EEKLY

CONOMIC

INANCIAL

OMMENTARY

June 5, 2009

U.S. Review Global Review

Nonfarm Employment Change

Change in Employment, In Thousands-800-600-400-20002004006002000200120022003200420052006200720082009-800-600-400-2000200400600Nonfarm Employment Change: May @ -345,000

OECD Industrial Production

Year-over-Year Percent Change-20%-15%-10%-5%0%5%10%768084889296000408-20%-15%-10%-5%0%5%10%OECD Industrial Production: Feb @ -17.0%

Foreign Economies: Terrible Q1,But Q2 Looking Better

A number of major countriesreported first quarter GDP data thisweek, and the numbers weregenerally horrible. For example,both the Swedish and Swisseconomies contracted at more thana 3 percent annualized rate in thefirst quarter, and real GDP inCanada declined 5.4 percent. Thecarnage in the global economy inthe first quarter can be summed upwith the graph at the left. ThroughFebruary, industrial production inthe OECD countries, the 30 mostadvanced economies in the world,was down 17 percent on a year-over-year basis. Declines registeredover the past four decades pale incomparison to the severity of thecurrent downturn.That said, there have been someglimmers of light in recenteconomic data. For example,Australia defied the fate of most

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Recent Special Commentary

The Bottom May Finally be Near

Nonfarm employment declinedsignificantly less than expected forthe second month in a row. Thedecelerating trend of job losses nowlooks encouraging and the modestimprovement is consistent with themost recent weekly unemploymentclaims data. That said, we are trulyin some sort of alternative universewhen a monthly loss of 345,000 jobsis widely considered to be goodeconomic news.May’s employment report is stillextremely weak. Not only didpayrolls fall by 345,000 jobs but theunemployment rate also increaseddramatically and hours workedplummeted. On average, theeconomy shed 500,000 jobs duringeach of the past three months andaggregate hours worked fell at an8.6 percent annual rate.Employment losses also remainextremely broad-based. The onlysolid positives are education andhealthcare, and those gains looksuspect. Hospitals, private schools,and colleges have announcedunprecedented layoffs. We doubtthe official numbers capture theselosses. The average workweek alsofell sharply in May, a sign that morecutbacks are in the pipeline.

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DateTitleAuthors

June-04Past Recessions Suggest Sluggish Road AheadVitner & KhanJune-04Regional Commentary: PennsylvaniaBryson & QuinlanJune-01Housing & Manufacturing Weighed on State GDPVitnerJune-01Employment - Have We Reached a Turning Point?Silvia, York & Whelan

NSIDE

U.S. Forecast

ActualForecastActualForecast20082009200520062007200820092010

U.S. Review 2

1Q2Q3Q4Q1Q2Q3Q4Q

Real Gross Domestic Product

0.92.8-0.5-6.3-6.1-2.4-0.21.72.92.82.01.1-3.01.6Personal Consumption0.91.2-3.8-4.32.20.11.21.33.03.02.80.2-0.51.3Inflation Indicators

"Core" PCE Deflator2.22.32.31.91.81.50.90.82.12.32.22.21.20.9Consumer Price Index4.24.35.21.5-0.2-1.4-2.7-0.33.43.22.93.8-1.21.0Industrial Production

0.2-4.6-9.0-12.7-20.0-16.2-4.80.13.32.31.5-2.2-12.6-0.2Corporate Profits Before Taxes

-1.5-8.3-9.2-21.5-30.0-28.0-26.0-10.017.615.2-1.6-10.1-24.25.3Trade Weighted Dollar Index

70.371.076.179.482.583.386.589.086.081.573.379.489.085.0Unemployment Rate4.95.46.16.98.19.29.810.35.14.64.65.89.310.5Housing Starts

1.051.030.880.660.520.480.510.552.071.811.340.900.510.74Quarter-End Interest RatesFederal Funds Target Rate2.252.002.000.250.250.250.250.254.255.254.250.250.250.5010 Year Note3.453.993.852.252.713.203.403.404.394.714.042.253.403.70

Data As of: May 13, 2009

Compound Annual Growth Rate Quarter-over-Quarter

Federal Reserve Major Currency Index, 1973=100 - Quarter End

Year-over-Year Percentage Change

Millions of Units

U.S. Outlook 3Global Review 4 Global Outlook 5 Point of View 6 Market Data 7

U.S. Review Economics Group

U.S. Review

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Unemployment Rate

Seasonally Adjusted2%4%6%8%10%12%606570758085909500052%4%6%8%10%12%

Unemployment Surges to its Highest Level Since 1983

The civilian unemployment rate surged half a percentage point to9.4 percent in May, which was exactly in line with our expectations.The surge brings the unemployment rate to its highest level since July 1983 and reflects both the heavy layoffs over the past year andcontinued unwillingness of businesses to boost hiring.The jobless rate is bound to rise further in coming months but theincreases should be less dramatic. The most recent weeklyunemployment claims data show both first time unemploymentclaims and continuing unemployment claims declining in recentweeks. In addition, after rising for 11 consecutive weeks, theinsured unemployment rate has remained unchanged at5.0 percent for the past two weeks. The most recent data, however,cover the period surrounding the Memorial Day holiday anddeclines around that holiday are not unusual. Since the timing ofMemorial Day shifts, however, it can wreak havoc with theseasonal adjustment process. We would expect to see somebounce back next week, when the early June data are reported.

Unemployment Rate: May @ 9.4%

The modest decline in weekly unemployment claims and smallerlosses in nonfarm payrolls have raised hopes that the end of therecession may be near. The second quarter should mark the lastnegative period for real GDP and the recession should end at somepoint in the third quarter. The end of the recession will not markthe end of the economy’s troubles, however. Consumers are stillde-leveraging and will continue to do so until they rebuild savingsand feel more comfortable about their employment and incomeprospects. That could be several months down the road, as weexpect the unemployment rate to peak around a year from now atsomewhere between 10.5 and 11 percent.

ICSC/UBS Retail Chain Store Sales Index

Year-over-Year Percent Change-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%10.0%12.0%91939597990103050709-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%10.0%12.0%

Consumers clearly were not in the mood to spend freely in May.Monthly chain store sales figures showed broad-based declines forthe month. Comparable store sales, which now exclude Wal-Mart,were down 4.6 percent from one year ago and total store sales weredown 2.4 percent. Drug stores were the only category posting anincrease in sales.Motor vehicle sales were better than expected in May.Manufacturer sales rose to a 9.9 million unit annual rate during themonth, which matches March as the strongest pace of the year. Theincrease likely reflects some improvement in dealer financing.Dealers have held extremely lean new car inventories in recentmonths. Retail motor vehicle sales will not likely improve to thesame extent as manufacturer sales, reflecting the continuedreluctance of consumers to commit to major purchases.

Year-over-Year Percent Change: May @ 0.5%

Light Vehicle Sales

Seasonally Adjusted Annual Rate, In Millions02468101214161820222004200520062007200820090246810121416182022

Selected Current Data

Gross Domestic Product - CAGRQ1 - 2009-5.7%GDP Year-over-YearQ1 - 2009-2.5%Personal ConsumptionQ1 - 20091.5%Business Fixed InvestmentQ1 - 2009-36.9%Consumer Price IndexApril - 2009-0.7%"Core" CPIApril - 20091.9%"Core" PCE DeflatorApril - 20091.9%Industrial ProductionApril - 2009-12.5%UnemploymentMay - 20099.4%Federal Funds Target RateJun - 050.25%

Light Vehicle Sales: May @ 9.9 Million

U.S. Outlook Economics Group

Trade Balance • Wednesday

After falling every month since last November, imports finallypicked up a bit in March. The trade deficit bounced off of a nineyear low, widening to -$27.6B in March as imports were proppedup by higher oil prices. The widening was less than the consensushad expected.

U.S. Exports and Imports

Year-over-Year Percent Change, 3-Month Moving Average-30%-20%-10%0%10%20%30%94959697989900010203040506070809-30%-20%-10%0%10%20%30%Exports: Mar @ -17.0%Imports: Mar @ -26.2%

We expect the trade deficit to continue to widen to -$28.3B in April.While the combination of global recession and the worldwidecredit crunch caused trade to dry-up late last year, some signs oflife have recently returned. However, oil prices, and not robustglobal growth, will be a main driver of the headline number thismonth.

Previous: -$27.6B Wachovia: -$28.3BConsensus: -$28.9B

Retail Sales • Thursday

Retail sales fell 0.4 percent in April after a downwardly-revised fallin March. The core series, which excludes gasoline stations,building materials and auto dealers declined for the second straightmonth. Gains were seen in a few sectors but were minor at best.Big drops materialized in electronics and gasoline stations.

Retail Sales Ex. Auto & Gas Stations vs. Income

3-Month Moving Average-12%-9%-6%-3%0%3%6%9%12%15%9697989900010203040506070809-12%-9%-6%-3%0%3%6%9%12%15%Disposable Personal Income, Yr/Yr % Change: Apr @ 3.6%3-Month Annual Rate: Apr @ 0.7%

Stock MarketBubbleTax Cut 1Tax Cut 2Housing RefiBoomTaxRebates

Same store sales fell significantly in May with broad-based declinesacross all sectors. Department and luxury stores remain thehardest hit. However, on a year-over-year basis, discount stores,drug stores and wholesale clubs excluding fuel sales continue topost gains as consumers seek bargains. Additionally, prices at thepump rose roughly 18 percent from a month ago and should post again. We expect motor vehicle sales to continue showing weakness.The likely bottoming in retail sales combined with the sharpreduction in business inventories are preconditions to the recovery.

Previous: -0.4% Wachovia: 0.2%Consensus: 0.4%

Import Price Index • Friday

Overall import prices rose 1.6 percent in April, the secondconsecutive monthly increase. The rise was driven entirely by the15.4 percent jump in petroleum prices in April. Excludingpetroleum, import prices were down 0.4 percent in April, the ninthconsecutive monthly decline. On a year-over-year basis, prices ofnon-oil imports are down 5.6 percent, the sharpest rate of declineon record.

Import Prices

Year-over-Year Percent Change-20%-15%-10%-5%0%5%10%15%20%25%96980002040608-20%-15%-10%-5%0%5%10%15%20%25%Non-Oil Import Prices: Apr @ -5.6%Total Import Prices: Apr @ -16.3%

We expect petroleum prices to continue to weigh heavily onheadline import prices. However, import prices excludingpetroleum will likely continue their downward trend with inflationrates of imported capital goods and consumer goods remaining innegative territory. Economic weakness in foreign economies willlikely continue to exert downward pressure on U.S. inflationindicators in the months ahead.

Previous: 1.6% Wachovia: 2.4%Consensus: 1.1%