The Goldman Sachs Group, Inc. Goldman Sachs Research Global Themes and Risks April 2013 Abby Joseph Cohen, CFA Goldman, Sachs & Co. 1-212-902-4095 abby.cohen@gs.com Rachel Siu Goldman, Sachs & Co. 1-212-357-0493 rachel.siu@gs.com The Global Markets Institute is the public policy research unit of Goldman Sachs Global Investment Research. Its mission is to provide research and high-level advisory services to policymakers, regulators and investors around the world. The Institute leverages the expertise of Research and other Goldman Sachs professionals, as well as highly regarded partners, to offer written analyses and host discussion forums.
Composition of US GDP, 2006-2014 Reduced government spending a drag on GDP growth 2006 2007 2008 2009 2010 2011 2012 2013(E) 2014(E) GDP 2.7 % 1.9 % (0.3) % (3.1) % 2.4 % 1.8 % 2.2 % 2.2 % 2.9 % Domestic Final Demand 2.6 1.2 (1.5) (4.0) 2.8 1.7 2.1 2.0 3.0 Personal Consumption 2.9 2.3 (0.6) (1.9) 1.8 2.5 1.9 2.1 2.5 Residential Fixed Investment (7.3) (18.7) (23.9) (22.4) (3.7) (1.4) 12.1 15.1 15.0 Business Fixed Investment 8.0 6.5 (0.8) (18.1) 0.7 8.6 8.0 5.0 9.0 Government 2.1 1.3 7.2 6.1 4.5 (2.8) (2.2) (5.2) (5.9) Exports 9.0 9.3 6.1 (9.1) 11.1 6.7 3.2 2.1 4.6 Imports 6.1 2.4 (2.7) (13.5) 12.5 4.8 2.4 2.1 4.6 Source: Goldman Sachs Economics Research. Goldman Sachs Global Investment Research 2
Debt service payments as % of disposable personal income Consumer debt service payments as a percentage of DPI at lowest levels since mid-1990s 15 14 13 12 11 DSP as a % of DPI back to mid-1990s levels 10 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Federal Reserve Board, Goldman Sachs Research. Goldman Sachs Global Investment Research 3
Index: 2003 Q1=100 Exports and business equipment lead all other GDP sectors Private construction showing life; reduced government spending is a drag on overall GDP and employment 175 170 165 160 155 150 145 140 135 130 125 120 115 110 105 100 95 90 Exports Personal Consumption Expenditures Business Equipment and Software Government Expenditures Business Structures 85 1Q 03 3Q 03 1Q 04 3Q 04 1Q 05 3Q 05 1Q 06 3Q 06 1Q 07 3Q 07 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 3Q11 1Q 12 3Q 12 Data from 2003 Q1 through 2012 Q4 Source: Bureau of Economic Analysis. Goldman Sachs Global Investment Research 4
Total IT spending still a source of strength 24% 76% Note: Due to rounding, totals may not add up to 100 percent. Source: Goldman Sachs IT Spending Survey, February 2013. Goldman Sachs Global Investment Research 5
Percent Job Losses Relative to Peak Employment Employment changes during selected recessions and recoveries 1.0% Current 2001 1958 0.0% -1.0% Structural -2.0% -3.0% Cyclical The current weakness is linked to the combination of both cyclical and structural factors -4.0% -5.0% -6.0% -7.0% 0 5 10 15 20 25 30 35 40 45 50 55 60 65 Months from Peak Employment Source: Brookings, Bureau of Labor Statistics, Goldman Sachs Global Markets Institute. Goldman Sachs Global Investment Research 6
Unemployment rate (%) Employment gap by education Unemployment rates for adults, 25 years and over 16 14 12 Less than a high school diploma High school diploma 10 8 6 Some college or associate degree 4 Bachelor's degree and higher 2 0 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Source: Bureau of Labor Statistics. Goldman Sachs Global Investment Research 7
Inflation-adjusted dollars Median household income, inflation adjusted Trending lower since 2000 56,000 54,000 52,000 50,000 48,000 46,000 44,000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: Census Bureau. Goldman Sachs Global Investment Research 8
Inf lation-adjusted dollars Median household income by educational attainment of head of household 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 No high school Some high school High school diploma Some college Associate degree Bachelor's degree and higher 1995 2000 2005 2011 Source: Census Bureau. Goldman Sachs Global Investment Research 9
Percent US productivity gains are driven by investment in equipment and people 3 2.5 2 1.3 1.4 0.4 1.5 1 0.5 0.4 0.5 0.5 0.2 0.2 0.4 0.5 1.2 1 1.2 0.6 0.6 0 1987-1990 1990-1995 1995-2000 2000-2007 2007-2011 Capital intensity Labor composition Multif actor productivity Percentage point contributions to growth in output per hour Source: Bureau of Labor Statistics. Goldman Sachs Global Investment Research 10
Annual wages (in thousands USD) Technology wages are higher and have grown more quickly $120 $110 Annual Average Wages Sector Growth since 2000 Total Private 32.8% High Tech 42.3 $100 $90 $80 $70 $60 $50 $40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total Private High Tech Source: New York State Department of Labor, QCEW Data. Data for New York City. Goldman Sachs Global Investment Research 11
Employment and annual average wages by tech occupation $160,000 $140,000 $137,455 $120,000 $120,825 $107,670 $100,000 $80,000 $60,000 $40,000 $93,816 $87,674 $85,867 $85,489 $82,029 $68,560 $61,070 $58,093 $41,002 $59,590 $20,000 $0 Note: Only tech-related occupations are included in each category. New York City, 2010 Source: US Bureau of Labor Statistics, Occupational Employment Statistics. Goldman Sachs Global Investment Research 12
Thousand b/d Shale technology is driving a resurgence in US oil and gas production, creating a competitive advantage 16,000 14,000 USNGL production 12,000 10,000 US biofuel and oxygenates production 8,000 6,000 US conventional crude oil production 4,000 US non-conventional crude oil production 2,000 0 1918 1927 1936 1945 1954 1963 1972 1981 1990 1999 2008 2017 Source: IEA, Goldman Sachs Global ECS Research. Goldman Sachs Global Investment Research 13
The US outspends the rest of the world Global energy production in volume and value and capex (2011) Country Total Liquids (thousands of barrels per day) Natural Gas (billion cubic feet) Thermal Coal (million tons) Market Value ($ billions) E&P Capex ($ billions) US 10,107 23,000 1,094 $696 $138 China 4,303 3,629 3,829 663 35 Russia 10,229 23,647 372 617 10 Saudi Arabia 11,153 3,504 0 475 5 Iran 4,234 5,161 1 206 n/a Source: Haver Analytics, Goldman Sachs Global ECS Research. Goldman Sachs Global Investment Research 14
Global growth outlook Global GDP projected at 3.3% in 2013, with recession in Europe ($ Billions) Growth Rates 2011 GDP 2008 2009 2010 2011 2012(E) 2013(E) 2014(E) US 15,076 (0.3) % (3.1) % 2.4 % 1.8 % 2.2 % 2.2 % 2.9 % Eurozone 12,993 0.3 (4.3) 1.9 1.5 (0.5) (0.5) 0.8 Germany 3,572 0.8 (5.1) 4.0 3.1 0.9 0.7 1.9 France 2,753 (0.2) (3.1) 1.6 1.7 0.0 (0.7) 0.4 Italy 2,181 (1.2) (5.5) 1.8 0.6 (2.2) (1.2) 0.5 Japan 5,788 (1.0) (5.5) 4.7 (0.6) 2.0 1.2 1.5 United Kingdom 2,393 (1.0) (4.0) 1.8 0.9 0.3 1.3 2.0 China 7,318 9.6 9.2 10.4 9.3 7.8 8.2 8.4 Canada 1,736 0.7 (2.8) 3.2 2.4 1.9 2.2 2.5 Brazil 2,426 5.2 (0.3) 7.5 2.7 0.9 3.3 4.4 Mexico 1,159 1.2 (6.0) 5.3 3.9 3.9 3.6 3.8 Korea 1,116 2.3 0.3 6.3 3.6 2.1 3.1 3.9 Australia 1,484 2.5 1.4 2.6 2.4 3.6 2.4 2.8 Source: Goldman Sachs Economics Research. Goldman Sachs Global Investment Research 15
Share of US foreign trade February 2012 through January 2013 US Exports to US Imports from $Billions % Share $Billions % Share North America $510.6 32.9 % $603.1 26.5 % Canada 293.6 18.9 330.1 14.5 Mexico 217.0 14.0 280.1 12.3 European Union 264.3 17.0 380.1 16.7 Japan 69.6 4.5 145.8 6.4 Central/South America 185.3 11.9 171.6 7.5 Brazil 43.8 2.8 32.4 1.4 Argentina 10.1 0.7 4.5 0.2 China 111.6 7.2 428.4 18.8 Korea 42.3 2.7 59.6 2.6 Total $1,552.4 $2,276.9 Aggregate trade deficit of $724.5 billion. Source: Goldman Sachs Global Markets Institute, US Department of Commerce. Goldman Sachs Global Investment Research 16
Index: January 2007 = 100 Selected foreign exchange rates The Chinese yuan has been rising 130 Canadian Dollar 120 Chinese Yuan 110 100 Euro 90 Mexican Peso 80 70 01/07 07/07 01/08 07/08 01/09 07/09 01/10 07/10 01/11 07/11 01/12 07/12 Source: Federal Reserve Board, Goldman Sachs Global Markets Institute. Goldman Sachs Global Investment Research 17
Daily closing price S&P 500 performance: Staircase pattern June 1995 March 2013 1575 1500 1425 Top of prior bull market 1350 1275 9/11 aftermath 1200 1125 Higher volatility begins 1050 975 900 825 750 Accounting scandals and beginning of Iraq engagement Financial crisis worries reach climax - Q1 2009 675 2002 economic and market troughs 600 2009 economic and market troughs 525 6/95 6/96 6/97 6/98 6/99 6/00 6/01 6/02 6/03 6/04 6/05 6/06 6/07 6/08 6/09 6/10 6/11 6/12 Daily closing price from 6/1/95 through 3/28/2013 Source: Standard & Poor s, FactSet, Goldman Sachs Global Markets Institute. Goldman Sachs Global Investment Research 18
Annual share price performance for major indices 2006 2007 2008 2009 2010 2011 2012 2013 YTD* S&P 500 13.6 % 3.5 % (38.5) % 23.5 % 12.8 % (0.0) % 13.4 % 10.0 % Dow Jones EURO STOXX 50 15.1 6.8 (44.4) 21.1 (5.8) (17.1) 13.8 (0.5) FTSE 100 10.7 3.8 (31.3) 22.1 9.0 (5.6) 5.8 8.7 Deutsche Aktien Xchange 30 22.0 22.3 (40.4) 23.8 16.1 (14.7) 29.1 2.4 Nikkei 225 6.9 (11.1) (42.1) 19.0 (3.0) (17.3) 22.9 18.7 KOSPI 200 34.2 39.3 (48.3) 52.0 5.3 (20.0) 10.3 (0.3) Hang Seng Index 4.5 30.1 (39.3) 51.6 22.2 (12.2) 22.9 (1.6) * As of 3/28/2013. Source: FactSet. Goldman Sachs Global Investment Research 19
Index: September 22, 2005 = 100 Share price performance for major indices Significant divergences have emerged 230 210 190 S&P 500 Dow Jones EURO STOXX 50 FTSE 100 Deutsche Aktien Xchange 30 Nikkei 225 Hang Seng Index KOSPI 200 KOSPI 200 170 Heng Seng Index 150 130 110 Deutsche Aktien Xchange 30 FTSE 100 90 S&P 500 70 50 Dow Jones EURO STOXX 50 Nikkei 225 30 Sep-05 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Source: FactSet. Goldman Sachs Global Investment Research 20
Sep-05 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 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Rolling 3-Month Realized Volatility (%) Realized volatility for major indices Volatility sharply declined following Euro-zone worries in late 2011; may return as worries resume 80 70 60 S&P 500 Dow Jones EURO STOXX 50 FTSE 100 Deutsche Aktien Xchange 30 Nikkei 225 Hang Seng Index KOSPI 200 50 Hang Seng Index 40 30 Deutsche Aktien Xchange 30 Nikkei 225 KOSPI 200 Earthquake/ Tsunami 20 FTSE 100 10 0 S&P 500 Dow Jones EURO STOXX 50 Source: Goldman Sachs Options Research. Goldman Sachs Global Investment Research 21
Inflation and P/E multiples (a) The S&P 500 now at 15.5X 2013 estimated median EPS Inflation Less than 2.5% Average S&P 500 P/E 18.6 X 2.5% - 3.5% 17.6 3.5% - 4.5% 12.1 4.5% - 5.5% 14.2 5.5% - 6.5% 12.8 6.5% - 7.5% 10.0 Greater than 7.5% 8.6 (a) For the period 1950-2007 Source: Standard & Poor s, Bureau of Labor Statistics, Goldman Sachs Global Markets Institute. Goldman Sachs Global Investment Research 22
GDP and profits are substantially higher than at prior stock market peak 2000 Q1 2013 Q1 2000 Q1-2013 Q1 % Change Nominal GDP, $ billions $9,709.50 $16,030.70 65.1 % S&P 500 Operating Earnings, per share 54.18 108.00 99.3 S&P 500 Price 1,498.58 1,569.19 (a) 4.7 (a) Closing price as of 3/28/2013. Source: Goldman Sachs Portfolio Strategy Research, Standard & Poor s. Goldman Sachs Global Investment Research 23
Disclosure Appendix April 3, 2013
Disclosure Appendix Disclosures This report has been prepared by the Global Markets Institute, the public policy research unit of the Global Investment Research Division of The Goldman Sachs Group, Inc. ( Goldman Sachs ). As public policy research, this report, while in preparation, may have been discussed with or reviewed by persons outside of the Global Investment Research Division, both within and outside Goldman Sachs, and all or a portion of this report may have been written by policy experts not employed by Goldman Sachs. While this report may discuss implications of legislative, regulatory and economic policy developments for industry sectors, it does not attempt to distinguish among the prospects or performance of, or provide analysis of, individual companies and does not recommend any individual security or an investment in any individual company and should not be relied upon in making investment decisions with respect to individual companies or securities. Distributing entities This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Banco Múltiplo S.A.; in Canada by Goldman, Sachs & Co. regarding Canadian equities and by Goldman, Sachs & Co. (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union.. European Union: Goldman Sachs International, authorized and regulated by the Financial Services Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman Sachs AG, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany.. General disclosures in addition to specific disclosures required by certain jurisdictions Goldman Sachs conducts a global full-service, integrated investment banking, investment management and brokerage business. It has investment banking and other business relationships with governments and companies around the world, and publishes equity, fixed income, commodities and economic research about, and with implications for, those governments and companies that may be inconsistent with the views expressed in this report. In addition, its trading and investment businesses and asset management operations may take positions and make decisions without regard to the views expressed in this report. Copyright 2013 The Goldman Sachs Group, Inc. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc. Goldman Sachs Global Investment Research 25