NABE OUTLOOK 2004Q1 SURVEY

Presented to Silicon Valley Round Table

MARCH 9, 2004

Duncan H. Meldrum

NABE President &

Chief Economist, Air Products

OUTLOOK SUMMARY• 2004: Strongest Real GDP growth since 1984

– 2005: Growth recedes to trend

• Investment accelerates• Employment recovers, but slowly

– Held back by productivity gains & high benefit costs– Unemployment rate falls to 5.6%

• No inflation threat– No rise in short rates until 2004Q3– Long rates rise with recovery

• Profits continue to recover– Demand expansion raises top line growth– Strong productivity gains and moderate wage gains lead to lower

unit labor costs in 2004

REAL GDP GROWTHFEB ‘04 FORECAST: STRONGER 2004

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2003 2004 2005

Per

cen

t C

han

ge

SeptemberNovemberFebruary '04

MAIN SOURCES OF GDP STRENGTH

LESS RELIANCE ON POLICY IN 2004

2003 2004

Residential Investment Business Fixed Investment

Government Spending Personal Consumption

Personal Consumption Inventory Investment

REAL GDP GROWTH RATES

2003 2004 2005

REAL GDP 3.1 4.6 3.8

Consumption 3.1 3.8 3.5

Business Fixed Invest. 2.8 9.8 9.0

Residential Investment 7.6 3.5 -2.3

Inventory Change (B00$) -$1.5 $41.5 $48.9

Government 3.4 2.6 1.8

Exports 1.9 10.0 9.9

Imports 3.7 7.3 5.4

2004 OUTLOOK FEB ’04 VS PREVIOUS FORECASTS

-2

0

2

4

6

8

10

12

Perc

en

t C

han

ge

SEPT

NOV

FEB '04

2005 OUTLOOK FEB ’04 FORECAST

0

2

4

6

8

10

12

Perc

en

t C

han

ge FEB '04

INVENTORY INVESTMENTLARGE SWING FROM 2003 TO 2004

-10

0

10

20

30

40

50

60

2003 2004 2005

BN

00$

Sept

Nov

Feb '04

0604020098969492

20

15

10

5

0

-5

-10

20

15

10

5

0

-5

-10

ACTUAL TO 2003Q4

INV

ES

TM

EN

T %

CH

VS

YR

AG

O (4

QM

A) IN

VE

ST

ME

NT

%C

H V

S Y

R A

GO

(4QM

A)

U.S. REAL BUSINESS FIXED INVESTMENTEXPECTED CAP SPEND NRI (DOTTED) SUPPORTS NABE OUTLOOK

0604020098969492

20

15

10

5

0

-5

-10

40

30

20

10

0

-10

-20

ACTUAL TO 2003Q4

INV

ES

TM

EN

T %

CH

VS

YR

AG

O (4

QM

A)

CA

P S

PE

ND

NR

I (4QM

A)

U.S. REAL BUSINESS FIXED INVESTMENTEXPECTED CAP SPEND NRI (DOTTED) SUPPORTS NABE OUTLOOK

0604020098969492

20

15

10

5

0

-5

-10

40

30

20

10

0

-10

-20

ACTUAL TO 2003Q4

INV

ES

TM

EN

T %

CH

VS

YR

AG

O (4

QM

A)

CA

P S

PE

ND

NR

I (4QM

A)

U.S. REAL BUSINESS FIXED INVESTMENTEXPECTED CAP SPEND NRI (DOTTED) SUPPORTS NABE OUTLOOK

0604020098969492

20

15

10

5

0

-5

-10

40

30

20

10

0

-10

-20

ACTUAL TO 2003Q4

INV

ES

TM

EN

T %

CH

VS

YR

AG

O (4

QM

A)

CA

P S

PE

ND

NR

I (4QM

A)

U.S. REAL BUSINESS FIXED INVESTMENTEXPECTED CAP SPEND NRI (DOTTED) SUPPORTS NABE OUTLOOK

04020098969492

20

15

10

5

0

-5

-10

60

45

30

15

0

-15

-30

ACTUAL TO 2003Q4

INV

ES

TM

EN

T %

CH

VS

YR

AG

OC

AP

SP

EN

D N

ET

RIS

ING

IND

EX

EQUIPMENT & SOFTWARE INVESTMENTIndustry Survey's New Expected Tech Spending NRI Anticipated Upturn

Equipt & Software Investment ($)Expected Tech Spending in Next 12 Months

JANUARY 2004 (03Q4) NET RISING INDEXES

Total Goods TUC Service Finance

CAPITAL SPENDING 29 16 8 36 41

Expected 45 53 42 47 58

Tech Expected 41 45 42 55 68

INDUSTRY SURVEY SUPPORTSCAPITAL SPENDING OUTLOOK

11 9 7 5 3 111 9 7 5 3 111 9 7 5 3 111 9 7 5 3 111 9 7 5 3 120042003200220012000

550

500

450

400

350

300

250

200

CALENDAR MONTH

WE

EK

LY

CL

AIM

S (

000)

EMPLOYMENT WEAKNESS ENDING ?

Data Through2/28/04

Weekly Initial Unemployment Claims4-Week Moving Average

040200989694929088868482

40

20

0

-20

-40

40

20

0

-20

-40

PE

RC

EN

T N

ET

RIS

ING

PE

RC

EN

T N

ET

RIS

ING

EMPLOYMENT NRI VS TOTAL EMPLOYMENT

JANUARY 2004 (03Q4) NET RISING INDEXES Total Goods TUC Services FinanceEMPLOYMENT 1 (10) (17) 3 19 Hiring Plans 4 (5) 0 17 39

NABE NRI - EMPLOYMENT

040200989694929088868482

40

20

0

-20

-40

5

3

2

0

-2

-3

-5

PE

RC

EN

T N

ET

RIS

ING

%C

H V

S Y

R A

GO

EMPLOYMENT NRI VS TOTAL EMPLOYMENT

JANUARY 2004 (03Q4) NET RISING INDEXES Total Goods TUC Services FinanceEMPLOYMENT 1 (10) (17) 3 19 Hiring Plans 4 (5) 0 17 39

EMPLOYEES - ALL ESTABLISHMENTSNABE NRI - EMPLOYMENT

EMPLOYMENT FORECASTSlow Improvement

-0.5

0.0

0.5

1.0

1.5

2.0

2003Q3

Q4 2004Q1

Q2 Q3 Q4 2005Q1

Q2 Q3 Q4

Per

cen

t C

han

ge

An

nu

al R

ate

060504030201009998979695949392919089

4

3

2

1

0

-1

-2

ACTUAL THROUGH FEBRUARY 2004

%C

H v

s YR

AG

O -

12

MM

A

EMPLOYMENT GROWS 1.1% IN 2004 AFTER 2003 DECLINELowers Unemployment Rate from 6.0% in 2003 to 5.6% in 2004

Shaded Areas Indicate U.S. Recessions

SIGNIFICANT FACTORS HOLDING BACK PAYROLL HIRING (RANKED)

1 2 3 4 5

Productivity Gains

Health & Benefit Costs

Payroll Data Shortfall

Inadequate Final Demand

Jobs Lost Overseas

Mean Rank

MOST IMPORTANT FACTOR DRIVING PRODUCTIVITY IN U. S.

0

10

20

30

40

StaffReductions

Require MoreFrom

Survivors

NetworkManagement

Improvements

New CapitalEquipment

Other Outsourcingto OffshoreProviders

Per

cen

t o

f P

anel

PRODUCTIVITY GROWTH SLOWSBut Outlook Stronger in 2004 Than in November

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2003 2004 2005

Per

cen

t C

han

ge

Sept

Nov

Feb '04

COMPENSATION PER HOURMore Modest Gain Now Expected In 2004, Stronger Gain in 2005

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2003 2004 2005

Per

cen

t C

han

ge

Sept

Nov

Feb '04

Unit Labor CostsLarger Decline Now Expected in 2004

-2.0

-1.0

0.0

1.0

2003 2004 2005

% C

HA

NG

E

Sep

Nov

Feb '04

AFTER TAX CORPORATE PROFITSFaster Growth Than Previous Forecasts

02468

101214161820

2003 2004 2005

Per

cen

t C

han

ge

Sept

Nov

Feb '04

040200989694929088868482

40

20

0

-20

-40

40

20

0

-20

-40

PE

RC

EN

T N

ET

RIS

ING

PE

RC

EN

T NE

T RIS

ING

INDUSTRY SURVEY TOTAL MARGIN NET RISING INDEXSTRONG PROFIT OUTLOOK: JAN '04 BEST READING SINCE 1987

JANUARY 2004 (03Q4) NET RISING INDEXES Total Goods TUC Services FinanceMARGINS 20 44 15 7 20

TOTAL MARGIN NRI

INFLATION IS NOT AN ISSUE

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2000 2001 2002 2003 2004 2005

INF

LA

TIO

N R

AT

E (

%) CPI

GDP PRICE INDEX

INTEREST RATE OUTLOOKFirst Short Term Increase In 2004Q3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Q12004

Q2 Q3 Q4 Q12005

Q2 Q3 Q4

Per

cen

t

3 Mo Tbill

10 Yr Tbond

Federal Deficit ForecastA Little Deeper in FY2004

(With Some Recovery In FY2005)

-600

-500

-400

-300

-200

-100

0

FY 2003 FY 2004 FY2005

Sept

Nov

Feb '04

04020098969492908886848280

4

2

0

-2

-4

-6

-8

% O

F G

DP

FEDERAL DEFICIT AS % GDPDeep, But Not As Deep As After Previous Recessions

BLUE BARSFEB '04 NABEFORECAST

History

REAL NET EXPORTS Better Performance Expected

Net Exports of Goods & Services, NIA Basis

-600

-550

-500

-450

-400

-350

-300

-250

-200

2003 2004 2005

BN

00$

Sept

Nov

Feb '04

FACTORS BEHIND DOLLAR’S DECLINE VS EURO (&, TO LESSER EXTENT, OTHER CURRENCIES)

1 2 3 4 5

Foreign Investor Views Of $ Assets

Interest Rate Differentials

Unstated "Weak $ Policy"

Stronger Growth Expected Outside US

Friction Between US & Trading Partners

Mean Rank

040200989694929088868482

100

75

50

25

0

-25

-50

100

75

50

25

0

-25

-50

PE

RC

EN

T N

ET

RIS

ING

PE

RC

EN

T N

ET

RIS

ING

GOODS-PRODUCERS DEMAND NRI VS FRB INDUSTRIAL PRODUCTION INDEX

NABE NRI - GOODS DEMAND

040200989694929088868482

100

75

50

25

0

-25

-50

16

12

8

4

0

-4

-8

PE

RC

EN

T N

ET

RIS

ING

CA

GR

GOODS-PRODUCERS DEMAND NRI VS FRB INDUSTRIAL PRODUCTION INDEX

FRB INDUSTRIAL PRODUCTION (RT SCALE)NABE NRI - GOODS DEMAND

0504030201009998979695949392919089

10

8

6

4

2

0

-2

-4

-6

ACTUAL THROUGH DECEMBER 2003

%C

H v

s YR

AG

O -

12M

MA

INDUSTRIAL PRODUCTIONSOLID GROWTH ABOVE 5% IN 2004 AND 2005

0402009896949290888684828078767472

90

85

80

75

70

65

ACTUAL THROUGH DECEMBER 2003

PE

RC

EN

TU.S. MANUFACTURING CAPACITY UTILIZATION

RECOVERS TO LEVELS EQUIVALENT TO 91 RECESSION IN 04

FEB 2004NABE OUTLOOK

BLUE BARS

OUTLOOK SUMMARY• 2004: Strongest Real GDP growth since 1984

– 2005: Growth recedes to trend

• Investment accelerates• Employment recovers, but slowly

– Held back by productivity gains & high benefit costs– Unemployment rate falls to 5.6%

• No inflation threat– No rise in short rates until 2004Q3– Long rates rise with recovery

• Profits continue to recover– Demand expansion raises top line growth– Strong productivity gains and moderate wage gains lead to lower

unit labor costs in 2004

JANUARY ’04 INDUSTRY SURVEYJANUARY 2004 (03Q4) NET RISING INDEXES

Total Goods TUC Service FinanceDEMAND 49 81 31 27 56 Exports 52 60 0 38 100INVENTORY (7) (11) 33 (33) 0 Net Too High 0 (11) 33 25 NPRICES 17 14 15 13 20 Expected 30 20 8 40 35 Success Raising 32 38 23 32 33COST MATERIALS 26 22 83 6 44 Expected 34 35 46 31 27Wages 14 10 0 10 32Benefits 11 10 (8) 23 19MARGINS 20 44 15 7 20EMPLOYMENT 1 (10) (17) 3 19 Hiring Plans 14 (5) 0 17 39CAPITAL SPENDING 29 16 8 36 41 Expected 45 53 42 47 58 Tech Expected 41 45 42 55 68No Shortages 81 94 89 77 83

JULY ‘03 INDUSTRY SURVEYJULY 2003 NET RISING INDEXES

Total Goods TUC Service FinanceDEMAND 27 (5) (6) 31 65 Exports 27 13 D 8 DINVENTORY 8 (25) 25 18 25 Net Too High 13 13 25 8 0PRICES 3 (25) 17 11 0 Expected 6 (20) 12 7 14 Success Raising 19 5 28 24 19COSTS 13 11 29 11 (18) Expected 9 (5) 12 5 4Wages 3 (5) 6 0 33Benefits 8 5 0 17 27MARGINS (3) (11) 0 (2) 9EMPLOYMENT (13) (40) (39) (7) 16 Hiring Plans (3) (35) (18) (7) 36CAPITAL SPENDING 3 (5) (6) (2) 29 Expected 27 15 (7) 40 61 Tech Expected 50 50 20 53 78

No Shortages 82 84 85 83 78