1 1

Positive Surprises in Store for 2012? Macro Overview

February 8, 2012 Robert Johnson Director of Economic Analysis

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U.S. Economic Data

× 2011: Soft, but no recession, Growth Accelerated Through the Year

× GDP Growth: 1.6%, Less in the First Half

× Inflation: Peaked at 3.9% this fall, now 3.0%

× Unemployment: Dipped to 8.5% × Job Growth: 174,000 Per Month

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U.S Economic Forecast

× 2012 Outlook, Slow Start Before an Acceleration

× Real U.S. GDP Growth of 2.0% - 2.5%

× Inflation Slows to 2% or Less Due to Falling Commodities

× Employment Growth Accelerates to 185,000 Per Month × Unemployment Rate Drops to 8.0% - 8.5%

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Economic Drivers

× Consumer spending

× Housing and Construction

× Balance of Trade

× Lower Inflation

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Risks to Economic Growth

× Inflation: Gasoline and commodities on the rise again

× Consumer spending outpacing incomes

× Geopolitical issues

× European sovereign debt

× Slowing manufacturing economy outside U.S.

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Where Are We Now?

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This Recovery Has Grown at Half of the Normal Rate

Year After Bottom, 30 Month GDP Growth Rate

Prior GDP Contraction

1970 15.9% -1.1%

1982 14.8% -2.7%

1975 13.7% -3.2%

1960 13.5% -1.0%

1958 12.6% -3.7%

1954 10.3% -2.6%

1991 7.3% -1.4%

2001 5.7% -0.3%

1980 2.9% -2.2%

Average 10.7% -2.0%

2009 6.2% -5.1%

Sources: BEA, Morningstar calculations.

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Consumer, Exports Drive GDP Overall % Contribution to GDP Growth by Category

Sources: Bureau of Economic Analysis, Morningstar, updated January 27, 2012

Contributions to GDP Growth by Category%, Combined Categories = GDP GrowthAnnualized, Seasonally Adjusted

RecoveryBegins Whole Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Recovery

Consumer Goods 1.7 0.1 1.5 0.9 1.1 1.9 1.1 -0.4 0.3 1.3 2.6%Consumer Services 0.0 0.2 0.5 1.2 0.8 0.6 0.4 0.9 0.9 0.1 1.4%

Business Structures -0.7 -1.1 -0.8 0.2 0.1 0.3 -0.4 0.5 0.4 -0.2 -0.4%Equipment & Software 0.4 0.7 1.3 1.5 0.9 0.6 0.6 0.4 1.1 0.4 2.3%Residential Construction 0.4 -0.1 -0.4 0.5 -0.8 0.1 -0.1 0.1 0.0 0.2 -0.1%Inventory 0.2 3.9 3.1 0.8 0.9 -1.8 0.3 -0.3 -1.4 1.9 1.9%

Exports 1.5 2.5 0.9 1.2 1.2 1.0 1.0 0.5 0.6 0.6 2.8%Imports -2.1 -2.4 -1.8 -3.1 -1.9 0.4 -1.4 -0.2 -0.2 -0.8 -3.4%

Government 0.3 -0.2 -0.3 0.8 0.2 -0.6 -1.2 -0.2 0.0 -0.9 -0.5%

Other -0.1 -0.3%

Total GDP Growth(annualized) 1.7 3.8 3.9 3.8 2.5 2.3 0.4 1.3 1.8 2.8

Total Recovery GDP growth 6.2%

Boxes are two best categories for the period

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Exports a Big Contributor to Growth

Source: St. Louis Federal Reserve, updated January 27, 2012

Exports As % of GDP

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

1947 1957 1967 1977 1987 1997 2007

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A Fall In U.S. Exports to Europe Won’t Kill the Economy by Itself

Source: Bureau of Economic Analysis, Census Bureau, Morningstar Calculations, updated November 22, 2011

Year to Date U.S. Exports to:Billions $, Sept., 2011

% of % ofBillions of $ U.S. Exports U.S. GDP

North America 356 33% 4.5%Europe 245 22% 3.1%Pacific Rim 270 25% 3.4%South America 124 11% 1.6%Other 100 9% 1.3%

Total 1095 100% 13.9%

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Consumer Takes the Stage, Represents 71% of the Economy

Source: topnews.net.nz

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Watching the Consumer Is Key

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Private Sector Employment Continues to Grow

Source Bureau of Labor Statistics, updated February 3, 2012

Employment Growth Year over Year Growth (3 month moving average)

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

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Initial Claims Point to a Stronger Job Market

Source: Bureau of Labor Statistic, updated February 3, 2012

Claims % of Covered Employment

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

19701975

19801985

19901995

20002005

2010

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Gasoline Prices Tamer, But on the Rise Again

Source: St. Louis Federal Reserve, updated February 6, 2012

Regular Gasoline Prices per Gallon, Weekly

$2.00

$2.20

$2.40

$2.60

$2.80

$3.00

$3.20

$3.40

$3.60

$3.80

$4.00

Jan-10 Apr-10 Jun-10 Sep-10 Dec-10 Mar-11 May-11 Aug-11 Nov-11 Feb-12

Price

per G

allon

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Consumer Fixed Payments Improved Sharply

Source: U.S. Federal Reserve, Morningstar, updated December 8, 2011

Financial Obligations Ratio

15.00

15.50

16.00

16.50

17.00

17.50

18.00

18.50

19.00

19.50

20.00

Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12

Average =17.2

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Retail Sales Continue to Chug Along

Source: International Council of Shopping Centers, updated February 7, 2012

Year over Year Shopping Center Sales Growth(Five Week Moving Average)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

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Improved Consumer Confidence Means More Car Sales …

Interpretation: January 2011 sales were 81% of 2005 levels. Source: BEA, Bureau of Labor Statistics, Morningstar, Updated February 1, 2012

Auto Sales vs. Mid-2005

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

2005 2006 2007 2008 2009 2010 2011 2012

Ratio

Com

pare

d to

200

5 Hi

gh

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… but Not Enough to Help the Housing Market

Source: Census Bureau, Morningstar, updated January 19, 2012

Red bar represents average natural demand, Morningstar estimate

0

500

1000

1500

2000

2500

1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009

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Corporations Will Continue to Struggle to Raise Prices as Savvy Consumers Fight Back

Source: Bureau of Economic Analysis, Census Bureau, Morningstar Calculations, updated January 19, 2012

Auto SalesAuto Units Apparel Apparel

Price Change Mil (SAAR) Price Change Sales Change

January -0.1% 12.6 1.0% 0.8%February 1.0% 13.2 -0.9% 1.9%March 0.7% 13.0 -0.5% 1.0%April 0.7% 13.1 0.2% 0.1%May 1.1% 11.7 1.2% 0.2%June 0.6% 11.5 1.4% 1.2%July 0.0% 12.2 1.2% -0.1%August 0.0% 12.1 1.1% -0.4%September 0.0% 13.1 -1.1% 1.3%October -0.3% 13.2 0.4% -0.7%November -0.3% 13.6 0.6% 0.4%December -0.2% 13.5 -0.1% 0.7%

Source: Morningstar Calculations, BLS, Census Bureau, BEA

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Upside Potential

Source: psoutowood.wordpress.com

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U.S. Oil and Gas Production Accelerates

Source: North Dakota State Government updated January 10, 2012

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Boeing Production Set to Boom

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Auto Sales Could Jump Again in 2012

U.S. Auto Sales

Year Millions of Units2009 10.42010 11.62011 12.8

2012E 13.6

Source: Automotive News, updated January 4, 2012

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Housing???

Source: newhomessection.com

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Housing, a Lot of Potential Positives

× Improved housing starts × Increased existing home sales/pending home sales × Artificially small household formations can’t last forever × Record high affordability ratio × Lennar, a leading home builder announces new orders up 20% in Q4 × Foreign/income investors- potential block sales

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Lennar, a Leading Builder, Sees Improvement

In our fourth quarter, we have seen real evidence of these changes in the field. We are experiencing more traffic in our Welcome Home centers and customers are actively discussing their desire to find a way to purchase and avoid the rental market and its re-pricing. Perhaps most importantly, we've seen consistent sales pace at stabilized prices throughout our fourth quarter and even through December during the season that is generally the most difficult time of the year.

Stuart Miller, Chief Executive Officer, Lennar, Inc.

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But Negatives Remain

× Credit requirements remain tight × Foreclosure pipeline is still large × Prices are down over the past year