Kicking Into a Higher Gear MARK ZANDI CHIEF

Kicking Into a Higher Gear MARK ZANDI, CHIEF ECONOMIST

No New Normal % change yr ago 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 Private sector 09 10 11 Total Government 12 13 14 Sources: BEA, Moody’s Analytics 2

Housing Will Soon Be Undersupplied Vacant homes for sale, for rent and held off market, ths 11 500 10 500 9 500 8 500 7 500 Trend vacancy 6 500 5 500 90 92 94 96 98 00 02 04 06 08 10 12 14 Sources: Census Bureau, Moody’s Analytics 3

The Banking System is Well Capitalized Commercial banks 13, 5 1, 6 13, 0 1, 4 12, 5 1, 2 12, 0 11, 5 Tier 1 Capital Ratio (L) 11, 0 Return on Assets (R ) 1, 0 0, 8 0, 6 10, 5 10, 0 0, 4 9, 5 0, 2 9, 0 0, 0 '02 '04 '06 '08 '10 '12 '14 Source: FDIC 4

U. S. Households De-Lever and Lock-In % 13, 5 35 13, 0 12, 5 30 12, 0 11, 5 25 11, 0 10, 5 10, 0 9, 5 20 Debt service burden (L) Adjustable share of liabilities (R) 15 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Sources: Federal Reserve, BEA, Moody’s Analytics 5

Businesses Have Never Been as Profitable… After-tax corporate profit margin, % 20 15 10 5 45 50 55 60 65 70 75 80 85 90 95 00 05 10 Sources: BEA, Moody’s Analytics 6

…And Have a Significant Energy Advantage 300 Industrial electricity prices, $ Mwh 250 Italy 200 Japan Germany 150 China 100 France U. S. U. K. India 50 Korea Natural gas price, $ mmbtu 0 0 5 10 15 20 Sources: Country sources, Moody’s Analytics 7

The Fed’s Exit Will Be Tricky Assets held outright on Fed’s balance sheet, $ bil 4 500 Forecast 4 000 3 500 3 000 2 500 2 000 1 500 Treasury securities Federal agency debt Mortgage-backed securities 1 000 500 0 06 6 7 8 09 9 10 11 12 12 13 14 15 15 16 17 18 18 19 20 21 21 22 23 Source: Moody’s Analytics 8

Global Growth is Soft Contribution to global GDP growth from 1% acceleration in GDP growth of specified country, ppt 1, 0 EMEA EM Latam 0, 8 EM Asia Developed Direct 0, 6 0, 4 0, 2 0, 0 U. S. EU China Japan Source: Moody’s Analytics 9

Ukraine-Russian Conflict Could Hurt Oil production, mil bpd, 2013 12 10 Global oil production was 85 mil bpd in 2013 8 6 4 2 0 Russia Saudi U. S. Iran China Canada Iraq UAE Ven. Mexico Source: International Energy Agency 10

Businesses Experience a Field of Dreams Moment U. S. business confidence diffusion index 50 40 30 20 10 0 % of positive responses to the survey less % of negative responses -10 -20 -30 03 04 05 06 07 08 09 10 11 12 13 14 Source: Moody’s Analytics 11

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