US Economics Analyst

Issue No: 10/31

August 6, 2010
FOR THOSE PERMISSIONED:

Goldman Sachs Global ECS Research

at https://360.gs.com

Climbing Aboard QE2 to Avoid a Double Dip?

Our forecast for a significant slowing in the
second half of 2010, widely seen as
implausible three months ago, is now
increasingly accepted. We reaffirm our view
Fiscal and Inventory Supports Fade
Percentage points, annual rate Percentage points, annual rate
5
Impact on GDP Growth:
5

Jan Hatzius that real GDP growth will average 1½% at 4 Total 4
jan.hatzius@gs.com an annual rate for the rest of the year. Fiscal Stimulus
Inventories
212 902 0394 3 3
However, we have cut our forecast for 2011
Ed McKelvey as lawmakers’ resistance to renewing fiscal 2 2
ed.mckelvey@gs.com stimulus has risen while various headwinds 1 1
212 902 3393 to private-sector growth persist. We now Forecast
think growth will stay at 1½% in the first 0 0
Alec Phillips
alec.phillips@gs.com
quarter and then rise gradually to 3% by -1 -1
202 637 3746 year-end. At 2¼% from fourth quarter to
fourth quarter, the new profile is 0.9 -2 -2

Sven Jari Stehn percentage point below the old one. Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2009 2010 2011
jari.stehn@gs.com *Includes multiplier eff ects of federal, state, and local fiscal policy.

212 357 6224

Although the risk of a double-dip recession Source: Congressional Budget Of fice. Recovery.gov. Our calculations.

is material, we think it will be avoided for

Andrew Tilton two reasons.
andrew.tilton@gs.com
First, the Federal Open Market Committee Rental Indexes Stabilize
212 357 2619 Percent change, year ago Percent change, year ago
(FOMC) is likely to resume unconventional 5 5

David Kelley
easing by late 2010/early 2011 as the jobless
david.kelley@gs.com rate approaches 10%. Although it is a close
212 902 3053 call, we expect the FOMC to take a “baby
step” in this direction at next week’s meeting
Maria Acosta-Cruz by deciding to reinvest MBS paydowns in
maria.acosta-cruz@gs.com US Treasuries. Later measures would
212 902 6709 include a stronger commitment to keep rates
low and/or asset purchases of at least $1
trillion, most likely also in Treasuries.
4 4
3 3
2 2
1
Consumer Price Index:
1
Rent of Primary Residence
Owners' Equivalent Rent of Residences

Second, private-sector spending on durable 0 0

goods is unlikely to fall further from levels

already depressed by the last recession. -1
06 07 08 09 10
-1

Eventually, we also expect the headwinds Source: Department of Labor.

(from excess housing, reluctance to hire, and
consumer saving) to dissipate.
Despite the growth downgrade, we have
nudged up our inflation forecast to take on
board upward revisions to the core PCE
index and signs of stabilization in rental
indexes. However, we still expect inflation
to recede, and we still see deflation as a risk.
Important disclosures appear at the back of this document.
GS Global ECS US Research US Economics Analyst

I. Climbing Aboard QE2 to Avoid a Double Dip?

Over the past two to three months, the US economic
recovery has lost much of its momentum. As a result,
our forecast of a significant slowing in US growth in
the second half of 2010—widely seen as implausible
just three months ago—is now increasingly accepted.
As the data disappointments intensified in early July,
we indicated that we would consider revisions to our
economic outlook. With revisions to GDP and this
week’s high-profile data now in hand, we are making
the following changes, summarized in Exhibit 1:
1. Slower growth in 2011. We continue to expect
real GDP growth to average 1½% (annual rate) in
the second half of 2010. However, we have
scaled back the anticipated reacceleration in 2011,
largely due to heightened congressional resistance
to extending fiscal stimulus. Thus, whereas we
previously forecasted growth to rise from 2½% in
the first quarter to 3½% by the second half, we
now look for a more gradual pickup—from 1½%
in the first quarter to 3% in the fourth quarter.
2. Continued disinflation, but at a slower pace
than before. We now expect both the price index
for personal consumption expenditures excluding
food and energy (core PCE index) and the core
CPI to slow to a year-to-year rate of ½% by year-
end 2011; our previous forecasts were ¼% and
zero, respectively. Although the growth revision
implies a larger output gap over the next 18
months, two other considerations dominate: (a)
upward revisions to core PCE inflation announced
in the latest annual GDP revisions and (b) signs
that disinflation in rents may have ended.
3. A return to unconventional monetary easing by
late 2010/early 2011. We expect the Federal
Open Market Committee (FOMC) to respond to
renewed upward pressure on the unemployment
rate with another round of unconventional
monetary easing. These measures could involve
more asset purchases—probably Treasury
securities—and/or a more ironclad commitment to
keep the federal funds rate low. If the committee
decides on more asset purchases, the amount
would be at least $1 trillion (trn).
4. A “baby step” to unconventional easing next
week. Although it is a fairly close call, we now
expect the FOMC to announce that it will reinvest
paydowns of mortgage-backed securities (MBS)
in the bond market at next Tuesday’s meeting.
While this would be a “baby step” in the direction
of renewed unconventional easing, it would
probably be packaged as a decision to prevent
gradual tightening of the overall policy stance.
How We Got to Where We Are
Three months ago, our forecast that US economic
growth would slow to a 1½% annual rate—a pace
meaningfully below its long-term potential of 2½% to
3%—found few takers. Last week’s annual revisions
to GDP illustrate why. Growth in the first quarter of
2010, the data for which were still being published as
late as early May, was 3.7% at an annual rate. This
followed a 5.0% annualized increase in the fourth
quarter of 2009. In short, evidence of an impending
slowdown in overall output was scant, though final
sales were rising at only about a 1½% annual rate.
As this underlying trend has become more apparent,
most economic reports have fallen short of market
expectations. The disappointments were especially
large in late June and the first half of July. Although
they have become more mixed since then, this is
partly because forecasters have lowered their sights.
On balance, the surprises still tilt to the side of slower
growth, including today’s jobs report for July.

Exhibit 1: Key Changes in the US Economic Outlook

2010 2011 Ann. Avg. Q4/Q4
Q3 Q4 Q1 Q2 Q3 Q4 '10 '11 '10 '11

Real GDP (percent change from previous period, annual rate)

Current 1.5 1.5 1.5 2.0 2.5 3.0 2.7 1.9 2.3 2.2
Previous 1.5 1.5 2.5 3.0 3.5 3.5 2.7 2.5 2.3 3.1

Unemployment Rate (percent of labor force)

Current 9.6 9.8 9.9 10.0 10.0 10.0 9.7 10.0 9.8 10.0
Previous 9.6 9.8 9.9 9.9 9.8 9.7 9.7 9.8 9.8 9.7

Core PCE Inflation (percent change, year ago)

Current 1.6 1.5 1.4 1.3 0.8 0.5 1.6 1.0 1.5 0.5
Previous 1.2 1.1 0.8 0.7 0.5 0.3 1.1 0.4 0.8 0.3
Source: Our calculations.
Issue No: 10/31 2 August 6, 2010
GS Global ECS US Research
Exhibit 2: Fiscal and Inventory Supports Fade
Percentage points, annual rate Percentage points, annual rate
5 5
Impact on GDP Growth:
4 Total 4 from the current political climate—that any further
Fiscal Stimulus
Inventories
3 3
2 2
1 1
Forecast
0 0
-1
-2
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2009 2010 2011
*Includes multiplier ef f ects of federal, state, and local f iscal policy.
Source: Congressional Budget Of f ice. Recovery.gov. Our calculations.
Could the slowdown prove to be fleeting? This is
always possible. However, as we noted on these
pages three weeks ago, its timing is roughly consistent
with our estimates that the growth supports from fiscal
stimulus and the inventory cycle would dissipate
around midyear. Accordingly, we believe that US
growth will remain sluggish for a while. If anything,
the 1½% annualized growth rate we had penciled in
for the second half of 2010 could be too high as it is
roughly in line with the growth trend in real final sales
over the past year and therefore consistent with the
lack of any meaningful contribution from increased
inventory accumulation. Implicitly, this assumes that
private-sector demand will pick up by enough to offset
the loss of fiscal support. As shown in Exhibit 2, we
reckon that the combined fiscal posture of federal,
state, and local jurisdictions is turning restrictive in
the second half of 2010.1 Given this shift, it is
heartening to see that many companies have coupled
strong earnings reports with upbeat guidance about
business for the remainder of the year; otherwise, we
might be lowering our forecast for 2010.
Lowering Sights on 2011…
For 2011, we have reduced our growth outlook by
about 0.9 percentage point on a fourth-quarter to
fourth-quarter basis, as noted above. The main
reason, as also noted, is the heightened resistance by
many members of Congress to extending various
fiscal supports to economic activity as they worry
about rising risks of longer-term fiscal instability.
This resistance was on full display during the latest
debate on extending emergency jobless benefits in
1
For further details on the construction of the fiscal
component of Exhibit 2, see “The Fiscal ‘Swing’—
Federal, State, and Local,” US Daily Comment, July
28, 2010.
Issue No: 10/31
US Economics Analyst
July. Although the extension eventually passed, this
was more than six weeks after the benefits had lapsed
in early June. Moreover, the renewal lasts only until
November, at which time it seems likely—judging
renewal will require an offset elsewhere in the federal
budget. This would reduce the effect on economic
activity significantly. Meanwhile, a $26bn package of
federal aid to state governments barely cleared the
Senate this week, and extension of the tax cuts enacted
in 2001 and 2003, which once seemed like a done deal
for all but upper-bracket taxpayers, is far from certain
less than five months before they are due to expire.
-1
Given these hurdles, we have revised our estimates of
-2
the impact of fiscal programs on growth to show more
restraint in 2011. (This still assumes that the tax cuts
are extended along the lines just indicated.) As seen
already in Exhibit 2, we now estimate an average
fiscal drag of 1.7 percentage points over the four
quarters of next year. While a precise comparison
with our previous all-in fiscal assumption is difficult
given the various refinements we have made to this
calculation, we recently estimated that the increase in
fiscal drag for 2011 would be nearly one percentage
point for federal programs.2
Under these circumstances, it is difficult to rationalize
the pickup in growth that we previously forecasted for
the US economy in early 2011. Beyond the fiscal
issues, we see no let-up in three headwinds to private-
sector growth:
1. The overhang of unoccupied housing remains
near its record high. Until this supply is worked
off, it will siphon off a disproportionate share of
the net increase in demand for housing, leaving
builders with little reason to start new homes.
Thus, housing is not providing the cyclical power
that it has in past cycles, as shown in Exhibit 3.
2. Employers remain cautious in hiring.
Throughout this recovery, we have argued that US
firms did not reduce payrolls disproportionately
relative to real GDP during the recession, and that
they would more likely follow the path of the last
two “jobless” recoveries than the more vigorous
patterns of earlier cycles. The deeper downturn
now reported for real GDP reinforces the first
point; Exhibit 4 illustrates the second.
3. Consumers appear unlikely to reduce saving
materially. One of the most striking elements of
the annual GDP revision was the upward revision
to the personal saving rate, shown in Exhibit 5.
The household financial balance (not shown) was
2
See “The End of the Road for Fiscal Stimulus?” US
Daily Comment, July 20, 2010.
3 August 6, 2010
GS Global ECS US Research US Economics Analyst
3
also revised up by a comparable amount. Exhibit 3: Excess Supply Keeps Starts Down
Although this suggests that US households have Percent of housing stock Thousands of units
made more progress in adjusting to lower net 5.25 2800
worth positions, they are probably still wary of Residential Vacancies* (lef t)
reversing course. If that is correct, then the Housing Starts (3-mo avg, right) 2400
constraints on income implied by cautious hiring, 4.50
coupled with the likelihood of more price
2000
weakness in a housing market saddled with excess
3.75
supply, suggest that real consumer spending will
remain on a sluggish growth path. 1600

3.00
…Raising Fears of a Double Dip… 1200

As the slowdown in US growth has become more

2.25
visible, worries about a “double-dip” recession have 800
risen. This is understandable given the question
marks that now hang over US stabilization policy and 1.50 400
the key role that policy tightening has played in 65 70 75 80 85 90 95 00 05 10
aborting recoveries prematurely in the past. For * Vacant units f or sale or rent.
Source: Department of Commerce. NBER.
example, in 1981 the Fed consciously ran the risk of
renewed recession in a recovery that was only a year
old in order to rid the US economy of double-digit Exhibit 4: Payrolls on a “Jobless” Track
inflation; the economy subsequently suffered the only Pct chg vs end of recession Pct chg vs end of recession
double dip since World War II. Although the 1937 6 6
Private Nonf arm Employment:
recession was not exactly a double dip given that it
5 1954 - 1982* 5
came four years after the trough of the Great 1991
Depression, it was similar in the sense that it was a 4 2001 4
policy-induced downturn, engineered while the 2009
economy had considerable slack, and for reasons 3 3
eerily similar to those now being advanced against the
2 2
renewal of fiscal stimulus.
1 1
In the case of fiscal policy today, the big question is
whether Congress can find a way to couple more near- 0 0

term stimulus with a credible and “ironclad” path to -1 -1

fiscal austerity down the road, when the economy is
better able to withstand it. Our research suggests that -2 -2
packaging stimulus now with a credible fiscal rule -12 -10 -8 -6
-4 -2 0 +2 +4 +6 +8 +10 +12 +14 +16 +18
Months f rom End of Recession
would enhance the stimulus.4 However, the resistance * Excludes the 1980-81 recovery, which ended af ter 12 months.
Source: Department of Labor.
noted above represents a de facto judgment that this is
not politically feasible. In the case of monetary
policy, the question is whether the tools left are
powerful enough, although resistance to use them is Exhibit 5: Saving Rate Revised Up
Percent Percent
also apparent from some members of the FOMC. It is
8 8
largely for these reasons that we see more than a
trivial probability of a double-dip recession in 2011. Historical Avg: 7%

In the end, however, we think it will be averted.

6 6
…That the FOMC Will Combat with QE2…
A key factor in this judgment is this: when push
comes to shove the FOMC is likely to act and to do so 4 4
aggressively. This may sound surprising at first blush,

3
The household financial balance is an alternative 2 2
gauge of saving that we highlighted earlier this spring. Personal Saving Rate:
See “Housing Holds the Key to the Consumer Current
Conundrum,” US Economics Analyst, April 9, 2010. Previous
4 0 0
See “Squaring the Fiscal Circle: Could a Fiscal Rule 90 92 94 96 98 00 02 04 06 08 10
Help?” US Economics Analyst, July 23, 2010. Source: Department of Commerce.

Issue No: 10/31 4 August 6, 2010

GS Global ECS US Research
as the minutes to the June FOMC meeting revealed
only a small downgrade to the committee’s growth
forecast and provided only a fleeting and highly
qualified reference to the possibility that renewed
easing might be needed. Moreover, Chairman
Bernanke largely stuck to the party line at the policy
hearings in July, at least in his prepared testimony.
However, in the question-and-answer sessions the
chairman did indicate that more Fed easing would be
forthcoming if the slowdown persisted to the point of
pushing the jobless rate back up. This makes sense
given how reliable small increases in the jobless rate
have been in signaling recessions. As we have noted
many times over the years, since World War II the US
economy has never escaped recession once the jobless
rate has posted a cumulative increase of more than 0.3
percentage points on a 3-month moving average basis
from a fresh low, as shown in Exhibit 6. Although the
applicability of this rule in early recovery is unclear,
the FOMC can hardly afford to stand by if the jobless
rate rises 0.3 points from the current low of 9.57%.
Chairman Bernanke also outlined three possible tools
for further easing: (1) to strengthen the commitment to
keep short-term rates “exceptionally low for an
extended period;” (2) to cut the interest rate on excess
reserves (IOER) from its current 25-basis-point level;
and (3) to resume asset purchases. He also said that
the FOMC would review all of its options, including
the possibility of reinvesting MBS prepayments and
redemptions. Currently, these proceeds are not being
reinvested, with the result that the Fed’s balance sheet
is set to shrink slowly over time. This amounts to a
slight tightening bias in the current policy stance,
albeit one that may not have much effect given the
enormous volume of excess reserves in the system.
With the IOER already close to zero, we see little to
be gained from cutting it further, other than to signal a
switch in policy orientation. The incentive for banks
to make new loans would increase only marginally,
while money market funds would have a tougher time
eking out positive returns as yields on other short-term
assets moved even closer to zero. Besides, the FOMC
could send the same signal by taking up the MBS
reinvestment option. Although it is a close call, we
now expect this to occur at next week’s meeting.
Implementation of the “bigger” options—a stronger
commitment to keep the federal funds rate near zero
and/or more asset purchases—will require both more
discussion and more evidence of economic weakness.
Recall in this regard that most FOMC members are
starting from a more robust economic outlook than
ours; as recently as late June, the committee’s “central
tendency” range for growth in 2010 was 3% to 3½%.
These figures would undoubtedly be lower now, but
probably not to the point where most members see a
Issue No: 10/31
US Economics Analyst
Exhibit 6: Jobless Rate Signals Downturns
Percent of labor f orce Percent of labor f orce
12 12
10 10
8 8
6 6
4 4
2 2
Civilian Unemployment Rate
0 0
48 52 56 60 64 68 72 76 80 84 88 92 96 00 04 08 12
* 3-month moving average. Vertical lines denote months in which jobless
rate rose more than 0.3 percentage points above the preceding low.
Source: Department of Labor. NBER.
double-dip as sufficiently likely to warrant more than
a shot across the bow.
The one member who has publicly spoken on these
alternatives is James Bullard, president of the St.
Louis Federal Reserve Bank. In a recent paper, he
argued that additional stimulus—if needed—should
take the form of purchasing Treasury securities rather
than beefing up the rate commitment language, which
he sees as potentially counterproductive.5 Elsewhere
we have shown that both have had similar effects in
reducing long-term interest rates. However, we think
that the FOMC is likely to opt for asset purchases as
the more effective way to provide additional stimulus.
This is because most members appear uncomfortable
with the type of policy rate commitment needed to
push real long-term rates down materially—for
example, one that promises to hold rates low until
inflation rises to a certain level.6
That said, one possibility would be for Chairman
Bernanke, after consultation with the FOMC, to speak
out publicly about research that shows how the
FOMC’s past rate-setting behavior would currently
imply a federal funds rate well below zero. By
suggesting, even indirectly, how long it would take for
this desired funds rate to get back to zero, he could
have a meaningful impact on market expectations.
Some of this research is ours, but notably it also
includes contributions from the San Francisco Fed.7
5
See James Bullard, “Seven Faces of ‘The Peril’,”
Federal Reserve Bank of St. Louis Review
(forthcoming) September-October 2010.
6
See “‘Extended Period’ vs. Asset Purchases: How
Effective are the Fed’s Unconventional Policies,” US
Daily Comment, August 3, 2010.
7
See “No Rush for the Exit,” Global Economics Paper
No. 200, June 30, 2010, and Glenn Rudebusch, “The
5 August 6, 2010
GS Global ECS US Research
Exhibit 7: Equipment Spending at a Low
Percent of GDP
10
Private Equipment Investment:
9 Gross Investment
Depreciation
8 8
7 7
6 6
5 5
4 4
3 3
50 55 60 65 70 75 80 85 90 95
Source: Department of Commerce.
In the end, the FOMC is more likely to embrace a new
asset purchase program—climbing aboard QE2 to
help avert a double dip, so to speak—though both are
certainly possible. The most likely timing of these
larger steps would be late 2010 or early 2011, as the
jobless rate approaches 10%. The asset purchases
would likely be for Treasury securities, and to have a
meaningful effect, total at least $1trn.
…With Some Help from the Private Sector
While the prospect of more monetary stimulus
certainly helps the case against a double dip, two
private-sector considerations also factor into our
thinking on this issue. First, purchases of durable
goods have already taken a beating as households and
businesses have deferred acquisitions of these largely
discretionary items. In many cases, activity has fallen
close to or below replacement rates. The most
obvious example is home building, where starts have
fallen to a 600,000 annual rate. While the case for a
near-term increase is not good, this starts rate appears
to be a frictional low, and it is only about half the
trend rate of household formation. Meanwhile,
business spending on capital equipment has fallen to
the level needed to replace worn-out equipment, as
shown in Exhibit 7. The same is likely true for
household purchases of motor vehicles.
Second, at some point the headwinds to growth will
peter out. The excess supply of empty housing will
eventually disappear, businesses will eventually hire
more workers as they run out of ways to squeeze more
out of the existing work force, and consumers will
eventually tire of efforts to boost saving. These points
Fed’s Monetary Policy Response to the Current Crisis,
FRBSF Economic Letter, 2009-17, May 22, 2009.
Issue No: 10/31
US Economics Analyst
Exhibit 8: Rental Indexes Stabilize
Percent of GDP Percent change, year ago Percent change, year ago
10 5 5
9
4 4
3 3
2 2
Consumer Price Index:
1 1
Rent of Primary Residence
Owners' Equivalent Rent of Residences
0 0
-1 -1
00 05 10 06 07 08 09 10
Source: Department of Labor.
are obviously hard to predict, and not all of them will
be reached in 2011. But as the headwinds diminish,
real GDP growth can strengthen, aided by policy
stimulus. It is on this basis that we forecast a gradual
resumption of trend growth in 2011, though with
lingering concern that risks still tilt to the downside.
Inflation Still Falls, But From a Higher Base
As noted at the outset, we have nudged our inflation
forecast up despite the downgrade to our growth view
and its implication that the economy will be operating
with more spare capacity than we previously thought.
This change reflects two overriding factors. First, the
annual GDP revisions reveal that the core PCE
inflation rate has been about 0.2 percentage points
higher than we previously thought, all in the
nonmarket based components. We have therefore had
to benchmark our forecast to this higher trend.
Second, in the last two to three months, the rental
indexes have shown signs of stabilizing, as shown in
Exhibit 8. Although this is somewhat surprising given
conditions in the housing market, shifts in these
indexes tend to be meaningful. We have therefore
moderated the expected rate of disinflation on this
count as well, with a larger effect on the CPI core.
These changes do not overturn the direction of our
inflation call. It is still down, but now only to about
½% (year-to-year) by the end of 2011. Although this
creates a bit more room against the deflation outcome,
we still see that as the bigger risk, especially as the
persistence of excess capacity points to the likelihood
of slightly more disinflation beyond 2011.
Ed McKelvey
6 August 6, 2010
GS Global ECS US Research US Economics Analyst

THE US ECONOMIC AND FINANCIAL OUTLOOK

(% change on previous period, annualized, except where noted)
2009 2010 2011 2010 2011
(f) (f) (f) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
OUTPUT AND SPENDING
Real GDP 3.7 2.4 1.5 1.5 1.5 2.0 2.5 3.0
Year-to-year change -2.6 2.7 1.9 2.4 3.2 3.1 2.3 1.7 1.6 1.9 2.2
Consumer Expenditure -1.2 1.3 1.4 1.9 1.6 1.5 1.0 1.0 1.5 2.0 2.5
Residential Fixed Investment -22.9 -1.6 0.5 -12.3 27.9 -15.0 -10.0 0.0 5.0 10.0 15.0
Business Fixed Investment -17.1 5.5 5.2 7.8 17.0 10.0 5.0 2.5 2.5 5.0 5.0
Industrial Production, Mfg -11.1 5.1 2.0 6.3 7.8 0.5 1.0 1.0 2.0 3.0 4.0
INFLATION
Consumer Price Index 1.5 -0.7 0.2 1.6 1.5 0.9 0.5 0.3
Year-to-year change -0.3 1.4 0.9 2.4 1.8 0.9 0.6 0.6 1.0 1.1 0.8
Core Indexes (% chg, yr/yr)
CPI 1.7 1.1 0.9 1.3 1.0 1.0 1.0 1.2 1.1 0.7 0.5
PCE* 1.5 1.6 1.0 1.8 1.5 1.6 1.5 1.4 1.3 0.8 0.5
Unit Labor Costs (% chg, yr/yr) -1.9 -3.0 -0.5 -4.2 -4.5 -2.5 -0.7 -0.5 -0.4 -0.6 -0.6
LABOR MARKET
Unemployment Rate (%) 9.3 9.7 10.0 9.7 9.7 9.6 9.8 9.9 10.0 10.0 10.0
FINANCIAL SECTOR
Federal Funds** (%) 0.12 0.15 0.15 0.16 0.18 0.15 0.15 0.15 0.15 0.15 0.15
3-Month LIBOR (%) 0.25 0.50 0.60 0.27 0.54 0.45 0.50 0.40 0.40 0.45 0.60
Treasury Yield Curve** (%)
2-Year Note 0.87 0.40 0.75 0.96 0.72 0.40 0.40 0.40 0.50 0.50 0.75
5-Year Note 2.34 1.00 2.00 2.43 2.00 1.00 1.00 1.25 1.50 1.75 2.00
10-Year Note 3.59 2.50 3.25 3.73 3.20 2.75 2.50 2.50 2.75 3.00 3.25
Profits*** (% chg, yr/yr) 5.1 18.5 0.0 27.0 30.5 15.0 4.5 0.0 -5.0 0.0 5.5
_ _ _ _ _ _ _ _
Federal Budget (FY, $ bn) -1,414 -1,375 -1,300
FOREIGN SECTOR
Current Account (% of GDP) -2.7 -3.0 -2.6 -3.0 -3.3 -2.9 -2.7 -2.7 -2.7 -2.6 -2.6
Exchange Rates
Euro ($/€)** 1.46 1.35 1.38 1.36 1.22 1.22 1.35 1.37 1.38 1.38 1.38
Yen (¥/$)** 90 83 90 91 91 85 83 87 90 90 90
* PCE = Personal consumption expenditures. ** Denotes end of period. *** Profits are after taxes as reported in the national income
and product accounts (NIPA), adjusted to remove inventory profits and depreciation distortions.
NOTE: Published figures are in bold

We, Jan Hatzius, Ed McKelvey, Alec Phillips, Sven Jari Stehn and Andrew Tilton hereby certify that all of the views expressed in this report accurately reflect personal views, which have not been influenced by considerations
of the firm’s business or client relationships.

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Issue No: 10/31 7 August 6, 2010

US Calendar

Focus for the Week Ahead

Retail sales are apt to show gains after two months of softer data. Unit sales of vehicles rose in July, and retailers
posted reasonable results, if slightly below expectations (August 13).
We expect a sticky increase in headline CPI, due mainly to the failure of energy prices to fall as they normally do
in July. Food prices also appear to have picked up. However, the core index should be fairly benign (August
13).
Output per hour stalled in the second quarter, but so did labor compensation. As a result, we look for another
decline in unit labor costs. Data for the prior three years will be revised to accommodate the GDP revisions
(August 10).

Economic Releases and Other Events

Time Estimate
Date (EST) Indicator GS Consensus Last Report
Tue Aug 10 8:30 Nonfarm Productivity (Q2-Preliminary) +0.6% +0.2% +2.8%
8:30 Unit Labor Costs -0.8% +1.5% -1.3%
10:00 Wholesale Inventories (Jun) n.a. +0.5% +0.5%
14:15 FOMC Meeting Results 0.25% 0.25% 0.25%
Wed Aug 11 8:30 Trade Balance (Jun) -$42.6bn -$42.3bn -$42.3bn
14:00 Federal Budget Balance (Jul) -$160.0bn -$169.0bn -$180.7bn
Thu Aug 12 8:30 Import & Export Prices (Jul) n.a. +0.4% -1.3%
8:30 Initial Jobless Claims n.a. 465,000 479,000
8:30 Continuing Claims n.a. 4,540,000 4,537,000
10:00 Fed Gov Duke spks at Chicago Fed on Reinvestment Act
Fri Aug 13 8:30 Consumer Price Index (Jul) +0.30% +0.2% -0.1%
Ex Food and Energy +0.10% +0.1% +0.2%
NSA Index 218.175 218.172 217.965
8:30 Retail Sales (Jul) +0.4% +0.5% -0.5%
Ex Autos +0.3% +0.3% -0.1%
9:55 Reuters/U. Mich Consumer Sentiment—Prel (Aug) n.a. 69.4 67.8
10:00 Business Inventories (Jun) n.a +0.2% +0.1%
11:30 KC Fed Pres Hoenig spks in Lincoln, NE on
“Too Big to Fail or Too Big to Succeed? Wall Street,
Main Street, and America’s Economic Security”

Issue No: 10/31 8 August 6, 2010