State of the Economy May 27, 2008 Jose Sanchez Maria Rodarte Mandi Tom Emerson Figueroa Omar Barragan

State of the EconomyState of the Economy

May 27, 2008May 27, 2008

Jose SanchezJose Sanchez

Maria RodarteMaria Rodarte

Mandi TomMandi Tom

Emerson FigueroaEmerson Figueroa

Omar BarraganOmar Barragan

HOUSING SECTORHOUSING SECTOR

New Permits-New Permits- Housing StartsHousing Starts New Home SalesNew Home Sales Existing Home SalesExisting Home Sales 10 Year U.S. Treasury Interest Rates10 Year U.S. Treasury Interest Rates

Issued PermitsIssued Permits

0

500

1,000

1,500

2,000

2,500

Series1

Housing StartsHousing Starts

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

Series1

New Home SalesNew Home Sales

877908973

1,086

1,2031,283

1,185

1,0841,1261,0971,0871,073

9691,0091,004

9529871,019

890840830

907861

797796

701693725

634604601575526

0

200

400

600

800

1000

1200

1400

Series1

Existing Home SalesExisting Home Sales

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

2005 2006 2007 Mar-07 Apr-07 May-07 J un-07 J ul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 J an-08 Feb-08 Mar-08

Series1

10 Year Treasury 10 Year Treasury Interest RatesInterest Rates

GDPGDP In 2001In 2001 Real GDP increased 0.3%. Real GDP increased 0.3%. Real GDP in private services-Real GDP in private services-

producing industries producing industries increased 1.7%increased 1.7%

Real GDP in private goods-Real GDP in private goods-producing industries producing industries decreased 4.2%.decreased 4.2%.

Manufacturing was the Manufacturing was the hardest hit by the 2001 hardest hit by the 2001 recession. recession. Its real GDP decreased 6.0%.Its real GDP decreased 6.0%. Durable-goods manufacturing Durable-goods manufacturing

decreased 5.2 %.decreased 5.2 %. nondurable-goods nondurable-goods

manufacturing decreased manufacturing decreased 7.1%7.1%

In First Quarter 2008In First Quarter 2008 Real GDP increased 0.6%Real GDP increased 0.6% Price Index increased Price Index increased

3.5%3.5% Personal Consumption Personal Consumption

Expenditures increased Expenditures increased 1%1%

In ManufacturingIn Manufacturing Durable goods decreased Durable goods decreased

6.1%6.1% Nondurable goods Nondurable goods

decreased 1.3%decreased 1.3%

GDPGDP 2001 2001 2001 2001 2007 2007 2007 2007 2008

I I I I I I I V I I I I I I I V I

1 Gross domestic product

-0.5 1.2 -1.4 1.6 0.6 3.8 4.9 0.6 0.6

2 Personal consumption expenditures

1.7 1 1.8 7 3.7 1.4 2.8 2.3 1

3 Durable goods

6.7 -0.3 3.1 37.4 8.8 1.7 4.5 2 -6.1

4 Nondurable goods

0.5 -0.1 2.4 4.9 3 -0.5 2.2 1.2 -1.3

5 Services 1.1 1.8 1.2 2.3 3.1 2.3 2.8 2.8 3.4

6 Gross private domestic investment

-13.6 -7.6 -10.5 -22.7 -8.2 4.6 5 -14.6 -4.7

7 Fixed investment

-2.6 -8.7 -4.5 -10.6 -4.4 3.2 -0.7 -4 -9.7

8 Nonresidential

-4.2 -13.6 -6.8 -13.3 2.1 11 9.3 6 -2.5

9 Structures

-8.3 -4 6 -33.2 6.4 26.2 16.4 12.4 -6.2

10 Equipment and software

-2.8 -16.9 -11.4 -4.2 0.3 4.7 6.2 3.1 -0.7

11 Residential

2.2 5.6 1.8 -3.7 -16.3 -11.8 -20.5 -25.2 -26.7

12 Change in private inventories

--- --- --- --- --- --- --- --- ---

13 Net exports of goods and services

--- --- --- --- --- --- --- --- ---

14 Exports -5.3 -12.7 -18.2 -10.8 1.1 7.5 19.1 6.5 5.5

15 Goods -5.4 -17.1 -20 -8.8 0.9 6.6 26.2 3.9 5.2

16 Services

-5 -0.7 -13.7 -15.3 1.6 9.6 4 13.2 6.1

17 Imports -3.7 -12.6 -10.3 -3.4 3.9 -2.7 4.4 -1.4 2.5

18 Goods -3.4 -16.9 -8.6 -2 4.2 -2.9 4.8 -2.6 2.4

19 Services

-5 12.8 -18.3 -10.4 2.3 -1.7 1.7 5.5 3.5

Government consumption expenditures

and gross investment

21 Federal 8.1 9.1 0 8.8 -6.3 6 7.1 0.5 4.6

22 National defense

7 4.3 2.4 12.5 -10.8 8.5 10.1 -0.5 6

23 Nondefense

10.1 18 -3.9 2.3 3.8 0.9 1.1 2.8 1.8

24 State and local

4 7.2 -2.3 8.4 3 3 1.9 2.8 0.5

4.1 3.8 2 27.9 -1.5 8.5 -0.5

Line

20 5.3

GDPGDP

3.7

.8

1.6

2.5

3.0

3.5 3.6

2.5

3.12.8

4.5

1.2

4.8

2.4

1.1

2.1

.6

3.8

4.9

.6 .6

.0

1.0

2.0

3.0

4.0

5.0

6.0

Series1

Consumer Price IndexConsumer Price Index

CPI is up 3.9% from a year earlierCPI is up 3.9% from a year earlier

Core CPI is still increasing at a 2.3% Core CPI is still increasing at a 2.3% annual rate annual rate

For the past three months, core For the past three months, core prices rose at a 1.2% seasonally prices rose at a 1.2% seasonally adjusted rate.adjusted rate.


Measure of Prices Measure of Prices

Increase 0.3% in MarchIncrease 0.3% in March

increase 0.2% in Aprilincrease 0.2% in April Gasoline Costs Gasoline Costs

rose 5.8% government’s formula rose 5.8% government’s formula adjusted gain to a 0.2% dropadjusted gain to a 0.2% drop


Food Prices up 5% in the past 12 Food Prices up 5% in the past 12 monthsmonths BreadBread FruitFruit CoffeeCoffee Other consumer staplesOther consumer staples

Health care costs increased 4.3% in Health care costs increased 4.3% in the past 12 months the past 12 months Up 0.2% in AprilUp 0.2% in April


Areas where prices decreasedAreas where prices decreased Loading costs 1.9%Loading costs 1.9% Vehicles 0.2%Vehicles 0.2% Recreation 0.1%Recreation 0.1%


Slightly increasing trend during 2007 Slightly increasing trend during 2007 and 2008and 2008

2001 Growing at a faster pace2001 Growing at a faster pace Inflation Risks:Inflation Risks:

Rising Fuel CostsRising Fuel Costs Loosening of Monetary PolicyLoosening of Monetary Policy

Personal Income and Personal Income and OutlaysOutlays

Nov. 2007 Dec. 2007 Jan.2008 Feb. 2008 Mar. 2008 (percent change from preceding month)

Personal income, current dollar 0.3 0.4 0.3 0.5 0.3Disposible personal income: Current dollars 0.3 0.4 0.4 0.5 0.3 Chained (2000) dollars -0.3 0.2 0.1 0.3 0.0Personal consumption expenditures: Current dollars 1.0 0.2 0.4 0.1 0.4 Chained (2000) dollars 0.3 -0.1 0.1 0.0 0.1

Savings and InvestmentsSavings and InvestmentsLine 2000 2001 2002 2003 2004 2005 2006 2007

1 Gross saving 1,770.50 1,657.60 1,489.10 1,459.00 1,618.10 1,734.60 1,866.90 1,853.102 Net saving 582.7 376.1 197.1 122.5 182 125.1 251.7 166.53 Net private saving 343.3 324.6 479.2 515 551.1 428.2 447.2 398.84 Personal saving 168.5 132.3 184.7 174.9 181.7 44.6 38.8 42.95 Undistributed corporate profit

s with inventory valuation and capital consumption adustments

174.8 192.3 294.5 325.1 384.4 378.6 400.9 333.5

6 Undistributed profits 130.3 132.9 176.6 240.1 357.8 585.3 653 614.97 Inventory valuation adjustm

ent-14.1 11.3 -2.2 -13.6 -43.1 -36.2 -36.3 -46.2

8 Capital consumption adjustment

58.6 48.1 120.1 98.7 69.7 -170.6 -215.8 -235.3

9 Wage accruals less disbursements

0 0 0 15 -15 5 7.5 22.5

10 Net government saving 239.4 51.5 -282.1 -392.5 -369.1 -303.1 -195.4 -232.411 Federal 189.5 46.7 -247.9 -372.1 -370.6 -318.3 -220 -220.612 State and local 50 4.8 -34.2 -20.4 1.5 15.2 24.6 -11.813 Consumption of fixed capital 1,187.80 1,281.50 1,292.00 1,336.50 1,436.10 1,609.50 1,615.20 1,686.6014 Private 990.8 1,075.50 1,080.30 1,118.30 1,206.00 1,357.00 1,347.50 1,398.7015 Domestic business 836.1 903.7 893.6 916.6 970.2 1,060.40 1,081.40 1,119.1016 Households and institutios 154.8 171.7 186.8 201.7 235.8 296.6 266.1 279.6

17 Government 197 206 211.6 218.2 230.2 252.4 267.7 287.918 Federal 87.2 88.2 88.9 90.4 94 99 105.4 110.419 State and local 109.8 117.8 122.7 127.8 136.1 153.4 162.3 177.520 Gross domestic investment, ca

pital account transactions, and net lending, NIPAs

1,643.30 1,567.90 1,468.10 1,507.80 1,637.30 1,739.90 1,848.80 1,882.50

21 Gross domestic investment 2,040.00 1,938.30 1,926.40 2,020.00 2,261.40 2,475.00 2,642.90 2,593.3022 Gross private domestic investme

nt1,735.50 1,614.30 1,582.10 1,664.10 1,888.60 2,077.20 2,209.20 2,125.40

23 Gross government investment 304.5 324 344.3 356 372.8 397.8 433.8 467.9

24 Capital account transactions (ne) 0.8 1.1 1.4 3.2 2.4 4.1 3.9 1.6

25 Net lending or net borrowing (-), NIPAs

-397.4 -371.5 -459.7 -515.5 -626.5 -739.1 -798 -712.4

26 Statistical discrepancy -127.2 -89.6 -21 48.8 19.1 5.4 -18.1 29.4 Addenda:

Government Receipts and ExpendituresGovernment Receipts and Expenditures 2000 2001 2002 2003 2004 2005 2006 2007

Current receipts 3,125.90 3,113.10 2,958.70 3,035.60 3,254.10 3,589.10 3,934.80 4,180.30

Current tax receipts 2,206.80 2,168.00 2,004.50 2,050.30 2,213.40 2,518.70 2,769.80 2,949.00

Personal current taxes 1,235.70 1,237.30 1,051.80 1,001.10 1,046.30 1,209.10 1,354.30 1,482.50 Taxes on production and imports 708.9 728.6 762.8 807.2 863.8 921.6 967.3 1,008.50 Taxes on corporate income 255 194.9 182.6 233.1 293.3 376.5 435.5 444.5 Taxes from the rest of the world 7.3 7.1 7.3 8.9 10 11.5 12.6 13.4Contributions for government social insurance

702.7 731.1 750 778.6 828.8 874.8 927.6 979

Income receipts on assets 117.4 113.7 98.4 95.8 99.1 105.6 111.9 114.6 Interest and miscellaneous receipts

115.6 111.7 96.4 93.7 96.7 103.1 109.3 111.9

Dividends 1.9 2 2 2.2 2.4 2.4 2.6 2.7Current transfer receipts 93.7 101.8 104.9 109.2 117 105.2 139.5 152.3 From business (net) 43.7 47.5 46.6 47.9 48.1 30.7 60.6 66.2 From persons 50 54.2 58.2 61.3 68.9 74.5 78.9 86.1Current surplus of government enter

prises2

5.3 -1.4 0.9 1.7 -4.2 -15.1 -13.9 -14.5

Current expenditures 2,886.50 3,061.60 3,240.80 3,428.10 3,623.20 3,892.20 4,130.30 4,412.70Consumption expenditures 1,417.10 1,501.60 1,616.90 1,736.50 1,844.00 1,965.70 2,089.30 2,221.90Current transfer payments 1,062.40 1,160.60 1,270.40 1,343.20 1,425.30 1,521.70 1,618.30 1,742.40 Government social benefits 1,044.10 1,146.60 1,251.60 1,319.50 1,399.10 1,486.20 1,588.70 1,707.40 To persons 1,041.60 1,143.90 1,248.90 1,316.70 1,396.10 1,483.10 1,585.30 1,703.80

To the rest of the world3 2.5 2.7 2.7 2.8 3 3.1 3.3 3.6

Other current transfer payments to the

rest of the world (net)3

Interest payments1 362.8 344.1 315.1 300.6 309.3 346.2 372.9 401.3

To persons and business1 279.8 261.7 238.5 226.7 226.8 242.4 239.2 244.1

To the rest of the world 83 82.4 76.6 73.9 82.5 103.9 133.8 157.2

Subsidies2 44.3 55.3 38.4 47.9 44.6 58.5 49.7 47.1

Less: Wage accruals less disbursements

0 0 0 0 0 0 0 0

Net government saving 239.4 51.5 -282.1 -392.5 -369.1 -303.1 -195.4 -232.4Social insurance funds 114.4 89.6 50.6 42.7 63.9 60.3 21.5 -5.7Other 125.1 -38.1 -332.7 -435.2 -433 -363.4 -217 -226.7Addenda: Total receipts 3,161.60 3,148.80 2,991.50 3,063.70 3,284.50 3,619.50 3,967.50 4,211.00 Current receipts 3,125.90 3,113.10 2,958.70 3,035.60 3,254.10 3,589.10 3,934.80 4,180.30 Capital transfer receipts 35.7 35.7 32.7 28.1 30.4 30.3 32.6 30.7 Total expenditures 3,002.60 3,188.20 3,388.20 3,593.40 3,793.20 4,066.00 4,312.30 4,632.50 Current expenditures 2,886.50 3,061.60 3,240.80 3,428.10 3,623.20 3,892.20 4,130.30 4,412.70 Gross government investment 304.5 324 344.3 356 372.8 397.8 433.8 467.9 Capital transfer payments 0 0 3.8 16.9 16.8 18.3 18.1 29.2 Net purchases of nonproduced assets

8.5 8.5 10.9 10.7 10.6 10.1 -2.1 10.6

Less: Consumption of fixed capital

197 206 211.6 218.2 230.2 252.4 267.7 287.9

Net lending or net borrowing (-) 159 -39.3 -396.7 -529.7 -508.7 -446.5 -344.8 -421.5

3523.6 26.2 35.5 29.618.3 13.9 18.8

Labor SectorLabor Sector

Lagging economic indicatorLagging economic indicator The impact is after the eventThe impact is after the event Is still important because it confirms Is still important because it confirms

trendstrends Reports are released monthly, at the Reports are released monthly, at the

end of the monthend of the month

Mass LayoffsMass Layoffs

Job openings and Labor Job openings and Labor Turnovers US Private Turnovers US Private

IndustryIndustry

Job Openings and Labor Job Openings and Labor Turnover US Public Turnover US Public

IndustryIndustry

Employment – Population Employment – Population RatioRatio

Unemployment RateUnemployment Rate (Percentage) (Percentage)

TrendingTrending

Mass layoff is consistent with Mass layoff is consistent with historical past, January has highest historical past, January has highest postings.postings.

Compared to the recession in 2001-Compared to the recession in 2001-02, the economy is not in recession, 02, the economy is not in recession, but a natural economic slowdown. but a natural economic slowdown.

Economy will continue to slow down Economy will continue to slow down and I believe we will be in recession and I believe we will be in recession if unemployment claims increase.if unemployment claims increase.

Manufacturing SectorManufacturing Sector

ISM IndexISM Index Manufacturing & Trade Inventories & Manufacturing & Trade Inventories &

SalesSales Manufacturing Shipments, Inventories Manufacturing Shipments, Inventories

& Orders& Orders Advanced Reports on Durable GoodsAdvanced Reports on Durable Goods Kansas City Fed Manufacturing SurveyKansas City Fed Manufacturing Survey Richmond Fed Manufacturing SurveyRichmond Fed Manufacturing Survey

ISM IndexISM Index

Manufacturing & Trade Manufacturing & Trade Inventories & SalesInventories & Sales

Manufacturing Manufacturing Shipments, Inventories & Shipments, Inventories &

OrdersOrders

ManufacturingManufacturing


Advanced Report on Durable GoodsAdvanced Report on Durable Goods

1.4% Decrease for March, following 1.4% Decrease for March, following 0.9% decrease for the previous 0.9% decrease for the previous month.month.


Kansas City Fed Manufacturing Kansas City Fed Manufacturing Survey Survey

Production , Shipments 0, New Production , Shipments 0, New Orders , Export Orders , Inventory Orders , Export Orders , Inventory , Employment (3, Employment (3rdrd Month in a row) Month in a row)


Richmond Fed SurveyRichmond Fed Survey

ShipmentsShipments

New OrdersNew Orders

Job Index (still negative)Job Index (still negative)

Inventory 0Inventory 0

Overall Manufacturing IndexOverall Manufacturing Index

PricesPrices

Consumer Price Index (CPI)Consumer Price Index (CPI) Producer Price Index (PPI)Producer Price Index (PPI) Productivity and CostsProductivity and Costs Employment Cost Index (ECI)Employment Cost Index (ECI) Federal Open Market Committee Federal Open Market Committee

(FOMC) (FOMC)

INFLATION INFLATION

InflationInflation: An : An increase in the price increase in the price level of goods and level of goods and services. A rise in services. A rise in the prices of goods the prices of goods and services, as and services, as happens when happens when spending increases spending increases relative to the relative to the supply of goods on supply of goods on the market.the market.

Core InflationCore Inflation: The : The rate of inflation rate of inflation excluding certain excluding certain sectors whose prices sectors whose prices are most volatile, are most volatile, specifically food and specifically food and energy. Core inflation energy. Core inflation is a measure of is a measure of inflation which inflation which excludes certain items excludes certain items that face volatile price that face volatile price movements.movements.

Consumer Price Index Consumer Price Index (CPI)(CPI)

It’s the most popular measure of It’s the most popular measure of price inflation in retail goods and price inflation in retail goods and services. It determines how much services. It determines how much consumers pay for goods and consumers pay for goods and services. It affects the cost of doing services. It affects the cost of doing business, and causes chaos with business, and causes chaos with personal and corporate investmentspersonal and corporate investments

Frequency: MonthlyFrequency: Monthly Market Sensitivity: Very HighMarket Sensitivity: Very High

CPICPI

CPICPI MinimumMinimum 0.7 IN 0.7 IN

YEAR 1959 YEAR 1959 MaximumMaximum 13.5 IN 13.5 IN

YEAR 198YEAR 198 NUMBERS FROM NUMBERS FROM

THE PAST FOUR THE PAST FOUR MONTHS: 4.3, 4, MONTHS: 4.3, 4, 4, 3.9. 4, 3.9.

CORE CPICORE CPI MinimumMinimum 1.2 IN 1.2 IN



THE PAST FOUR THE PAST FOUR MONTHS: 2.5, 2.3, MONTHS: 2.5, 2.3, 2.4, 2.3. 2.4, 2.3.

Producer Price Index Producer Price Index (PPI)(PPI)

Measures the changes in prices that Measures the changes in prices that manufacturers and wholesalers pay manufacturers and wholesalers pay for goods during various stages of for goods during various stages of production. Any hint of inflation here production. Any hint of inflation here could eventually be passed on to could eventually be passed on to retail level.retail level.

Frequency: MonthlyFrequency: Monthly Market Sensitivity: Very HighMarket Sensitivity: Very High

PPIPPI

PPIPPI MinimumMinimum -1.4 IN -1.4 IN



THE PAST FOUR THE PAST FOUR MONTHS: 7.4, 6.4, MONTHS: 7.4, 6.4, 6.9, 6.5. 6.9, 6.5.

CORE PPI CORE PPI MinimumMinimum 0.1 IN 0.1 IN

YEAR 2002YEAR 2002 MaximumMaximum 11.4 IN 11.4 IN


THE PAST FOUR THE PAST FOUR MONTHS: 2.3, 2.4, MONTHS: 2.3, 2.4, 2.7, 3. 2.7, 3.

Productivity and CostsProductivity and Costs Productivity is the output in goods and services Productivity is the output in goods and services

employees produce for each hour of labor worked. It employees produce for each hour of labor worked. It serves as a way of measuring how well companies serves as a way of measuring how well companies are using their employees and their physical capital. are using their employees and their physical capital.

Productivity is by far the most important Productivity is by far the most important determinant in the long-term health and prosperity determinant in the long-term health and prosperity of an economy. of an economy.

Labor costs account for some 70% of all business Labor costs account for some 70% of all business expenses, so if companies are not using workers expenses, so if companies are not using workers efficiently, it’s an enormous waste of resources.efficiently, it’s an enormous waste of resources.

Frequency: QuarterlyFrequency: Quarterly Market Sensitivity: MediumMarket Sensitivity: Medium

Employment Cost Index Employment Cost Index (ECI)(ECI)

This is the most comprehensive measure of This is the most comprehensive measure of labor costs. It tracks changes in the cost of labor costs. It tracks changes in the cost of labor, the single biggest expense companies labor, the single biggest expense companies face.face.

Labor-related outlays on wages, salaries, and Labor-related outlays on wages, salaries, and the range of benefits (vacations, health the range of benefits (vacations, health insurance, and social security) account for 70% insurance, and social security) account for 70% of the cost of making the product. of the cost of making the product.

Frequency: QuarterlyFrequency: Quarterly Market Sensitivity: Medium to highMarket Sensitivity: Medium to high..

The Federal Open The Federal Open Market Committee Market Committee

(FOMC)(FOMC) This is a press release that This is a press release that

announces its decision on where the announces its decision on where the crucial federal funds rate has been crucial federal funds rate has been set.set.

Frequency: Formally the get Frequency: Formally the get together 8 times a year but in the together 8 times a year but in the most extraordinary circumstances most extraordinary circumstances they would meet sooner.they would meet sooner.

Market Sensitivity: VERY HIGHMarket Sensitivity: VERY HIGH

ConclusionConclusion

U.S. is experiencing an economic U.S. is experiencing an economic slowdownslowdown

Some inflation concerns, rising Some inflation concerns, rising energy pricesenergy prices

We decided that rates should stay We decided that rates should stay the samethe same Previous rate reductions still having Previous rate reductions still having

effecteffect Stimulus PackageStimulus Package

Documents

State of the Economy May 27, 2008 Jose Sanchez Maria Rodarte Mandi Tom Emerson Figueroa Omar Barragan