February 8, 2012 Robert Johnson Director of Economic Analysis

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1 Positive Surprises in Store for 2012? Macro Overview February 8, 2012 Robert Johnson Director of Economic Analysis 1

2 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 2

3 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% 3

4 Economic Drivers Consumer spending Housing and Construction Balance of Trade Lower Inflation 4

5 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. 5

6 6 Where Are We Now?

7 This Recovery Has Grown at Half of the Normal Rate Year After Bottom, 30 Month GDP Growth Rate Prior GDP Contraction % -1.1% % -2.7% % -3.2% % -1.0% % -3.7% % -2.6% % -1.4% % -0.3% % -2.2% Average 10.7% -2.0% % -5.1% Sources: BEA, Morningstar calculations. 7

8 Consumer, Exports Drive GDP Overall % Contribution to GDP Growth by Category Contributions to GDP Growth by Category %, Combined Categories = GDP Growth Annualized, Seasonally Adjusted Recovery Begins Whole Q Q Q Q Q Q Q Q Q Q Recovery Consumer Goods % Consumer Services % Business Structures % Equipment & Software % Residential Construction % Inventory % Exports % Imports % Government % Other % Total GDP Growth(annualized) Total Recovery GDP growth 6.2% Boxes are two best categories for the period Sources: Bureau of Economic Analysis, Morningstar, updated January 27,

9 Exports a Big Contributor to Growth Exports As % of GDP 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Source: St. Louis Federal Reserve, updated January 27, 2012

10 A Fall In U.S. Exports to Europe Won t Kill the Economy by Itself Year to Date U.S. Exports to: Billions $, Sept., 2011 % of % of Billions of $ U.S. Exports U.S. GDP North America % 4.5% Europe % 3.1% Pacific Rim % 3.4% South America % 1.6% Other 100 9% 1.3% Total % 13.9% Source: Bureau of Economic Analysis, Census Bureau, Morningstar Calculations, updated November 22,

11 Consumer Takes the Stage, Represents 71% of the Economy 11 Source: topnews.net.nz

12 Watching the Consumer Is Key 12

13 Private Sector Employment Continues to Grow 3.00% Employment Growth Year over Year Growth (3 month moving average) 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -5.00% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Source Bureau of Labor Statistics, updated February 3,

14 Initial Claims Point to a Stronger Job Market 0.90% Claims % of Covered Employment 0.80% 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% Source: Bureau of Labor Statistic, updated February 3,

15 Gasoline Prices Tamer, But on the Rise Again Regular Gasoline Prices per Gallon, Weekly $4.00 $3.80 $3.60 $3.40 Price per Gallon $3.20 $3.00 $2.80 $2.60 $2.40 $2.20 $2.00 Jan-10 Apr-10 Jun-10 Sep-10 Dec-10 Mar-11 May-11 Aug-11 Nov-11 Feb-12 Source: St. Louis Federal Reserve, updated February 6,

16 Consumer Fixed Payments Improved Sharply Financial Obligations Ratio Average = Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan Source: U.S. Federal Reserve, Morningstar, updated December 8, 2011

17 Retail Sales Continue to Chug Along Year over Year Shopping Center Sales Growth (Five Week Moving Average) Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Source: International Council of Shopping Centers, updated February 7,

18 Improved Consumer Confidence Means More Car Sales 1.1 Auto Sales vs. Mid Ratio Compared to 2005 High Interpretation: January 2011 sales were 81% of 2005 levels. Source: BEA, Bureau of Labor Statistics, Morningstar, Updated February 1,

19 but Not Enough to Help the Housing Market Red bar represents average natural demand, Morningstar estimate Source: Census Bureau, Morningstar, updated January 19,

20 Corporations Will Continue to Struggle to Raise Prices as Savvy Consumers Fight Back Auto Sales Auto Units Apparel Apparel Price Change Mil (SAAR) Price Change Sales Change January -0.1% % 0.8% February 1.0% % 1.9% March 0.7% % 1.0% April 0.7% % 0.1% May 1.1% % 0.2% June 0.6% % 1.2% July 0.0% % -0.1% August 0.0% % -0.4% September 0.0% % 1.3% October -0.3% % -0.7% November -0.3% % 0.4% December -0.2% % 0.7% Source: Morningstar Calculations, BLS, Census Bureau, BEA Source: Bureau of Economic Analysis, Census Bureau, Morningstar Calculations, updated January 19,

21 Upside Potential Source: psoutowood.wordpress.com 21

22 U.S. Oil and Gas Production Accelerates Source: North Dakota State Government updated January 10,

23 Boeing Production Set to Boom 23

24 Auto Sales Could Jump Again in 2012 U.S. Auto Sales Year Millions of Units E 13.6 Source: Automotive News, updated January 4,

25 Housing??? Source: newhomessection.com 25

26 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 26

27 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. 27

28 But Negatives Remain Credit requirements remain tight Foreclosure pipeline is still large Prices are down over the past year 28

July 2012 Robert Johnson, CFA Director of Economic Analysis

U.S. Consumer: Key to World Growth Macro Overview July 2012 Robert Johnson, CFA Director of Economic Analysis 1 U.S. Economic Forecast 2012 Outlook: A Slow Start Before an Acceleration Real U.S. GDP Growth