Purpose. Passion. Performance. Trusco Capital Management, Inc

Purpose. Passion. Performance.Purpose. Passion. Performance.Purpose. Passion. Performance.Purpose. Passion. Performance.

Trusco Capital Management, Inc.

Economic Update and OutlookMay 23, 2007

Alan M. GayleSenior Investment StrategistDirector of Asset [email protected]

This perspective was prepared for clients and prospective clients of Trusco Capital Management, Inc. Neither Trusco Capital or any affiliates make any representation or warranties as to the accuracy or merit of this analysis for individual use. Past returns are not indicative of future results. Comments and general market related projections were based on information available at the time of writing, are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for future investing. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions.

FGFOA May 23, 2007FGFOA May 23, 2007FGFOA May 23, 2007FGFOA May 23, 200722 | | Trusco Capital Management, Inc.Trusco Capital Management, Inc.22 | | Trusco Capital Management, Inc.Trusco Capital Management, Inc.

Outline

Economy losing momentum.

How fast can the consumer grow?

Housing market blues.

Businesses are profitable but slowing as well.

The importance of trade.

Federal deficit.

What’s up / down with inflation?

Fed policy perspectives.

Comments on the Florida economy.

The outlook.


Composite Index of 10 Leading Indicators % Change - Year to Year 1996=100

Composite Index of 10 Leading Indicators1996=100

0706050403020100Source: The Conference Board /Haver Analytics

10.0

7.5

5.0

2.5

0.0

-2.5

-5.0

140

135

130

125

120

115

110

Economy losing momentum

Leading Indicators Index

Leading Indicators (YOY%)


Real GDP - 3.4% Trend Since 1961

Real Gross Domestic Product % Change - Year to Year SAAR, Bil.Chn.2000$

Real GDP - 3. 4% Trend Since 1961YOY% Change

05009590858075

Source: Bureau of Economic Analysis /Haver Analytics

10.0

7.5

5.0

2.5

0.0

-2.5

-5.0

10.0

7.5

5.0

2.5

0.0

-2.5

-5.0

Real GDP (YOY%)


Real Personal Consumption Expenditures % Change - Year to Year SAAR, Bil.Chn.2000$

Real PCE - 3. 6% Trend Since 1961Proportion of Real GDP (Line) & YOY% Rel. to 61-05 Trend (Bar)

05009590858075

8

6

4

2

0

-2

0.72

0.70

0.68

0.66

0.64

Real PCE - 3.6% Trend Since 1961

Real Personal Consumption

Expenditures as Proportion of GDP

Real Personal Consumption

Expenditures (YOY%)

Sources: BEA, Trusco Capital


All Employees: Total Nonfarm Difference - Period to Period SA, Thous

Average Hourly Earnings: Total Private Industries % Change - Year to Year SA, $/Hour

0706050403020100Source: Bureau of Labor Statistics /Haver Analytics

600

400

200

0

-200

-400

4.5

4.0

3.5

3.0

2.5

2.0

1.5

Job Creation Positive but Weaker

Average Hourly Earnings (YOY%)

All Employees: Total Nonfarm (Monthly Change

000s)


Retail Sales & Food Services % Change - Year to Year SA, Mil.$

University of Michigan: Consumer SentimentNSA, Q1-66=100

0706050403020100Sources: Census Bureau/Haver Analytics, University of Michigan

10

8

6

4

2

0

-2

112.5

105.0

97.5

90.0

82.5

75.0

67.5

Post-Easter Sales & Sentiment Weaker

Retail Sales & Food Services (YOY%)

University of Michigan: Consumer Sentiment


Domestic Light Vehicle Sales 12-month MovingAverage SAAR, Mil.Units

Light Weight Vehicle Sales {Autos+Light Trucks} 12-month MovingAverage SAAR, Mil.Units

0500959085807570Source: Bureau of Economic Analysis/Haver Analytics

18

16

14

12

10

8

6

18

16

14

12

10

8

6

Auto Sales Softening

Domestic Light Vehicle Sales (SAAR, Mil.)

Domestic Light Vehicle Sales (SAAR, Mil.)


Real Private Nonresidential Investment: Structures % Change - Year to Year SAAR, Bil.Chn.2000$

Structures: 1. 6% Trend Since 1961Proportion of GPDI (Line) & YOY% Rel. to 61-05 Trend (Bar)

05009590858075

22.5

15.0

7.5

0.0

-7.5

-15.0

-22.5

0.5

0.4

0.3

0.2

0.1

Real Structures Investment – 1.6% Trend Since 1961

Real Structures Investment as a

Proportion of GDP

Real Structures Investment (YOY%)



Real Private Residential Investment % Change - Year to Year SAAR, Bil.Chn.2000$

Residential - 3. 0% Trend Since 1961Proportion of GPDI (Line) & YOY% Rel. to 61-05 Trend (Bar)

05009590858075

60

40

20

0

-20

-40

0.50

0.45

0.40

0.35

0.30

0.25

Real Residential – 3.0% Trend Since 1961

Real Residential Investment as a

Proportion of GDP

Real Residential Investment (YOY%)



Housing Starts: 1 UnitSAAR, Thous.Units

HX1US + HN1USthous

0706050403020100999897

2000

1800

1600

1400

1200

1000

8250

7500

6750

6000

5250

4500

Housing Market Soft

New + Existing Home Sales (000s)

Housing Starts (000s)

Sources: NAR, Census


NAR Median Sales Price: Existing 1-Family Homes, United States % Change - Year to Year $

New 1-Family Houses For Sale: Months SupplySA, Ratio

05009590858075Sources: National Association of Realtors, Census Bureau /Haver Analytics

20

15

10

5

0

-5

12

10

8

6

4

2

Excess Supply Caused Weak Pricing

New 1-Family Houses For Sale: Months Supply

Existing 1-Family Home Median Sales Price (YOY

%)


New 1-Family Houses For Sale: Months SupplySA, Ratio

Composite Housing Affordability IndexMedian Inc=Qualifying Inc=100

0706050403020100999897Sources: Census Bureau, National Association of Realtors /Haver Analytics

9

8

7

6

5

4

3

142.5

135.0

127.5

120.0

112.5

105.0

97.5

Excess Supply / Softer Prices / Greater Affordability

Housing Affordability Index

New 1-Family Houses for Sale (Months Supply)


Real Gross Private Domestic Investment % Change - Year to Year SAAR, Bil.Chn.2000$

Real GPDI - 4. 8% Trend Since 1961Proportion of Real GDP (Line) & YOY% Rel. to 61-05 Trend (Bar)

05009590858075

60

40

20

0

-20

-40

0.20

0.18

0.16

0.14

0.12

0.10

Real GPDI - 4.8% Trend Since 1961

Real Gross Private Domestic Investment as

a Proportion of GDP

Real Gross Private Domestic Investment

(YOY%)



Corporate Profits with IVA and CCAdj % Change - Year to Year SAAR, Bil.$

Corporate Profits Growth and Willingness to HireISM Employ. Index (Line) & Corp. Profits w/ IVA & CCA (YOY%-Bar)

0500959085

Sources: BEA, ISM /Haver

40

30

20

10

0

-10

-20

67.5

60.0

52.5

45.0

37.5

30.0

22.5

Company Profits Growth Suggests Strength

ISM Employ. Index

Corporate Profits with IVA and CCAdj (YOY%)


ISM Mfg: Production IndexSA, 50+ = Econ Expand

Production Firmed Post-Hurricanes but Off HighsInd. Prod. (YOY%-Line) ISM Production (Bar)

0500959085Sources: ISM, FRB /Haver

90

80

70

60

50

40

30

16

12

8

4

0

-4

-8

Production Growing More Slowly

Industrial Production (YOY%)

ISM Mfg: Production Index


ISM Mfg: New Orders IndexSA, 50+ = Econ Expand

Orders Firm but Off HighsN-D Capital Gds X-Aircraft (YOY%-Line) ISM Orders Survey (Bar)

0706050403020100999897969594Sources: Institute for Supply Management, Census Bureau /Haver Analytics

75.0

67.5

60.0

52.5

45.0

37.5

30

20

10

0

-10

-20

-30

New Orders Picking Up Slightly

N-D Capital Gds X-Aircraft (YOY%-Line)

ISM Mfg: New Orders Index


Inventories: Total Business % Change - Year to Year EOP, SA, Mil.$

Inventory Growth Off Highs and I/S Ratio at LowsInventories (YOY%-Light) & Inventory/Sales Ratio (Dark)

0500959085Source: Census Bureau/Haver Analytics

16

12

8

4

0

-4

-8

1.8

1.7

1.6

1.5

1.4

1.3

1.2

Inventories Low, but Additional Trimming Likely

Inventory/Sales Ratio

Inventories: Total Business (YOY%)


Mfrs' New Orders: Nondefense Capital Goods ex Aircraft % Change - Year to Year SA, Mil.$

Mfrs' Inventory/Sales Ratio: All Manufacturing IndustriesSA

0706050403020100999897Sources: Census Bureau, Census Bureau/Haver Analytics

30

20

10

0

-10

-20

-30

1.45

1.40

1.35

1.30

1.25

1.20

1.15

New Orders Slowing / Inventories Higher

Inventory / Sales Ratio

Orders for Nondefense Capital Goods ex Aircraft

(YOY%)


MH + XH1970=100

Real Gross Domestic Product1970=100

0500959085807570

1000

800

600

400

200

0

1000

800

600

400

200

0

Trade Expanded from 10% to 30% of GDP!

Real GDP (1970=100)

Real Imports + Real Exports (1970=100)

Source: BEA


Exports: Goods and Services, BOP Basis % Change - Year to Year SA, Mil.$

Trade Deficit Wider but Export Growth HealthyDeficit (Mo. $Bil. -Dark) and Export Growth (YOY%-Light)

070605040302010099989796Source: Census Bureau /Haver Analytics

20

10

0

-10

-20

0

-20000

-40000

-60000

-80000

Trade Deficit Wider but Export Growth Healthy

Deficit (Mo. $Bil.)

Exports: Goods and Services, BOP Basis

(YOY%)


Imports: Goods and Services, BOP Basis % Change - Year to Year SA, Mil.$

Exports Growing Faster in Percentage TermsYOY%: Exports (Dark) Imports (Light)

070605040302010099989796Source: Census Bureau /Haver Analytics

30

20

10

0

-10

-20

30

20

10

0

-10

-20

Exports Growing Faster in Percentage Terms

Exports (YOY%)

Imports (YOY%)


Foreign Exchange Rate: People's Republic of ChinaEOP, Yuan/US$

Nominal Trade-Weighted Exch Value of US$ vs Major CurrenciesMar-73=100

05009590858075Source: Federal Reserve Board /Haver Analytics

10

8

6

4

2

0

160

140

120

100

80

60

Dollar Weaker but Not Against Yuan

Nominal Trade-Weighted Exchange Value of US$

vs. Major Currencies

People's Republic of China Yuan/US$


TMMCCMA / TMMCN 12-month MovingAverage

China Imports Now Nearly 15% of TotalChina Imports % Total Imports (12-month Moving Avg. )

0500959085

0.20

0.16

0.12

0.08

0.04

0.00

0.20

0.16

0.12

0.08

0.04

0.00

China Imports Now 16% of Total

China Imports / Total Imports (12-month

Moving Avg.)

Source: BEA


Real Government Consumption Expenditures & Gross Investment % Change - Year to Year SAAR, Bil.Chn.2000$

Real Gov't. Spending - 2. 3% Trend Since 1961Proportion of Real GDP (Line) & YOY% Rel. to 61-05 Trend (Bar)

05009590858075

10

8

6

4

2

0

-2

0.250

0.225

0.200

0.175

0.150

Real Gov't. Spending - 2.3% Trend Since 1961

Real Government Consumption

Expenditures & Gross Investment as Proportion

of GDP

Real Government Consumption

Expenditures & Gross Investment (YOY%)



Federal Surplus {+} or Deficit {-} 12-month MovingTotal-ann Mil.$

Increased Reciepts Helping to Trim a Large Federal Deficit12-mo. Mov. Total: Receipts (Line) and Deficit (Bar)

070605040302010099989796959493Source: U.S. Treasury /Haver Analytics

400000

200000

0

-200000

-400000

-600000

2800000

2400000

2000000

1600000

1200000

800000

Increased Receipts Trimming a Large Federal Deficit

Receipts: 12-mo. Mov. Total

Federal Surplus {+} or Deficit {-}

(12-month Moving Total Mil.$)


PCE less Food & Energy: Chain Price Index % Change - Year to Year SA, 2000=100

CPI-U: All Items % Change - Year to Year NSA, 1982-84=100

0706050403020100999897Sources: BEA, BLS /Haver

5.25

4.50

3.75

3.00

2.25

1.50

0.75

5.25

4.50

3.75

3.00

2.25

1.50

0.75

Inflation Too High but Moderating

CPI (YOY%)

Core PCE (YOY%)


U. S. Retail Gasoline Price: All FormulationsEOP, Cents/Gallon

Spot Oil Price: West Texas Intermediate [Prior'82=Posted Price]$/Barrel

0706050403020100999897Sources: Department of Energy, Wall Street Journal /Haver Analytics

320

280

240

200

160

120

80

80

60

40

20

0

Energy Prices: Inflationary or Restraining Force?

WTI Oil ($/Barrel)

Retail Gasoline Price (Cents/Gallon)


Composite Index of 4 Coincident Indicators % Change - Year to Year 1996=100

FCM10 - FFED

05009590858075

7.5

5.0

2.5

0.0

-2.5

-5.0

-7.5

7.5

5.0

2.5

0.0

-2.5

-5.0

-7.5

Behind the Math: A Closer Look at the Yield Curve

10-Yr. Treasury Yield – Federal Funds Rate (%)

Composite Index of 4 Coincident Indicators

(YOY%)

Sources: Conference Board, FRB


Composite Index of 4 Coincident Indicators % Change - Year to Year 1996=100

FBAA - FAAA

05009590858075

7.5

5.0

2.5

0.0

-2.5

-5.0 2.8

2.4

2.0

1.6

1.2

0.8

0.4

Credit Still Ample: Private Equity “Put”

Corporate BAA Yield – Corporate AAA Yield

(Inverted Scale)

Composite Index of 4 Coincident Indicators

(YOY%)

Sources: Conference Board, FRB


Federal Funds [effective] Rate

% p.a.

05009590858075Source: Federal Reserve Board /Haver Analytics

20

16

12

8

4

0

20

16

12

8

4

0

Absolute Rate Levels Remain Historically Low

Federal Fund Rate (%)


Total Employment Growth

-0.50.00.51.01.52.02.53.03.54.0

National Average1.4


Total Unemployment Rate

0

1

2

3

4

5

US

Flor

ida

Seb

astia

nP

ort S

t. Lu

cie

Pun

ta G

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Lake

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Oca

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Bay

Wes

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Pan

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City

Cap

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Tam

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Sar

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Talla

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National Average4.4


Total Building Permits

-100

-80

-60

-40

-20

0

US

Florida

Wes

t Palm

Bea

ch

Lake

land

Saras

ota

Punta

Gor

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Cape

Coral

Port S

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Palm B

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Sebas

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Naple

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Mia

mi

Tampa

Panam

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Ocala

Jack

sonv

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Orland

o

Gaine

sville

Tallah

asse

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Pensa

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Ft. W

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n

Ft. La

uder

dale

National Average-25.2


Florida Economic Update - 1

U. S. Florida Cape Coral Ft. Lauderdale Ft. Walton Gainesville

Establishment Employment (Ths, SA)Total Employment 1.4 1.7 3.4 2.2 2.7 1.8Natural Resources & Mining 6.9 -1.5 na 2.2 -4.5 naConstruction 0.0 0.5 na -0.1 na naManufacturing -0.8 -1.6 -3.1 2.2 na 4.7Trade, Transportation, & Utilities 0.8 1.0 3.9 1.3 2.4 1.6

Retail Trade 0.1 0.8 3.5 1.3 0.4 1.2Wholesale Trade 1.6 2.3 6.8 1.7 -0.6 0.1Transportation & Utilities 1.9 -0.3 2.6 3.4 0.1 7.6

Information Services 0.8 -0.5 -0.3 -4.3 11.4 -4.9Financial Services 1.6 1.3 0.3 -0.5 0.2 4.2Professional & Business Services 2.4 2.8 6.6 1.3 1.0 5.9Education & Health Services 2.7 3.0 2.5 0.1 4.5 0.9Leisure & Hospitality Services 3.3 1.9 7.5 1.6 2.1 2.6Other Services 0.8 4.4 5.3 2.1 4.2 3.5Government 1.3 1.8 3.7 3.7 1.6 0.4

Unemployment Rate (%, SA) 4.4 3.3 3.3 3.0 2.4 2.6Total Residential Permits (# of units YTD, NSA) -25.2 -52.7 -65.0 2.5 3.0 -30.9

Single-family, (# of units YTD, NSA) -27.1 -57.0 -66.6 -48.6 -52.2 -46.3Multifamily, (# of units YTD, NSA) -13.3 -40.2 -61.1 -43.5 -54.3 56.15 +, (# of units YTD, NSA) -21 -41.4 -60.5 -52.7 -45.9 56.1



U. S. Florida Jacksonville Lakeland Miami Naples

Establishment Employment (Ths, SA)Total Employment 1.4 1.7 2.4 2.1 1.2 2.7Natural Resources & Mining 6.9 -1.5 -25.1 na 9.2 naConstruction 0.0 0.5 3.2 na 6.1 naManufacturing -0.8 -1.6 -2.9 -4.2 -3.5 1.0Trade, Transportation, & Utilities 0.8 1.0 1.8 0.9 1.1 0.4

Retail Trade 0.1 0.8 1.5 1.5 1.4 1.5Wholesale Trade 1.6 2.3 0.0 1.0 1.9 0.0Transportation & Utilities 1.9 -0.3 4.4 -0.5 -0.3 -11.0

Information Services 0.8 -0.5 -1.1 0.4 -3.0 1.6Financial Services 1.6 1.3 0.5 1.1 3.2 1.6Professional & Business Services 2.4 2.8 4.2 4.4 2.2 0.3Education & Health Services 2.7 3.0 4.8 4.0 0.8 1.1Leisure & Hospitality Services 3.3 1.9 4.6 3.2 1.0 4.5Other Services 0.8 4.4 2.7 2.0 2.0 -0.5Government 1.3 1.8 1.3 4.3 0.4 6.5

Unemployment Rate (%, SA) 4.4 3.3 3.3 3.7 3.3 3.1Total Residential Permits (# of units YTD, NSA) -25.2 -52.7 -37.1 -77.2 -54.7 -58.1

Single-family, (# of units YTD, NSA) -27.1 -57.0 -51.8 -70.4 -61.3 -66.6Multifamily, (# of units YTD, NSA) -13.3 -40.2 12.0 -97.6 -48.5 -42.25 +, (# of units YTD, NSA) -21 -41.4 6.2 -98.7 -49.1 -27.7



U. S. Florida Ocala Orlando Palm Bay Panama City

Establishment Employment (Ths, SA)Total Employment 1.4 1.7 2.4 3.1 0.1 1.9Natural Resources & Mining 6.9 -1.5 na 0.0 na naConstruction 0.0 0.5 na 2.6 na naManufacturing -0.8 -1.6 -1.6 3.3 -1.8 7.4Trade, Transportation, & Utilities 0.8 1.0 1.0 1.6 0.2 2.9

Retail Trade 0.1 0.8 0.6 1.6 0.0 1.6Wholesale Trade 1.6 2.3 4.1 1.0 3.2 5.4Transportation & Utilities 1.9 -0.3 -1.3 2.6 -2.6 8.0

Information Services 0.8 -0.5 3.0 2.6 -0.8 0.5Financial Services 1.6 1.3 -0.7 1.0 -0.2 1.2Professional & Business Services 2.4 2.8 6.5 5.3 -2.1 -3.5Education & Health Services 2.7 3.0 4.3 4.0 3.9 3.0Leisure & Hospitality Services 3.3 1.9 -0.3 3.1 3.0 7.9Other Services 0.8 4.4 5.0 3.8 1.0 1.9Government 1.3 1.8 3.3 3.5 2.5 1.7


Single-family, (# of units YTD, NSA) -27.1 -57.0 -54.0 -48.9 -54.8 -41.2Multifamily, (# of units YTD, NSA) -13.3 -40.2 127.1 51.3 -78.2 -48.25 +, (# of units YTD, NSA) -21 -41.4 103.6 78.6 -80.2 -44.9



U. S. Florida Pensacola Port St. Lucie Punta Gorda Sarasota

Establishment Employment (Ths, SA)Total Employment 1.4 1.7 -0.1 0.4 1.2 2.0Natural Resources & Mining 6.9 -1.5 na na na naConstruction 0.0 0.5 na na na naManufacturing -0.8 -1.6 -1.5 0.0 0.2 -1.1Trade, Transportation, & Utilities 0.8 1.0 -1.0 -1.4 4.0 0.0

Retail Trade 0.1 0.8 -2.5 -2.2 4.5 0.2Wholesale Trade 1.6 2.3 3.9 -1.0 0.0 2.2Transportation & Utilities 1.9 -0.3 0.0 1.8 0.7 -6.2

Information Services 0.8 -0.5 -5.2 -3.7 -0.2 6.2Financial Services 1.6 1.3 4.2 1.2 0.1 1.7Professional & Business Services 2.4 2.8 -3.0 -2.9 -2.0 3.6Education & Health Services 2.7 3.0 3.7 3.2 2.2 3.2Leisure & Hospitality Services 3.3 1.9 -0.5 -3.4 -1.3 0.2Other Services 0.8 4.4 2.5 0.1 3.5 6.6Government 1.3 1.8 0.5 4.4 2.5 3.3

Unemployment Rate (%, SA) 4.4 3.3 3.3 4.4 3.9 3.1Total Residential Permits (# of units YTD, NSA) -25.2 -52.7 13.2 -64.7 -65.5 -72.5

Single-family, (# of units YTD, NSA) -27.1 -57.0 -20.5 -70.9 -62.3 -73.8Multifamily, (# of units YTD, NSA) -13.3 -40.2 387.7 14.6 -74.8 -68.95 +, (# of units YTD, NSA) -21 -41.4 631.4 71.3 -81.4 -73.7



U. S. Florida Sebastian Tallahassee Tampa West Palm Beach

Establishment Employment (Ths, SA)Total Employment 1.4 1.7 1.1 1.3 1.5 1.8Natural Resources & Mining 6.9 -1.5 na na -33.5 1.3Construction 0.0 0.5 na na 0.3 3.3Manufacturing -0.8 -1.6 2.9 -0.1 -2.1 -0.9Trade, Transportation, & Utilities 0.8 1.0 3.1 4.0 0.2 1.8

Retail Trade 0.1 0.8 3.6 4.7 0.6 1.7Wholesale Trade 1.6 2.3 -0.1 0.9 1.1 3.8Transportation & Utilities 1.9 -0.3 0.5 2.9 -3.0 -1.5

Information Services 0.8 -0.5 -14.5 -7.6 1.1 2.2Financial Services 1.6 1.3 4.9 1.6 1.2 1.5Professional & Business Services 2.4 2.8 -1.9 -4.1 2.7 1.4Education & Health Services 2.7 3.0 2.6 1.6 2.0 1.4Leisure & Hospitality Services 3.3 1.9 2.3 1.6 2.4 2.8Other Services 0.8 4.4 0.2 8.7 7.1 3.5Government 1.3 1.8 4.6 1.4 1.2 0.9


Single-family, (# of units YTD, NSA) -27.1 -57.0 -58.1 -29.6 -63.7 -72.6Multifamily, (# of units YTD, NSA) -13.3 -40.2 -76.1 -27.9 1.7 -90.65 +, (# of units YTD, NSA) -21 -41.4 -91.9 -37.2 0.2 -92.4


2007: Slower Growth with Moderating Inflation

Economic momentum slowing

due to weak housing and

slowing profits growth. Moderate job gains are the

key driver at present. Fed policy

currently steady due to

uncomfortable inflation levels, but

ease is possible if slower growth

persists. The dollar is expected to remain under

downward pressure over the near-term.

5/18/07

Cycle

Position

Short Trend

Intermediate

Trend

Comments

Consumer

Fading Fading At Risk Weak housing and recent energy price rise dampening spending and consumer sentiment. Job growth is key driver of consumer strength.

Capital Spending

High

Fading Neutral Slower profits growth after extended period of above-average gains likely to curb pace of future investment despite high cash positions.

Dollar Low Weaker Weaker / Neutral

Weaker domestic growth and the possibility of Fed ease contrasts with firm growth and more restrictive monetary policies overseas.

Inflation

Stable / Slightly Lower

Core Peaking

Core Moderately

Lower

Core inflation above 2% remains a policy concern, driven by tighter capacity and higher unit labor costs. Slower growth expected to curb core inflation later this year.

Monetary Policy

Moderately Restrictive

Moderately Restrictive

Restrictive / Neutral

Fed on hold at 5 ¼% following 17 rate hikes since 6/30/04. Anti-inflation rhetoric continuing and “data-dependent” policy approach likely to keep markets volatile near term. Fed focus may have to shift to sustaining growth if recent softness persists. Ease possible later in 2007.

Fiscal Policy

Neutral

Neutral

Neutral / Stimulative

Tax revenues enjoying strong cyclical growth, offset in part by addition to war costs. 2008 presidential race likely to generate new spending proposals.

This perspective was prepared for clients and prospective clients of Trusco Capital Management, Inc. Neither Trusco or any affiliations make any representation or warranties as to the accuracy or merit of this analysis for individual use. Past returns are not indicative of future results. Comments and projections were based on information available at the time of writing, are for informational purposes only, are not intended as individual or specific advice, and may not be relied upon for future investing. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions.


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90 92 94 96 98 00 02 04 06

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Actual Forecast

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90 92 94 96 98 00 02 04 06 08

Actual Forecast

-2%-1%0%1%2%3%4%5%6%7%

90 92 94 96 98 00 02 04 06 08

Actual Forecast

Perspectives on Growth, Inflation, Profits, & Rates

Real GDP (YOY%)

S&P 500 Op. EPS (YOY%)

Fed Funds (%)

CPI (YOY%)

Trailing P/E Ratio

10-Yr. Treas. (%)

Sources: Trusco, BEA, FRB, S&P, Blue Chip Financial Forecasts


Outlook Economic growth expected to continue at a sub-average pace.

Recession probability higher but less than 50/50. Job growth is the key economic driver currently.

We expect housing will remain soft into 2008 and we are monitoring the potential for contagion into other areas of the economy. Overall, we believe the pace of consumer spending will soften a bit further.

CAPEX growth is likely to slow as well due to slower profits growth. Lower, more realistic corporate earnings forecasts have reduced some valuation risks. Fed policy is on hold, but could shift toward ease if economic momentum continues to slide.

Core inflation remains a focus for policymakers, but is likely to trend somewhat lower this year.

“Data-dependent” / “Forecast-dependent” - Economic volatility around slower growth rates will help generate market volatility.

Florida has enjoyed above average growth, but the current housing stress is likely to negatively impact revenue growth.

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