses of investment/privatization

• Independent Market Consultant

• Environmental issues/emission modelingAmerican Society of Civil EngineersJohn G. Moffatt – Frank E. NicholEnvironmental issues/emission modeling 

Harbor and Coastal Engineering Award

Main PointsMain Points• Past the worst point but not the best point of the cyclePast the worst point but not the best point of the cycle

• Exports help the US but this must become a virtuous cycle• 4 lost years for healthy segments of the economy, longer for those exposed to real estate• Japan outlook downgraded near term upgraded medium termJapan outlook downgraded near term, upgraded medium term• Middle East instability so far prompts modest downgrades to global outlook

• Too early to give the “all clear” signal due to policymaker reactions• Too early to give the all clear signal due to policymaker reactions• Raw material and transportation cost increases are compressing profit margins• Quantitative Easing: will too much money chase too few goods?

Need a lot of investment in capacity and infrastructure to offset inflation pressures• Need a lot of investment in capacity and infrastructure to offset inflation pressures• Not yet clear which industries will lead this cycle

• Structural problems and opportunities will define the next decade• Twin deficits – more exports• Food shortages – more agriculture and equipment exports• Global energy crunch – more forest product and equipment exports• China needs to normalize - develop a consumer market

World Economy StrainsTo Recover Without The USWorld Economy StrainsTo Recover Without The USUS Consumer Spending and Global Real GDP Growth p g

8%

10%

2%

4%

6%

‐2%

0%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

8%

‐6%

‐4%

• The US accounts for 25% of World GDP• US consumers account for 70% of US GDP, or 17.5% of World GDP

‐8%

World GDP US Consumer

US consumers account for 70% of US GDP, or 17.5% of World GDP

Low Consumer Sentiment Isn’t SurprisingLow Consumer Sentiment Isn’t SurprisingConsumer Sentiment and Unemployment Indexes

250

300Consumer Sentiment and Unemployment Indexes

150

200

100

0

50

978

979

980

981

982

983

984

985

986

987

988

989

990

991

992

993

994

995

996

997

998

999

000

001

002

003

004

005

006

007

008

009

010

011

19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20

Recession Consumer Confidence Index Unemployed

• Significant rise in employment would improve consumer sentiment• Companies have been focused on cost control not expansion

Private Sector Has Led Employment RecoveryPrivate Sector Has Led Employment RecoveryChanges In Employment Levels in 2010 By Sector

1000

1150

1300

Private

Accumulated Payrolls  in thousands

+1 35 million

00

550

700

850Total

Federal

+1.35 million

+1.12 million

‐50

100

250

400 Federal

State

‐500

‐350

‐200

‐50

Local‐250 thousand

Jan‐20

10

Feb‐20

10

Mar‐201

0

Apr‐20

10

May‐201

0

Jun‐20

10

Jul‐2

010

Aug‐20

10

Sep‐20

10

Oct‐201

0

Nov

‐201

0

Dec‐20

10

Jan‐20

11

Feb‐20

11

• Private sector efforts were offset by public sector cutting 222K jobs in 2010• Private sector efforts were offset by public sector cutting 222K jobs in 2010

US US Retail Sales Recovering Retail Sales Recovering -- Inventories LagInventories LagRetail Sales, Inventory and Inventory-to-Sales Ratio

1 5

1.75

2

600

700

1

1.25

1.5

400

500

/Sales Ratio

llion

s

0.5

0.75

200

300

Inventory/

$ Bil

0

0.25

0

100

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

199

199

199

199

199

199

199

199

200

200

200

200

200

200

200

200

200

200

201

201

201

Inventory Retail Sales Inventory/Sales Ratio  (right axis)

• Retail sales are recovering – above pre-recession levels around May 2011C ti i t b ild l h i l d l i• Cautious inventory rebuild – supply chains are longer and less responsive

Home Home PricesPrices Still “Still “CorrectingCorrecting””US Home Prices and Consumer Price Index

200

250

150

100

0

50

0 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1

199

199

199

199

199

199

199

199

199

200

200

200

200

200

200

200

200

200

200

201

201

FHFA Home Price Index CPI

• Increases in home sales has been accompanied by falling prices• Mortgage default rates still at peak levels indicates no recovery yet

Industry Is Recovering From A Steep DropIndustry Is Recovering From A Steep DropIndustrial Production and Capacity Utilization

100

120

85

90

95

60

80

75

80

20

40

60

65

70

0

20

50

55

an‐67

ov‐68

ep‐70

ul‐72

ay‐74

ar‐76

an‐78

ov‐79

ep‐81

ul‐83

ay‐85

ar‐87

an‐89

ov‐90

ep‐92

ul‐94

ay‐96

ar‐98

an‐00

ov‐01

ep‐03

ul‐05

ay‐07

ar‐09

an‐11

• Production rebound since 2009-Q2 not enough to reach pre-recession levels

Ja No Se Ju

Ma

Ma Ja No Se Ju

Ma

Ma Ja No Se Ju

Ma

Ma Ja No Se Ju

Ma

Ma Ja

Capacity Utilization  (left axis) Industrial Production  (right axis)

• No surprise that companies are cautious about employment and investment

Source: Federal Reserve, Moffatt & Nichol

US US International Container Trade Trends International Container Trade Trends Monthly TEU Volumes – 12 Largest US Ports

3,000,000

3,500,000

+14.2% '10 vs '09

2,000,000

2,500,00010 vs 09

+10.7% 

1,000,000

1,500,000'10 vs '09

+15.2% '10 vs '09

5 2%

0

500,000

+5.2% '10 vs '09

+27.1% '10 vs '09

0

Dec‐05

Mar‐06

Jun‐06

Sep‐06

Dec‐06

Mar‐07

Jun‐07

Sep‐07

Dec‐07

Mar‐08

Jun‐08

Sep‐08

Dec‐08

Mar‐09

Jun‐09

Sep‐09

Dec‐09

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

Index Total Total Loaded Exports Empties

• Imported and empty containers led growth in 2010• Exports were surprisingly flat, some likely shifted to bulk

US US NonNon--fuelfuel Export Trends Export Trends Non-fuel Exports By Weight By Type Of Vessel

295 

317 

294 

331 

300

350Millions of Metric Tons

235 247  247 

263 

211 220 

207

235 

200

250

178 187  182 

191 

207 

150

200

56  60  65 72 

84 96 

87 97 

50

100

0

2003 2004 2005 2006 2007 2008 2009 2010

Total   Containerized Not‐Containerized

• Bulk began shifting into containers in 2007, some shifted back in 2010• Exports grew 12.7% in 2010, containerized 13.4% and other 11.1%

Positive Outlook for Positive Outlook for thethe AmericasAmericas ......Annual Real GDP Growth Rates

7%

8%

9%

5%

6%

7%

WCSA

2%

3%

4%WCSA

Caribbean

Cent America

ECSA

N America

‐1%

0%

1%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

‐3%

‐2%

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

• Except for Argentina and Venezuela the outlook is for robust growth• Except for Argentina and Venezuela, the outlook is for robust growth in Latin America

... and Asia... and AsiaAnnual Real GDP Growth Rates

7%

9%

5%

S Asia

N Asia

1%

3%SE Asia

Mediterranean

N America

N Europe

‐3%

‐1%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

‐5%

• Except for developed economies, the outlook is for robust growthp p g• Forecasts for Japan need to be trimmed in the near term, raised in the

medium term

What Are Commodity Prices Telling Us? What Are Commodity Prices Telling Us? Commodity Prices Indexed To 100 in Dec 2000

500

600

Copper

400

Copper

Oil

200

300

Corn

100 Nat Gas

0

Dec‐00

Jul‐0

1

Feb‐02

Sep‐02

Apr‐03

Nov

‐03

Jun‐04

Jan‐05

Aug‐05

Mar‐06

Oct‐06

May‐07

Dec‐07

Jul‐0

8

Feb‐09

Sep‐09

Apr‐10

Nov

‐10

Jun‐11

• Since the middle of the last decade commodity prices have soaredSince the middle of the last decade commodity prices have soared• Not speculation but supply-demand balance and infrastructure

Source: UN‐ILO, Business Monitor, Moffatt & Nichol

Oil Consumption Trends 1965 Oil Consumption Trends 1965 -- 2009 2009 Crude Oil Consumption

$100

$120

80

90

100

$60

$80

50

60

70

Barrels P

er Day

$40

20

30

40

Millions of B

$0

$20

0

10

20

65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10

• 8 million barrels of crude oil were consumed daily in 2010Si 2008 E i M k t il th D l d E i

19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20

Developed Economies Emerging Markets World WTI Annual Average (right axis)

• Since 2008 Emerging Markets consume more oil than Developed Economies

Source: UN‐ILO, Business Monitor, Moffatt & Nichol

Unsustainable Trade Deficit Unsustainable Trade Deficit US Trade Balance Components: 1992 -2010

$0

$20Billions

p

‐$20

$019

92

1992

1993

1994

1995

1996

1997

1997

1998

1999

2000

2001

2002

2002

2003

2004

2005

2006

2007

2007

2008

2009

2010

2011

45% of the trade deficit is due to

‐$40

due to petroleum imports

‐$60

‐$80

Goods Balance Services Balance

• Including oil, the goods deficit is 4.8x the services surplus, excluding oil it is 2.75x• Deficit is due to demographics containerization trade policies and• Deficit is due to demographics, containerization, trade policies and

communication/information processing technology• Increased import dependency is unavoidable – the US needs to export more

Source: US Census Bureau

US US ExportExport Candidates Candidates • Relative to faster growing Emerging Markets, the US hasRelative to faster growing Emerging Markets, the US has

• A lower cost of capital, but a higher cost of labor• Relative abundance of scare resources such as water• More advanced biotechnology • More reliable quality control and surveillance of complianceMore reliable quality control and surveillance of compliance

• Bulk commodities and specialized capital goods (project cargo) fit the profile of US comparative advantages

• Strong Emerging Market demand for bulk is expected to continue as these economies continue to grow and develop

• Grains and oilseeds• Meat• Meat • Coal

• Strong energy demand from Emerging Markets means strong forest product demand wood pellets in particularproduct demand – wood pellets in particular

• Strong bulk demand also means strong demand for capital equipment – energy, construction, agricultural

Proportion of Population Above 55 Years of Age

The World’s Population Is AgingThe World’s Population Is Aging

50%

60%

Japan

Europe

40%

p

China

Canada

US

20%

30% Brazil

Mexico

India

10%

0%

1990 2000 2010 2020 2030 2040 2050

• What will this booming consumer segment do next? g g

China’s Currency Policy Is A Global Economic RiskChina’s Currency Policy Is A Global Economic Risk

8

9

Exchange Rates Between US$, Chinese Yuan and Brazilian Real

6

7Yuan Per Dollar

4

5

Yuan Per Real

1

2

3

Real Per Dollar

0

1

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Summing Up...

R i di “ l d”Recovery is proceeding “as planned”Sustained World economic recovery depends on the US

Too early to give the “all clear” signal… risk of policy errorsy g g p yFiscal and monetary stimulus help but create new risks

Long term clouded by structural issues that will drive the next cycleLong term clouded by structural issues that will drive the next cycle

Thank you for your attention

Walter KemmsiesMoffatt & NicholNew York+1 212 768 7454wkemmsies@moffattnichol.com