The Disturbing Economic Tea Leaves Philadelphia, PA Wednesday, March 5, 2014

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Yamarone Bloomberg Economics, Bloomberg Economic BRIEF

1 Economic Indicators to Watch The Disturbing Economic Tea Leaves Philadelphia, PA Wednesday, March 5, 2014 Richard Yamarone Bloomberg Economics, Bloomberg Economic BRIEF Author of The Trader s Guide to Key Economic Indicators

2 Jobs, Jobs, Jobs It s All About Jobs

3 The Type of Jobs Matter

4 The Top Concern for Businesses

5 Employment is Advancing, Not Desirable Jobs Nonfarm Payrolls vs. Real GDP Payrolls ('000) GDP YOY% Payrolls (lhs) 2000 Real GDP (rhs) 2400 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 ' Source: BEA, BLS NFP T <Index>, GDP CYOY <Index>

6 Economy Operating Well Below its Potential Real GDP (Blns) vs. Real Potential GDP (Blns) $17,500 $15,500 $13,500 Potential GDP Real GDP $11,500 $9,500 $7,500 CBOPGDPR <Index>, GDP CHWG <Index> $5, Source: BEA, CBO, Bloomberg

7 Employment To Be a Slow Train Coming 102 Nonfarm Payroll Creation From Onset of Recession '73 ' '81 '82 '90 ' '07 current Source: BLS, NBER, Bloomberg Months

8 Employment To Be a Slow Train Coming II peak-to-trough % jobs lost Recession Date (months) total jobs lost (millions) months to job restoration peak-to-trough Period AVG: Period AVG: Period (current) ? 6.03

9 Hiring not Exactly Brisk Jobs Created Since Depression Trough*, in thousands Government Others Services Leisure/Hospitality Healthcare Education Temporary Professional Financial Information Utilities Transportation Retail Trade Wholesale Trade Manufacturing Mining & Logging Construction ,237 1,528 2, ,000 1,300 1,600 1,900 2,200 2,500 Source: BLS *February 2010

10 Strongest Growing Jobs, Lowest Earnings Growth January 2014: Average Hourly Earnings (Y/Y%) by Industry Other Services Lesiure & Hospitality Education & Health Professional business svcs. Financial Activities Information Utilities Transportation & Warehousing Retail Trade Wholesale Trade Manufacturing Construction CPI Inflaton 1.5% Mining & Logging Source: Bureau of Labor Statistics

11 Key Barometer Emitting Signs of Frailty Conference Board Ratio of Coincidental to Lagging Index Source: The Conference Board RTCL <Index>

12 If GDP Dips to 2.0% It s Recession Time 14 Real GDP (Y/Y %) Source: NBER, BEA, Bloomberg GDP CYOY <Index>

13 Real Final Sales Below 2.0% Real Final Sales of Domestic Product (Y/Y%) Source: BEA FLSLCHAN <Index>

14 Manufacturing Gains Still Not Generating Jobs Industrial Production MFG vs. Manufacturing Jobs ('000) 19, , , , , , , , ,000 MFG Payrolls (lhs) MFG IP (rhs) 65 10, Source: Federal Reserve, BLS USMMMANU <Index>, IP <Index> 60

15 It s 1941 For Manufacturing U.S. Manufacturing Employment (in thousands) 20,000 19,000 18,000 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10, Source: Bureau of Labor Statistics USMMMANU <Index>

16 Housing Starts, the Most Interest Rate Sensitive Sector of the Economy Housing Starts ('000) Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Source: Dept. of Commerce NHSPSTOT <Index>

17 Still a Way to go for Housing Recovery Housing Starts ('000) 2,700 2,200 1,700 1, Jan 59 Jan 67 Jan 75 Jan 83 Jan 91 Jan 99 Jan 07 Source: Dept. of Commerce NHSPSTOT <Index>

18 Won t Get Any Jobs from Housing Residential Construction Spending ($ mls) Residential Construction Employment (thousands) 700, , , ,000 Spending (lhs) Res Construction Employment (rhs) 1,200 1,100 1, , , ,000 Source: U.S. Department of Commerce, Bureau of Labor Statistics, Bloomberg USECBURB <Index>, CNSTRESI <Index>

19 Sideways Movements in Housing Mortgage Bankers Association's Purchase Applications Index Source: Mortgage Bankers Association MBAVPRCH <Index>

20 Not All Home Prices Have Improved Since Crisis 300 S&P Case Shiller Home Price Index PHXR SA LXXR SA SDXR SA SFXR SA 250 DNXR SA WDXR SA MIXR SA TPXR SA 200 ATXR SA CHXR SA 150 BOXR SA DEXR SA MNXR SA CRXR SA 100 LVXR SA NYXR SA Source: S&P/Case Shiller CEXR SA DAXR SA POXR SA SEXR SA

21 Commercial Construction Slump Total U.S. Commercial Construction Spending ($ mlns) $100,000 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20, Source: U.S. Census Bureau CNSTCOMM <Index>

22 Retailers Headed Out of the Malls 12.0% Regional & Strip Mall Vacancies 11.0% 10.0% 9.0% Strip Mall Regional & Superregional Malls 8.0% 7.0% 6.0% 5.0% 4.0% Source: Reis Inc.

23 Earnings/Analyst Conference Calls

24 Bloomberg Orange Book Summary of Commentary on Current Economic Conditions By Corporation ORANGE <GO> from earning statements commencing July 1, 2010

25 What is Being Said And so we're still seeing that midnight shopping in our stores when that EBT card, it's like a debit card, when it is ready and it is funded, there are people who are in the store at midnight because they know it turns on. And they have shopped from like 10:45 to midnight and they're waiting for that card and then our lines open up. And we've had some of our busiest ours at midnight. Rosalind Brewer, EVP, Wal Mart April 12, 2011 I think the most telling indicator for us that economic weakness and employment is the key issue driving soft volumes, is the fact that we continue to see, as in contrast to the historical norms, we continue to see volume pick up heavily at the beginning of each month, and then steadily erode through the month, being particularly soft in the last week to 10 days of the month. That just tells us that people are running out of money. Gregg Engles, CEO Dean Foods May 10, 2011 Now clearly when it gets to the end of the month and they've run out of dollars and the first of month gets there, you'll see some pick up in sales. I would say it's not as dramatic as it was two years ago due mostly to the fact that not 100% of those benefits are getting loaded on to people's cards.. J. Michael Schlotman, CFO, SVP Kroger May 17, 2011

26 What is Still Being Said know that 15% of the Americans are living on food stamps today. And we know that most of them, even after two or three weeks, are short of money... Dick Boer, CEO Koninklijke Ahold Nv November 28, 2012 the value customers are still stretched. We still are getting a lot of food stamps, a very high dollar amount and a very high percentage amount, and that is definitely problematic. David Dillion, CEO Kroger October 16, 2012 Food stamp usage continues to grow for a fragile consumer that's seeing volatility in the economy, is worried about the state of their job or finding a job, maybe using food stamps to feed their family and is trying to figure out how to put fuel in the car, it's still a very challenging and uncertain environment. Brian Cornell, CEO, Pepsi Americas September 5, 2012

27 Real Disposable Incomes Trending Lower Real Disposable Personal Incomes (Y/Y%) Source: BEA, Bloomberg PIDSDCWT <Index>

28 No Typo, Over 47 Million People at or Below Poverty! 50,000,000 Supplemental Nutrition Assistance Program Number of Participants 45,000,000 40,000,000 35,000,000 30,000,000 25,000, Source: U.S.D.A, Bloomberg FDSPNUM <Index>

29 Poverty Growing Faster than Payrolls Growth in Food Stamps vs. Nonfarm Payroll Jobs Food Stamps Job Creation /1/2009 6/1/2010 6/1/2011 6/1/2012 6/1/2013 Source: USDA, BLS

30 Peddle too Slow, and the Bike Tips Over Real Consumption Expenditures (Y/Y%) Source: BEA, Bloomberg PCE CONC <Index>

31 Retail Spending Pace Has Moderated ICSC Goldman Sachs Weekly Retail Sales Index (Y/Y%) week Moving Average Source: ICSC Goldman Sachs MBRSTOTL <Index>

32 There is No Holy Grail of Economic Indicators

33 Fab Five Dining Out Spending: Meals at Other Eating Places (Y/Y%) '00 '03 '06 '09 '12 Source: BEA, NBER RPCEDPMB <Index> <GO>

34 Fab Five Casino Gambling Spending: Casino Gambling Y/Y% '00 '03 '06 '09 '12 Source: Bureau Economic Analysis, NBER RPCEDCAS <Index> <GO>

35 Fab Five Jewelry & Watches Spending: Jewelry & Watches Y/Y% '00 '03 '06 '09 '12 Source: Bureau Economic Analysis, NBER RPCEDJRY <Index> <GO>

36 Fab Five Cosmetics & Perfumes Spending: Cosmetics & Perfumes (Y/Y%) '00 '03 '06 '09 '12 Source: Bureau Economic Analysis, NBER RPCEDCOS <Index> <GO>

38 Fab Five Women s Dresses Spending: Women's & Girls' Clothing (Y/Y%) '00 '03 '06 '09 '12 Source: Bureau Economic Analysis, NBER RPCEDWGC <Index> <GO>

39 Trade Picture isn t Looking Too Encouraging

40 3 Trade Helped During the Housing Bust, But No Longer a Convincing Contributor Contribution to GDP Residential Spending & Trade Residential Trade '06 '07 '08 '09 '10 '11 '12 '13 Source: BEA GDP %NETX <Index>, GDP%RES <Index> 1.8

41 Inflation Not Yet A Concern Personal Consumption Expenditure Deflator (Y/Y%) PCED Core PCED 2 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Jan 14 Source: BEA, Bloomberg PCE YOY <Index>, PCE DEFY <Index>

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The Disturbing Economic Tea Leaves 2013 CFA Society of Houston Investor Symposium Society Houston, TX Friday, November 8, 2013

Economic Indicators to Watch The Disturbing Economic Tea Leaves 2013 CFA Society of Houston Investor Symposium Society Houston, TX Friday, November 8, 2013 Richard Yamarone Bloomberg Economics Author of