Prepared by:January 2013

2013 Macroeconomic OutlookArjun Chakravarti, Ph.D

General Overview

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2013 Economic Situation: Slow then Stable• Up and down with upward revisions

–Q3 revised upward to 3% GDP growth

–But holiday spending looks flat (0.6%)• Major uncertainties

–Europe and emerging market slowing

–Fiscal cliff kicked down the road

–Consumer confidence plummets

We often underestimate the rate of contractions and overestimate the rate of growth because of shifts in closings/openings.

Source: Federal Reserve, BLS unless otherwise noted

2012

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2013 Economic Situation: Slow then Stable• Potential upsides

–Major central bank interventions (with costs)

–Housing starts, prices in many regions

–Natural gas boom serving as a buffer

–Corporate profits; small business credit higher

–U.S. – Mexico energy-wage dynamic could make North America more globally competitive

Household sector and Fed action will help, but unresolved legislative issues will create a drag. Expect continued 1.7%- 2.3% growth.

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U.S. Market Situation

CORE Inflation Is Low

2008 20122000

2%

4%

6%

0

2004

Estimated 1.7% in November 2013

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Corn: Only 25% of crop in good condition

Wheat: Crop collected early, less drought

Meat prices: Drought leads to herd culling, prices fall then rise in mind 2013

Energy: 15% increase if Winter 2012 weather reverts to norm

Drought Could Prove Problematic in Retail Food

USDA: Retail food price inflation expected to be above 2-3% historical average (closer to 3-4 %).

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Unemployment Falling, but Sluggishly

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Une

mpl

oym

ent R

ate

14.1

7.7

Percent Unemployed vs. Underemployed

1994 20072001 2012

The Fed is now targeting a 6.5 % unemployment rate, which could take three years to achieve with pop growth (220k/month).

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Long-Term Unemployment Trend Is Poor

2007 20372012

200k

150k

Trend vs. Actual Civilian Employed

The economic situation is still tenuous. At this pace total civilianemployment will not return to 2007 trend until 2037!

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Where Is the Job Shift Coming From?

Household sector and Fed action will help, but spending cuts and taxes will create a drag. Expect continued 2% growth

Source: BLS adapted from Washington Post

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Group Unemployment Differentials

The core foodservice consumer is recovering well, but regional differences and structural issues with younger, lower SES groups

suggest major structural problems.

Below Average Above Average

• Rural Midwest and West• Mid-Atlantic (VA, MD, DE)• New England (MA, VT) • Others: TX, OH, WI

• Housing: CA, NV, CT, RI• Structural: IL, MI, NJ • Others: NC, GA

• White, Asian• Older• College-educated

• Latino, Black• Younger• Less than college*

Regi

onal

Soci

o-ec

onom

ic

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Key Point

Housing-related employment

accounted for 38% of job loss during

recession!

Household sector and Fed action will help, but spending cuts and taxes will create a drag. Expect continued 2% growth

Housing market performance and lower to middle class spending growth are intrinsically

linked (men, construction jobs)

• Housing starts are up• Supply is low, but shadow inventory lurks• Hedge funds are buying up homes in bulk

Housing Prices Rising in Many Regions

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2012

Household sector and Fed action will help, but spending cuts and taxes will create a drag. Expect continued 2% growth.

Housing Prices Rising in Many Regions

Household sector and Fed action will help, but spending cuts and taxes will create a drag. Expect continued 2% growth

SEPT 2008 2012

Case-shiller 20 City Composite Index(September 2012

2012

14

Negative Home Equity >30% by Region (approx.)

Shadow inventory and differing foreclosure laws by state.

15

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Housing Is Showing Recovery in Some Regions• U.S. housing growth will need to buffer

international slowdowns

–Housing supplies low, rental inflation is affecting is lowering available DPI

Hedge funds are buying homes in bulk Foreclosure resolution going fasterEach new household adds $145k to economy

Shadow inventory and differing foreclosure laws by state.

2013

Personal Savings Rate

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Federal Reserve Economic Data (FRED)

20122007-81980 1987 1990 2001

Dec: 3.6 %

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Real DPI per Capita Slowly Ticking Upward

Real DPI per capita: spending more with fewer dollars.

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Consumer Deleveraging Continues to Help

Non-Revolving

Revolving

Dodd-Frank limiting revolving balances, student loans a major contributor to non-revolving debt.

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Details of Changes in Debt Structure

More auto and durables purchases are a good sign, but limited revolving credit could limit nights out.

Type Balances Originations

Mortgages Auto loans Consumer Credit Student Loans

Credit: Owner vs. Renter DPI Differentials • Low rates have helped homeowners manage finances

better than renters–Financial obligations/DPI: reaching all-time lows

–Credit scores above 700 get 90% of mortgages

–Low interest rates investing instead of retiring debt

–Renters doing better but face high rent inflation

–Each new household adds $145k to economy

Household sector and Fed action will help, but spending cuts and taxes will create a drag. Expect continued 2% growth

The economy is still one million households short of projections but owners poised to spend on foodservice while renters a few years away.

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In general, the news is looking up!

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Household sector and Fed action will help, but spending cuts and taxes will create a drag. Expect continued 2% growth.

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So Why Is Consumer Confidence Plummeting?

201220072001 2011

DEC 72.3

Source: Univ. of Michigan Consumer Confidence 12/12

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Policy Issues: Fiscal Cliff1. Tax and revenue increases (consumer losses)– + 400k: 39.6% marginal rate; 20% capital gains tax

– Estate tax 40% after $5 million exemption

– Itemized deduction limits over $250k income

– Return to 6.2% payroll tax rate

2. Consumer gains – Credits: child-care, earned income remain the same

– Alternative minimum tax adjusted to inflation

– (3 million fewer people have to pay) Tax revenues and interest savings will produce $724 billion

in deficit reduction

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Structural Issues Delayed: Expect No Action • Debt ceiling and sequester deal not in sight

–Expect more political uncertainty in Q1 and Q2

–Structural deficits will be very damaging long-term

–No incentive to make a deal on structural deficits until we see real inflation

–Hopefully markets have internalized how political brinksmanship could work

Continued housing growth could push GDP growth near 3% but legislative and political uncertainties suggests 2%

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Implications for Food Service ConsumersGDP Growth: 2013 (2%); 2014 (closer to 3%)

Employment and asset stability depends on US housing market growth outpacing losses in Europe and emerging markets.

Highly Educated

• Recovered in job market but youth underemployed

Middle Class

• Rent inflation hitting the middle class into 2014

• Homeowners have more leeway in many markets

• Payroll taxes rising but other tax expectations are low

Poor

• Won’t recover without construction boom or other shock

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Thank you!

Arjun Chakravarti

Email: arjunchakravarti@gmail.com