Economic Outlook. Robert C. Fry, Jr., Ph.D. DuPont Economist s Office. June 6, 2012

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1 Copyright E. I. du Pont de Nemours and Company. All rights reserved. Distribution, reproduction or copying of this copyrighted work without express written permission of DuPont is prohibited. Economic Outlook Robert C. Fry, Jr., Ph.D. DuPont Economist s Office June, European economies are in recessions of varying severity and duration; growth has slowed in China, probably much more than official data indicate; and there has been essentially no growth in manufacturing in the rest of Asia and in South America since early. Growth in U.S. manufacturing output has been strong relative to the rest of the world and to the broad U.S. economy, which continues to grow at an anemic rate. While leading indicators, like the Institute for Supply Management s new orders index, point to continued growth in U.S. manufacturing, problems in the rest of the world and the impending fiscal cliff the expiration of tax cuts and sequestration of government spending at year-end introduce great uncertainty into the outlook. U.S. real GDP grew at a 1.9% annual rate in the first quarter, and has grown at less than a 3% rate for seven straight quarters and at just a.% annual rate over the first quarters of recovery. GDP is expected to grow at a -.5% rate over the rest of the year, but weak employment growth in April and May suggests that secondquarter growth could be below %. Industrial production in U.S. manufacturing (excluding computers, communication equipment, and semiconductors) rose in April, but remained slightly below the post-recession high hit in February. Production was up.% year-over-year in April. The outlook becomes even more uncertain than normal at year-end, when a host of tax cuts expire. Unless Congress takes steps to avoid this fiscal cliff, economic activity could fall sharply in early 13, and several of the charts in this documents show forecasts of declines in the first quarter of 13. Depending on the resolution of the fiscal cliff issue, 13 GDP growth could be much stronger or much weaker than the current forecast of 1.7%. Most, if not all, of the countries in Western Europe are now in recession. Greece and Portugal are in prolonged depressions, Spain and Italy in severe recessions, and the United Kingdom in a mild recession. Through the first quarter, it looked like Germany and perhaps France might avoid full-blown recessions, but Purchasing Managers Indexes for May suggest that that will be difficult. Real GDP for the European Union (7 countries comprising most of Western and Central Europe) was reported as unchanged in the first quarter, but actually declined at a.% annual rate after declining at a 1.% annual rate in the fourth quarter of. Year-over-year growth slowed to.1%. Real GDP in the Euro-Zone was also reported as flat (+.1% annualized) in the first quarter. Industrial production in European Union manufacturing rose slightly in March, but was still down.% from last August s peak and down 1.1% year-over-year. These numbers, like the European GDP figures, would be much worse were it not for Germany, where industrial production grew strongly from December to March. Industrial production fell sharply in Germany and Spain in April. The Growth Rate of Value Added of Industry, China's measure of growth in industrial production, was 9.3% in April, down from.9% in March and the lowest year-over-year growth rate since May 9. An alternative measure based on data on industrial products shows year-over-year growth of just.9% in April, also the worst since May 9, with production down very sharply on a seasonally adjusted month-to-month basis. There has been essentially no growth in manufacturing in the rest of Asia since early. Industrial production is below year-ago levels in Argentina and Brazil, but grew strongly in Mexico in the first quarter. Global GDP is expected to rise.% in after rising.7% in. Growth would have been higher in and would be lower in were it not for the earthquake and tsunami in Japan and the subsequent recovery. Political uncertainty in Greece, worsening fiscal and economic problems in Spain, a possible hard landing in China and anticipation of the fiscal cliff in the United States all present downside risks to this forecast. The DuPont Oval Logo and The miracles of science are registered trademarks of E. I. du Pont de Nemours and Company.

2 Global GDP Growth Forecast North America United States Canada Mexico Western Europe France Germany Italy Spain U.K Central Europe Russia Asia/Pacific Japan ex Japan Australia China India Indonesia Korea (South) Malaysia Philippines Singapore Taiwan Thailand Vietnam South America Argentina Brazil Colombia Venezuela World Disclaimer: This publication contains forward-looking statements based on expectations, estimates and projections that are not guarantees of future performance and involve a number of uncertainties and assumptions. DuPont expressly disclaims all liability for the use or interpretation by others of information contained in this DuPont communication. Decisions based on information contained in this DuPont communication are the sole responsibility of the reader, and in exchange for using this DuPont communication the reader agrees to hold DuPont harmless against any claims for damages arising from any decisions that the reader makes based on such information. Nothing contained in this DuPont communication constitutes investment advice.

3 Global Consumer Price Inflation Forecast North America United States Canada Mexico Western Europe France Germany Italy Spain U.K Central Europe Russia Asia/Pacific Japan ex Japan Australia China India Indonesia Korea (South) Malaysia Philippines Singapore Taiwan Thailand Vietnam South America Argentina Brazil Colombia Venezuela

4 Global Industrial Production Forecast North America United States Canada Mexico Western Europe France Germany Italy Spain U.K Central Europe Russia Asia/Pacific Japan ex Japan Australia China India Indonesia Korea (South) Malaysia Philippines Singapore Taiwan Thailand Vietnam South America Argentina Brazil Colombia Venezuela World

5 Macroeconomic Overview Global GDP is expected to rise.% in after rising.7% in. Growth would have been higher in and would be lower in were it not for the earthquake and tsunami in Japan and the subsequent recovery. 1 Global GDP Growth Percent 1 As usual, growth is expected to be highest in Asia. GDP is expected to decline slightly in Western Europe. Political uncertainty in Greece, worsening fiscal and economic problems in Spain, and a possible hard landing in China all present downside risks to this forecast gdpglobal 7 9 World Western Europe Japan South America 1 North America Emerging Europe A/P ex Japan U.S. real GDP grew at a 1.9% annual rate in the first quarter, and has grown at less than a 3% rate for seven straight quarters. GDP has grown at just a.% annual rate over the first quarters of recovery. GDP is expected to grow at a -.5% rate over the rest of the year. The outlook then becomes even more uncertain than normal when a host of tax cuts expire on December 31. Unless Congress takes steps to avoid this fiscal cliff, economic activity could fall sharply in early 13. Depending on the resolution, 13 growth could be much better or much worse than the current forecast of 1.7%. U.S. real personal consumption expenditures (PCE) grew at a.7% annual rate in the first quarter, with spending on durable good up sharply, spending on nondurable goods up moderately, and spending on services a weak spot in this recovery continuing to grow very slowly US Real Gross Domestic Product Annualized Growth Rates Quarter-to-quarter Year-over-year Shaded areas denote recessions - Annual Growth Rates (%) US Consumer Spending and Disposable Income Percent Change from Year Ago, Chained 5 Dollars Real disposable personal income has been growing very slowly. Unless income growth accelerates, growth in consumer spending will have to slow. - - J M 9 M J S N J M 1 M Consumption Expenditures Disposable Income J S N J M M J S N J M - - 5

6 U.S. Construction Activity Existing home sales rose in January to their highest level since May 1, when they were boosted by a tax credit. Sales remain near January s weather-aided level, but the National Association of Realtors Pending Home Sales Index fell in April from March s 3-month high, suggesting that headwinds remain. New home sales hit a -month high in February and remain near those levels. Some measures of house prices show small increases while others show further small declines. Taken together, they show no evidence of either a significant upturn or further large declines. U.S. housing starts, on a seasonally adjusted basis, have risen significantly since last spring and remain near the 3- month high hit in January. Building permits, a better measure of underlying conditions, hit a -month high in March before declining slightly in April. The National Association of Home Builders Housing Market Index rose to a five-year high in May. Despite the recent improvement and improved outlook, starts are expected to remain below one million units through 13. Before, starts had not fallen below one million units since 1. Investment in residential structures rose at a 19.3% annual rate in the first quarter. It was the strongest quarterly growth rate since the second quarter of 1, when housing was boosted by a tax credit. Double-digit growth is expected to continue through 15. Investment in nonresidential structures declined at a 3.3% annual rate in the first quarter after falling at a 1.% rate in the fourth quarter of. A slow recovery is expected over the next two years. US Mortgage Applications and Home Sales Index, -Week Moving Average 5 3 Thousands Mortgage Applications for Purchases (Left) New + Existing Home Sales (Right) mbavprch US Housing Starts Millions, Seasonally Adjusted Annual Rate Investment in Structures Billion 5 $ ifrer Residential Nonresidential Blue Chip Forecasts 13 Top Consensus.7.7 Bottom

7 U.S. Production and Key Markets Industrial production in U.S. manufacturing (excluding computers, communication equipment, and semiconductors) rose in April, but remained slightly below the postrecession high hit in February. Production was up.% year-over-year in April. The Institute of Supply Management s New Orders Index rose to.1 in May, its highest reading since April. This suggests continued growth in U.S. manufacturing. US Manufacturing Production ex High-Tech Sectors 7 = Actual -7 Trend (.9%) Annual Growth Rates (%) Revised data show that industrial production in the chemical industry (ex pharmaceuticals) rose more in 1 than previously estimated, but has grown little since March. Production was up.% year-over-year in April. Moderate growth is expected to continue, but growth could be much worse if the European recession spreads to the United States and the fiscal cliff is not avoided. Growth could be better than expected if the fiscal cliff issue is resolved and U.S. chemical producers gain market share because of low U.S. natural gas prices. Paper production rose slightly over the last few months of, but has remained flat since December. Production was down.% year-over-year in April. Paper production is expected to recover little going forward. The long-term trend in paper production is down because of a structural reduction in paper demand as replaces office documents and the internet replaces newspapers, magazines, catalogs, etc chemexpharm US Industrial Production, Chemicals ex Pharma 7 = 1 Annual Growth Rates Actual -7 Trend (1.3%) Before March revision U.S. Industrial Production, Paper 7 = 1, 3-Month Moving Average Actual -7 Trend (-1.%) 9 5 Before March revision 5 Annual Growth Rates (%) jipq

8 U.S. Production and Key Markets Industrial production of rubber and plastic products declined slightly in March and April after hitting a post-recession high in February. Production was up 3.1% yearover-year in April and still well below its pre-recession peak. Production of rubber and plastic products, which include tires, belts, hoses, and automotive parts made from highperformance polymers, is very dependent on motor vehicle production. The recovery in vehicle production should boost rubber and plastics production this year. jip3q 1 9 Industrial Production, Rubber & Plastic Products 7 = 1 Actual -7 Trend (.3%) Before March revision 1 Annual Growth Rates (%) U.S. motor vehicle sales fell sharply in May after four surprisingly strong months. Vehicles sold at a 1 million seasonally adjusted annual rate in May after selling at a 1. million rate over the first four months of the year US Motor Vehicle Sales & Production Millions Sales 19-7 Sales Trend (1.%) Production Annual sales are expected to total about 1.75 million in, up from just over 13 million in U.S. motor vehicle production has rebounded strongly from the supply constraints caused last year by the earthquake and tsunami in Japan and flooding in Thailand. Production was up 3.% year-over-year in April. Production was up.1% year-over-year in the first quarter and is expected to be up 3.5% in the second quarter and up 1.1% in the third quarter. Annual production rose nearly % last year. Production is expected to be up about 15% this year US Motor Vehicle Production Percent Change from Year Ago ipstotassc 3-month moving average -month moving average Q Schedule 3.5% Q3 Schedule 1.1%

9 U.S. Production and Key Markets Revised data show that U.S. shipments of computers and electronic products (excluding semiconductors and audio/video equipment) were much weaker over the last three year than previously estimated. Shipments & Orders, Computers & Electronic Products Billion $, Annual Rate, 3-Month Moving Average 5 35 Excludes semiconductors & audio/video equipment 5 35 Shipments have been trending down since late 1, but with orders rising above shipments, shipments could be about to turn up. 3 5 Shipments Orders 3 5 shp Shipments of silicon materials (wafer area) are a good indicator of global demand for products going into the electronics industry. Wafer area stabilized in the first quarter after a sharp decline but was still down.1% year-over-year. Semiconductor Shipments & Silicon Wafer Area Billion $, 3-Month Moving Average Million Square Inches 3 1 The data are only reported quarterly back to, but silicon wafer area (in square inches) has been strongly correlated with semiconductor shipments (in dollars), which are reported monthly back to semiwtns 1 3 Silicon Wafer Area (Right) Semiconductor Shipments (Left) On a seasonally adjusted basis, worldwide semiconductor shipments rose in the fourth quarter of and first four months of after falling sharply in the prior two quarters. Despite the rebound, shipments were down.9% year-overyear in the three months ending in April. Shipments of equipment used to make semiconductors were down.1% yearover-year in the three months ending in April, but have turned up on a month-tomonth basis. The book-to-bill (orders-toshipments) ratio for semiconductor equipment has been above one in recent months, suggesting that shipments will continue to rise near-term Semiconductor & Semi Equipment Shipments Percent Change from Year Ago, 3-Month Moving Average Semiconductor Equipment Shipments (Right) semieqsh Worldwide Semiconductor Shipments (Left)

10 U.S. Prices and Costs Inflation, as measured by the year-overyear change in the consumer price index, declined from 3.9% in September to.3% in April, and with oil prices plummeting in recent weeks, the inflation rate is likely to fall further in coming months. Inflation is now expected to decline to.% this year. US Consumer Price Index Percent Change from Year Ago - Annual Inflation Rates (%) The Federal Reserve s has established an official target of % for inflation as measured by the Personal Consumption Expenditures price index, replacing the unofficial target of slightly below % for the Personal Consumption Expenditures price index excluding food and energy. Inflation currently exceeds the Fed s target, but is likely to fall below it in the next month or two. 1 Personal Consumption Expenditures Price Index Percent Change from Year Ago jpc Total Ex Food & Energy The Employment Cost Index for total compensation was up 1.9% year-overyear in the first quarter. Wage and salary costs were up 1.7% year-over-year, the biggest increase in nearly three years. Benefits costs were up.7%, down from up from 3.% in the fourth quarter. Slow growth in wages and salaries holds back consumer spending, while rapid growth in benefits costs discourages hiring. Thus, the acceleration in wage costs and deceleration in benefits costs in the first quarter were both good news. Employment Cost Index, Civilian Workers Percent Change from Year Ago jecwbc 9 9 Total Compensation Wages & Salaries Benefits

11 U.S. Prices and Costs The price of Louisiana Light Sweet crude has fallen below $1/barrel for the first time since January. (Because of a glut of land-locked oil at Cushing, Oklahoma, West Texas Intermediate, the traditional U.S. benchmark, is no longer a good measure of oil prices.) Natural gas prices remain near ten-year lows. Hydraulic fracturing in shale formations has significantly increased the supply of natural gas in the United States, rendering strategies based on ever-rising energy prices suddenly obsolete. US Crude Oil and Natural Gas Futures Prices $/mmbtu Louisiana Light Sweet Crude (Right) Natural Gas (Left) oilgasl $/bbl Low natural gas prices should boost the competitiveness of U.S. chemical producers, which tend to use natural gas as a feedstock while most of their foreign competitors use oil as a feedstock. Industrial chemical prices are more highly correlated with oil prices than with natural gas prices because oil-based imports are the marginal source of supply. The Producer Price Index for industrial chemicals rose from January to April, but is likely to fall sharply in coming months because of the recent decline in oil prices. Industrial Chemical Prices vs. Oil Prices $/BBL 19 = PPI, Industrial Chemicals (Right) Louisiana Light Sweet Crude (Left) ppichemoil The Federal Reserve has announced that it plans to keep its target Federal Funds rate near current near-zero levels through 1. Such an announcement removes the urgency to borrow and is thus counterproductive. 1 US Interest Rates Percent 1-Year Bond Yield Target Federal Funds Rate 1 Yields on long-term U.S. Treasury securities have fallen to post-wwii lows despite the enormous U.S. budget deficit. This reflects slow economic growth, the lack of lower-risk alternatives in Europe and Japan, and purchases of Treasury securities by the Fed. If these conditions change or inflation rises, yields could rise sharply. ratesq

12 Trade and Currency Overview The Japanese Yen retreated from alltime highs versus the dollar earlier this year, but has been appreciating again lately. The yen reduces the profitability and competitiveness of Japanese exporters and is causing Japanese companies to move more production to other countries Japanese Yen per US Dollar yen The Euro has declined sharply versus the dollar in recent weeks. It is now approaching some estimates of the equilibrium or purchasing power parity exchange rate, which are generally around $1. per Euro. US Dollars per Euro Holding the Euro-Zone together might require a Euro that is even weaker than these estimates The U.S. trade deficit remains very large. Oil imports accounted for 5% of the merchandise trade deficit in. Trade with China accounted for more than %. - - US Merchandise Trade Balance Billion $, Annual Rate, 3-Month Moving Average Total (Left) Chemicals ex Pharma (Right) 3 The chemical industry (excluding pharmaceuticals) continues to run a healthy trade surplus Reducing the U.S. trade deficit will require increased investment in plant and equipment in the United States. -1 exchem

13 Non-U.S. Industrial Production Industrial production in European Union manufacturing rose in March, nearly reversing February's sharp decline, but year-over-year growth remained below zero (-1.1%). Production fell sharply in Germany and Spain in April. The EU s production expectations survey, which tracks industrial production but is reported in a timelier manner, fell below zero in May, to its lowest level since September Industrial Production*: Western Europe 7- Peak = 1 Germany UK France Italy Spain For the first quarter as a whole, industrial production was down.% year-over-year and flat quarter-to-quarter. 7 *Total in Spain. Manufacturing elsewhere eurip5peak 7 Except for (reported data in) China, industrial production has been flat or down in all of the major economies of Asia since early. The Growth Rate of Value Added of Industry, China's measure of growth in industrial production, was 9.3% in April, down from.9% in March and the lowest year-over-year growth rate since May 9. An alternative measure based on data on industrial products shows yearover-year growth of just.9% in April, also the worst since May 9, with production down very sharply on a seasonally adjusted month-to-month basis.. Industrial production in Argentina fell again in April, leaving it down.7% on a yearover-year basis. Industrial production in Brazilian manufacturing, which has been trending downward since March, fell slightly in April and was down 3.1% year-over-year. Industrial production in Mexican manufacturing has risen strongly since October as the North American auto industry has recovered. Production was up 7% year-over-year in March Industrial Production: Asia 5 = 1, Seasonally Adjusted Total industrial production in China, manufacturing elsewhere. *Data seasonally adjusted by this office. asia Japan Taiwan* Korea China* India* 9 1 Industrial Production: Latin America 5 = 1, 3-Month Moving Averages lata5 Argentina 9 1 Brazil Mexico