- US economic growth is expected to remain sub-trend at around 1.2-2.2% in Q3 2012 due to ongoing household deleveraging and fiscal drag. Unemployment is expected to remain elevated. - Risks include a slowdown in the Eurozone and potential policy mistakes around fiscal tightening. - Global manufacturing is slowing due to weak demand in Europe, the US, and a growth moderation in China.

1. Image page
U.S. Q3’12 Economic Overview and Outlook
Bloomberg BRIEF: Economics
Joseph Brusuelas
July 2012

2. U.S. Q3’12 Economic Overview and Outlook
Image page Summary
Executive
• Growth is tracking at 1.2 percent in the second quarter of 2012
and will struggle to reach that level in the third quarter.
• Sub-trend growth (2.5 percent) likely to continue through
mid-2013.
• The U.S. economy is downshifting amid broadening global
deceleration.
• Job growth near 100,000 per month with slight risk of higher
unemployment rate through end of the third quarter.
• Risks to the outlook:
• External Sector: Euro zone, Middle East tensions.
• Public policy: 2012 impact from 2013 „fiscal cliff.‟
• Political Economy: U.S. Presidential election.
Subscribe @ Brief <GO> 2

3. U.S. Q3’12 Economic Overview and Outlook
Image page
Cyclical Growth Scenarios
• Core Scenario: Below Trend (2.5%) Growth
• Modest consumption
• Household deleveraging and fiscal drag continue to weigh
• Elevated unemployment persists
• Low inflation
• Alternative: The Long Malaise
• Housing overhang persists
• Liquidity trap ensnares economy
• Policy Mistake: Premature fiscal & monetary tightening
• Deflation
• Low Probability: Cyclical Outperformance
• Policy directed at housing
• Acceleration in hiring quickly brings down unemployment
• Corporate sector deploys cash
• Inflation risk
Subscribe @ Brief <GO> 3

4. U.S. Q3’12 Economic Overview and Outlook
Bloomberg Consensus: Survey of Forecasters
Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13
Real GDP 1.8% 2.20% 2.20% 1.9% 2.40% 2.60%
CPI 1.9% 1.5% 1.75% 1.6% 1.90% 2.10%
Core PCE 1.80% 1.80% 1.90% 1.70% 1.80% 1.80%
Unemployment 8.17% 8.20% 8.10% 8.0% 7.90% 7.80%
Central Bank Rate 0.25% 0.25% 0.25% 0.25% .25% 0.38%
2-Year Rate 0.30% 0.30% 0.37% 0.52% .59% 0.74%
10-Year Rate 1.65% 1.75% 1.91% 2.09% 2.28% 2.52%
EUR/USD 1.23 1.23 1.24 1.24 1.25 ..
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
4

5. U.S. Q3’12 Economic Overview and Outlook
Output Gap Still Considerable
20
Shadow=Forecast Real GDP Real Potential GDP
19
18
17
16
15
Trillions
14
13
12
11
10
9
8
7
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Source: Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
5

6. U.S. Q3’12 Economic Overview and Outlook
Mind The Gap
Growth and Jobs
400.0 5.0
Q2'12 GDP Tracking at 1.5%
200.0
3.0
Quarterly Average (Percentage)
Quarterly Average (Thousands)
0.0
1.0
-200.0
-1.0
-400.0
-3.0
-600.0
-5.0
-800.0
Real GDP Y/Y (RHS) Total Change in Employment (LHS)
-1000.0 -7.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg R2=.77
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
6

7. U.S. Q3’12 Economic Overview and Outlook
Image page Overview
U.S. Rates
• Bloomberg consensus forecast indicates higher 10- and 30-year rates.
• Fed Operation Twist to Continue at $44 billion per month pace.
• Current Rates:
• 2-Year: .22%
• 10-year: 1.48%
• 30-year: 2.56%
• Third Quarter Consensus Survey Rate Forecast
• 2-Year: .30%
• 10-year: 1.75%
• 30-year: 2.83%
• Risk to that forecast:
• Slowing U.S. economy
• Euro zone debt
• U.S. fiscal cliff
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
7

8. U.S. Q3’12 Economic Overview and Outlook
Fixed Income Markets Pricing in Slow Growth
U.S. Nominal GDP Growth and Five Year Bond Yields
10
8
6
Nominal GDP Growth
Projections
4
2
0 Five-Year
Yield
Expectations
-2
-4
Nominal GDP Growth 5-Year Yield
-6
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
8

9. U.S. Q3’12 Economic Overview and Outlook
Projected Path of Long and Short Term Rates
5.50
5.00
4.50
4.00
3.50
Percent
3.00
2.50
2.00
1.50
1.00
0.50
US 10-Year (LHS) 3-Month, 2-Year Forward (RHS)
0.00
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12
Source: Bloomberg
USGG10YR INDEX, G0025 2Y3M BLC2CURNCY<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
9

10. U.S. Q3’12 Economic Overview and Outlook
FX Overview
Image page
• Dollar appreciation versus euro- and-trade weighted basket of
currencies eases:
• Near-term test of $1.18 euro
• Likely to move toward $1.15 by end of the third quarter
• Euro zone recession supports modest USD appreciation
• Risks to the outlook:
• Fiscal concerns at year end
• Weak labor market outlook
• Economic slowdown stimulates Fed action
• Global U.S. dollar strength: Dollar safe haven bid:
• Global economic slowdown
• Intensification of euro zone sovereign debt crisis
• Global central banks drive policy rates lower
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
10

11. U.S. Q3’12 Economic Overview and Outlook
U.S. Dollar Appreciation Peaking?
600 1.18
1.23
500
1.28
400
1.33
Basis Points
EUR/USD
300
1.38
200
1.43
100 1.48
Italian-German 10-Year Spread (LHS) EUR/USD (RHS, Inverted) 1.53
0
2011 2012
Source: Bloomberg
EUR CURNCY, GDBR10, GBTPGR10 INDEX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
11

12. U.S. Q3’12 Economic Overview and Outlook
U.S. Dollar Appreciation Peaking?
U.S. Trade Weighted Real Broad Dollar Index
98
96
94
92
90
Index
88
86
84
82
80
2008 2009 2010 2011 2012
Source: Bloomberg USTRBROA INDEX<GO>
Subscribe @ Brief <GO> 12

13. U.S. Q3’12 Economic Overview and Outlook
External Outlook and Overview
• Euro Area
• Intensification of sovereign debt crisis as recession continues
• Bloomberg consensus survey
• -0.7% Growth in third quarter
• Unemployment Rate to 11.2%
• ECB likely to ease policy rate to .50% in third quarter
• China
• Growth decelerating
• Further downward adjustment in residential investment
• State owned enterprises drive investment
• Fiscal and monetary stimulus likely
• Emerging Markets
• Growth eases to 3% from 3.2% previously
• Rising unemployment
• Policy rates likely to ease on central banks action
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
13

14. U.S. Q3’12 Economic Overview and Outlook
Safe Haven Move Due to EU Crisis
8
German 10-Year Yield US 10-Year Yield Spanish 10-Year Yield Italian 10-Year Yield
7
6
Percentage
5
4
3
2
1
2010 2011 2012
Source: Bloomberg
GDBR10, USGG10YR, GSPG10YR, GBTPGR10 INDEX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
14

15. U.S. Q3’12 Economic Overview and Outlook
Germany Not Immune to Crisis
US and Germans Equity Markets
8000 1450
DAX (LHS) S&P 500 (RHS)
1400
7500
1350
7000 1300
1250
Index
Index
6500
1200
6000 1150
1100
5500
1050
5000 1000
2010 2011 2012
Source: Bloomberg SPX INDEX, DAX INDEX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
15

16. U.S. Q3’12 Economic Overview and Outlook
Banks at Center of the Storm
Rising Stress: Bank 5-Year Credit Default Swaps
800
BBVA
700
BNP Paribas
600 Banco Santander
Credit Agricole
500
Intesa Sanpaolo
Basis Points
400 Soc Gen
UniCredit
300
200
100
0
2010 2011 2012
Source: Bloomberg SOVR INDEX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
16

17. U.S. Q3’12 Economic Overview and Outlook
Image page
U.S. Manufacturing Outlook and Overview
• Manufacturing growth slows.
• Fixed business investment and capital expenditures spending
likely to increase by 5 percent in the third quarter
• Auto production slows, remains solid
• U.S. ISM suffers “Europe Effect” in June.
• Likely rebound in third quarter
• Global production decelerating
• European recession
• Weak U.S. aggregate demand
• China‟s macroeconomic adjustment
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
17

18. U.S. Q3’12 Economic Overview and Outlook
Slower, More Sustainable Manufacturing Growth
Industrial Production and Growth
6.0 10.0
5.0
Y/Y Percentage Change (Quarterly Average)
4.0 5.0
3.0
Y/Y Percentage Change
2.0
0.0
1.0
0.0
-5.0
-1.0
-2.0
-3.0 -10.0
-4.0
GDP CYOY Industrial Production
-5.0 -15.0
1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg
IP YOY, GDP CYOY INDEX<GO> R2=.7
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
18

19. U.S. Q3’12 Economic Overview and Outlook
Slower, More Sustainable Manufacturing Growth
ISM Manufacturing Survey and Growh
65.0 6.0
60.0 4.0
GDP Y/Y Percentage Change
Index (Quarterly Average)
55.0 2.0
50.0 0.0
45.0 -2.0
40.0 -4.0
ISM Manufacturing Survey GDP Y/Y
35.0 -6.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
19

20. U.S. Q3’12 Economic Overview and Outlook
Global Manufacturing Slows
65 60%
60
40%
Y/Y Percentage Change (Index)
55
20%
50
Index
0%
45
-20%
40
-40%
35
MSCI World Index (RHS) US ISM (LHS)
China PMI (LHS) Euro Zone PMI (LHS)
30 -60%
2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg
MXWO, NAPMPMI, CPMINDX, PMITMEZ, JPMIGLOB
INDEX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
20

21. U.S. Q3’12 Economic Overview and Outlook
Financial Conditions Overview
• European sovereign debt crisis is offsetting the mild thaw in
domestic credit conditions.
• The pace of credit creation is on an upswing.
• Both demand and supply of credit is improving.
• This has not resulted in an increase in monetary velocity.
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
21

22. U.S. Q3’12 Economic Overview and Outlook
Bloomberg Financial Conditions Indices
1
0
-1
-2
Index
-3
-4
-5
US Financial Conditions Index EU Financial Conditions Index
-6
2010 2011 2012
Source: Bloomberg BFCIUS, BFCIEU INDEX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
22

23. U.S. Q3’12 Economic Overview and Outlook
Credit Markets Healing
Private Credit Creation & Nominal Growth
20%
Nominal GDP Total Credit Creation Private Financial Instiutions
15%
Year Over Year Percentage Change
10%
5%
0%
-5%
1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Source: Federal Reserve, Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
23

24. U.S. Q3’12 Economic Overview and Outlook
Credit Markets Healing
Commercial and Industrial Loan Demand Rising
50
25
0
-25
-50
-75
Net % of Domestic Respondents Reporting Strong Demand for C&I Loans:
Large/Medium Size Firms
-100
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg FRLSSDLM<GO>, FRLSSDS INDEX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
24

25. U.S. Q3’12 Economic Overview and Outlook
Credit Markets Healing
Credit Standards Easing
100
80
60
40
20
0
-20
-40
Net % Domestic Respondents Reporting Tightening Standards for C&I Loans: Large & Medium Size
Firms
-60
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg FRLSCILM INDEX<GO>, FRLSCIS INDEX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
25

26. U.S. Q3’12 Economic Overview and Outlook
Labor Markets and Consumer Outlook and Overview
• Private payroll growth barely sufficient to stabilize
unemployment rate.
• Pace of firings on the rise.
• Tepid earnings and income indicate weak consumption path
to persist.
• Gasoline prices have stabilized, likely to provide no further
relief to consumer.
• Consumer expectations sour.
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
26

27. U.S. Q3’12 Economic Overview and Outlook
Labor Market
BLS Non-Farm Private Payrolls
300
200
100
0
-100
-200
-300
-400
-500
-600
-700
-800
3-Month Average Change in Private Employment
-900
Jan-07 Jan-09 Jan-11
Source: Bloomberg NFP TCH INDEX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
27

28. U.S. Q3’12 Economic Overview and Outlook
Labor Market Slack
Labor Market Slack
65 3
64 4
5
63
6
62
Percent
Percent
7
61
8
60
9
59 10
Employment to Population Ratio (LHS) Unemployment Rate (RHS)
58 11
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Bloomberg USERTOT , USURTOT INDEX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
28

29. U.S. Q3’12 Economic Overview and Outlook
Unemployment Rate by Occupation
24
Management & Professional
22
Services Occupations
20
Percent (Household Survey, NSA)
Sales & Office
18
Natural Resources, Construction & Maintenance
16
Production and Transportation
14
12
10
8
6
4
2
May-11 May-12 May-11 May-12 May-11 May-12
Total Men Women
Source: Bureau of Labor Statistics
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
29

30. U.S. Q3’12 Economic Overview and Outlook
JOLTS Data Indicates Rising Separations
6.00
5.50
5.00
Millions
4.50
4.00
3.50
Hires Seperations
3.00
2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
30

31. U.S. Q3’12 Economic Overview and Outlook
Jobs, Earnings and Income
7
6
5
4
3
Percentage Change (Y/Y)
2
1
0
-1
-2
-3
-4
-5
-6 Average Hourly Earnings Real Personal Disposable Income
Private Payrolls
-7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg USHEYOY, NFP P, PIDSCWT%T INDEX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
31

32. U.S. Q3’12 Economic Overview and Outlook
Consumer Expectations Deteriorating
10
0
-10
-20
Index(Monthly)
-30
-40
-50
-60
Expectations: Economy Better/Worse Diff
-70
CCI Incomes Over $50K
CCI Incomes $50K To $74.9K
-80
2008 2009 2010 2011 2012
Source: Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
32

33. U.S. Q3’12 Economic Overview and Outlook
Housing Outlook and Overview
• Third quarter housing recovery?
• Recovery in starts driven by demand for multifamily dwellings.
• Prices still falling year-over-year.
• Some metro-areas experiencing price appreciation.
• Overall housing recovery still years away.
• Inventory
• Pricing
• Tight credit
• Attractive rates support sales albeit at historically low levels.
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
33

34. U.S. Q3’12 Economic Overview and Outlook
Housing Outlook
• Shadow inventory rising.
• Banks are likely to increase pace of foreclosures in the third
quarter.
• Housing drag persists.
• 25 percent of homeowners have negative equity.
• 5 percent near-negative equity.
• Falling prices, shadow inventory a drag on household
consumption.
• This drag is blocking the monetary transmission mechanism.
• Likely to need a policy response to target underwater
homeowners and the shadow inventory to move back toward
growth path.
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
34

35. U.S. Q3’12 Economic Overview and Outlook
Housing Starts Stabilize
2.5
Multi-Family Starts Single Family Starts
2
Millions (Annualized Pace)
1.5
1
0.5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg NHSPS1, NHSPS5 INDEX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
35

36. U.S. Q3’12 Economic Overview and Outlook
Shadow Inventory Growing
Shadow Inventory Looms Large
9
Shadow Inventory Existing Inventory
Shadow Inventory= Foreclosures and 90
8 Days Late
7
6
Millions
5
4
3
2
2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
36

37. U.S. Q3’12 Economic Overview and Outlook
Homeowners Submerged
13.7
Negative and Near Negative Equity
13.6
13.5
13.4
Units: Millions
13.3
13.2
13.1
13.0
12.9
12.8
Q4'09 Q1'10 Q2'10 Q3'10 Q410 Q1'11 Q2'11 Q3'11 Q4'11
Source: Core Logic, Bloomberg NEQSNATI + NNEQNATI INDEX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
37

38. U.S. Q3’12 Economic Overview and Outlook
Central Bank Policy Outlook and Overview
• Fed balance sheet remains extremely accommodative.
• Shifting duration of assets out along curve.
• Fed likely to extended pledge to hold rates effectively at zero until 2015.
• Questionable efficacy of further asset purchases.
• September 2012 FOMC meeting likely will see decision made
whether or not to purchase assets this year.
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
38

39. U.S. Q3’12 Economic Overview and Outlook
Monetary Policy at the Zero Bound
FOMC Projections of Year-End Levels of the Fed Funds Rate
(Median Projections as of January and June 2012)
4.5%
4.25%
January Median FOMC Projection June Median FOMC Projection
4.0%
3.5%
3.0%
2.5%
Percent
2.0%
1.5%
1.0%
0.50%
0.5%
0.25% 0.25%
0.0%
2012 2013 2014 Longer Run
Source: Federal Reserve
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
39

40. U.S. Q3’12 Economic Overview and Outlook
Monetary Policy at the Zero Bound
Federal Reserve SOMA Maturity Distribution
$275
9/22/2011 (Wt Avg Years to Maturity 6.09)
$250
06/18/2012 (Wt Avg Years to Maturity 8.79)
$225
$200
$175
Billions
$150
$125
$100
$75
$50
$25
$0
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2036 2038 2040
Source: Bloomberg Debt FED<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
40

41. U.S. Q3’12 Economic Overview and Outlook
Monetary Policy at the Zero Bound
Falling Wealth Effect from Fed Purchases
1450
End of QE1 End of QE2
1400
1350
1300
1250
S&P 500 Gains 80%
1200
1150
1100
Index
1050
1000 S&P 500 Gains 30% S&P 500 Gains 17%
950 During Operation
900 Twist
850
800
750
700 S&P 500
650
2009 2010 2011 2012
Source: Bloomberg SPX<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
41

42. U.S. Q3’12 Economic Overview and Outlook
Monetary Policy at the Zero Bound
Taylor Rule Model Estimates of the Fed Funds Rate
8
Fed Funds Rate Hawks
Baseline Taylor Rule Estimate Doves
June Median FOMC Projection Baseline
6
Rudebusch Model
4
Percent
2
0
-2
-4
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Source: Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
42

43. U.S. Q3’12 Economic Overview and Outlook
Fiscal Drag
• Medium-term policy shift.
• Discretionary spending declining.
• Potential fiscal shock in first quarter of 2013.
• Expiration of Bush tax cuts, Obama Tax holiday, tax
increases to support Affordable Healthcare Act, and fiscal
sequestration begins. Equivalent to 4% of GDP.
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
43

44. U.S. Q3’12 Economic Overview and Outlook
Fiscal Policy and Financial Conditions Mix
Financial
Conditions
Easy Financial Tight Financial
Conditions Conditions
Expansionary
Fiscal Policy 2009-2010
Fiscal
Policy
Restrictive
Fiscal Policy
2011-2014
Source: Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
44

45. U.S. Q3’12 Economic Overview and Outlook
Fiscal Drag
Federal Government Spending
12.0
Actual Projected
11.0
10.0
9.0
Percentage of GDP
8.0
7.0
6.0
5.0
4.0
3.0
Defense Nondefense Total
2.0
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022
Source: Congressional Budget Office
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
45

46. U.S. Q3’12 Economic Overview and Outlook
Fiscal Cliff Impact
Estimated Impact
Tax Changes Spending Changes
Bush Tax Cuts -221 Automatic Sequestration -65
2% Cut in Payroll Tax -95 Expiration of Emergency Unemployment -26
Benefits
Partial Expensing of Investment -65 Scheduled Reduction in Medicare Payment -11
Rates
Tax Provisions: Affordable Health Care Act -18 Other Revenue Increases/Spending -105
Reductions
Impact of Tax Changes -400 Impact of Spending Changes -207
Gross Impact on Spending Changes -607
Less Secondary Effects on Economy 47
Net Impact on Fiscal Deficit -560
Potential Hit on GDP 4%
Source: CBO, Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
46

47. U.S. Q3’12 Economic Overview and Outlook
Government Transfers
Austerity Bites
25%
Government Transfers as Percentage of Total
24%
Income
23%
22%
21%
20%
Percentage
19%
18%
17%
16%
15%
14%
13%
12%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
47

48. U.S. Q3’12 Economic Overview and Outlook
Commodities Outlook and Overview
• Commodity prices reverse slide.
• Middle East tensions.
• Speculation on further central bank easing.
• Domestic gasoline prices hold, albeit at elevated levels.
• Wholesale futures point to stabilization.
• Likely no further relief to U.S. consumer.
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
48

49. U.S. Q3’12 Economic Overview and Outlook
Middle East Tensions, Speculation Driving Rally in Commodities
130
West Texas Intermediate (LHS)
Brent (LHS) 560
Jefferies Commodity Index (RHS)
120
540
110
Price Per Barrel ($)
520
Index
100
500
90
80 480
70 460
Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12
Source: Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
49

50. U.S. Q3’12 Economic Overview and Outlook
Gasoline Prices Stable For Now
$3.75 $4.20
Wholesale Gasoline Futures (LHS)
$3.50 $4.00
$3.25 $3.80
Price Per Gallon ($)
Price Per Gallon ($)
$3.00 $3.60
$2.75 $3.40
$2.50 $3.20
$2.25 $3.00
Jul-11 Jan-12 Jul-12
Source: Bloomberg
3AGSREG INDEX<GO> XB1 Commodity<GO>, CL1 Commodity<GO>
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
50

51. U.S. Q3’12 Economic Overview and Outlook
Alternative Economic Outlook: The Long Malaise
• Housing remains deadweight on consumer and economy.
• Monetary policy fails to deliver as fiscal gridlock prevails.
• Long-term adjustment in consumption continues parallel with
household deleveraging.
• Public sector still leveraging up, creating asymmetrical risks to
growth once deleveraging starts.
• Elevated risk of policy error due to premature fiscal or monetary
policy tightening.
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
51

52. U.S. Q3’12 Economic Overview and Outlook
The Long Malaise: Housing as Ground Zero
US-Japan Housing Price Comparison
80
Tokyo: Residential (LHS, %)
70
Osaka: Residential (LHS,%)
60 Case Schiller 20 City (RHS,%)
50
Percentage Change
40
30
20
10
0
-10
-20
-30
T-6 T-5 T-4 T-3 T-2 T-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Years Priort to and Following Housing Bubbles
Source: Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
52

53. U.S. Q3’12 Economic Overview and Outlook
The Long Malaise: Rate Comparison
Direction of Long Term Yields
4.5 9
US 10- Year Yield (LHS) Japan 10-Year Yield (RHS)
4 8
3.5 7
3 6
2.5 5
Yield (%)
Yield (%)
2 4
1.5 3
1 2
0.5 1
0 0
1 24 47 70 93 116 139 162 185 208 231 254
Months After Onset of Recession
Source: Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
53

54. U.S. Q3’12 Economic Overview and Outlook
Long Malaise: Longer-Term Consumer Adjustment
Real Spending Four Year Rolling Average
5.0
Inflation Adjusted Spending
4.5
4.0
Percentage Change (Y/Y)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
54

55. Bloomberg
Joseph Brusuelas,
Senior Economist
Bloomberg, LP
jbrusuelas3@bloomberg.net
Joseph Brusuelas is an analyst who writes for the Bloomberg Economic Brief. The observations he makes
are his own. Bloomberg is a leading source of data, news, and analytics for financial and legal
professionals, corporations, media organizations and private individuals around the globe. The
BLOOMBERG PROFESSIONAL® service and Bloomberg’s media services provide real-time and historical
pricing, indicative data, reporting, research, estimates, analytics, portfolio management tools, electronic
trading and order management systems, multimedia events and electronic communications to Bloomberg
clients in more than 150 countries, 24 hours a day.
bloomberg.com
Frankfurt London San Francisco Singapore Tokyo
+49 69 9204 1210 +44 20 7330 7500 +1 415 912 2960 +65 6212 1000 +81 3 3201 8900
Hong Kong New York São Paulo Sydney
+852 2977 6000 +1 212 318 2000 +55 11 3048 4500 +61 2 9777 8600
The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and BLOOMBERG Order Management Systems (the "Services") are owned and distributed locally by Bloomberg Finance L.P. ("BFLP") and its
subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly-owned subsidiary of Bloomberg L.P. ("BLP"). BLP provides BFLP with all
global marketing and operational support and service for the Services and distributes the Services either directly or through a non-BFLP subsidiary in the BLP Countries. The Services include electronic trading
and order-routing services, which are available only to sophisticated institutional investors and only where the necessary legal clearances have been obtained. BFLP, BLP and their affiliates do not provide
investment advice or guarantee the accuracy of prices or information in the Services. Nothing on the Services shall constitute an offering of financial instruments by BFLP, BLP or their affiliates.
BLOOMBERG, BLOOMBERG PROFESSIONAL, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG ANYWHERE, BLOOMBERG TRADEBOOK, BLOOMBERG BONDTRADER, BLOOMBERG
TELEVISION, BLOOMBERG RADIO, BLOOMBERG PRESS and BLOOMBERG.COM are trademarks and service marks of BFLP, a Delaware limited partnership, or its subsidiaries.

56. U.S. Q3’12 Economic Overview and Outlook
Image page Summary
Executive
• Rates: US 10-year yields likely to trade in range between 1.5%
and 1.75% percent. External shocks posing downside risk of
below 1.5% rate
• US Dollar: Downside risk on consensus forecast of $1.24 against
euro at end of Q3‟12. Given external risks a move to long term
purchasing power parity of EUR/USD of $1.18 cannot be
discounted.
Subscribe @ Brief <GO> 56

57. U.S. Q3’12 Economic Overview and Outlook
The U.S. Q3’12 Economic Overview & Outlook is an exclusive publication from
Bloomberg Brief Economics.
Bloomberg BRIEF Economics is a new, groundbreaking publication written by leading economists in US, Europe and
Asia, published by Bloomberg, the premier source of data and analytics in the financial world.
Bloomberg BRIEF Economics is already read by thousands every morning and you’ll soon see why – the Economics
Brief provides a clear, concise snapshot every morning of all the key information you need to know:
• Valuable insight and independent analysis from our renowned economists who've spent decades on Wall Street including
Joseph Brusuelas Michael McDonough, Tamara Henderson, Richard Yamarone, David Powell and Niraj Shah.
• Proprietary data and commentary that gets beneath the numbers with eye catching charts.
• Guest columnists from top-tier firms.
• Exclusive publications such as the Orange Book, Quarterly Economic Overview, Daily Economic Outlook Videos and much
more!
Your time is valuable. Maximize it by switching to Bloomberg BRIEF Economics today.
Take a free 30 day trial today!
Or visit www.bloombergbriefs.com for more information.
Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664
57