John Silvia – Chief Economist December 12, 2003 Art of Forecasting: The Financial Economy Presentation to: FDIC Economic Outlook Panel.

John Silvia – Chief EconomistDecember 12, 2003

Art of Forecasting: The Financial Economy

Presentation to: FDIC Economic Outlook Panel

20032002200120001999

10%

8%

6%

4%

2%

0%

-2%

10%

8%

6%

4%

2%

0%

-2%

REAL GDP GROWTHQuarter/Quarter Percent Change, Seasonally Adusted Annual Rate

3rd Quarter 2003@ 8.2%

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15%

10%

5%

0%

-5%

-10%

15%

10%

5%

0%

-5%

-10%

FINAL DOMESTIC DEMAND COMPONENTS(Year-on-Year Growth)

Blue Line = Consumer Spending @ 3.5%Red Line = Government Spending @ 3.7%

Green Line = Business Fixed Investment @ 6.8%

3Q 2003

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$1350

$1300

$1250

$1200

$1150

$1100

$1050

$1000

$950

$1350

$1300

$1250

$1200

$1150

$1100

$1050

$1000

$950

REAL EXPORTS & BUSINESS FIXED INVESTMENTIn Billions of 1996 Dollars

Blue Line = Real Business Fixed InvestmentGreen Line = Real Exports

3Q 2003

Blue Chip Consensus performs better than any individual forecaster.

Average of forecasts reduces noise/bias of individual forecasters

Access to independent information

Auto, Housing, SectorsRegional Influences

*Forecast Evaluation with Cross-Sectional Data: The Blue Chip Surveys, Bauer et. Al., FRB-Atlanta Economic Review, Second Quarter 2003

Forecast Date 2003 2004

April 2002 3.5 NA

February 2003 2.7 3.6

July 2003 2.3 3.7

December 2003 3.1 4.4

Real GDP

Error Persistence second Half of 1990s*

GDP, Unemployment Rate, Inflation

Underreported GDP when inflation, Interest Rates Low

Inefficient Forecasts

* Scott Schuh, An Evaluation of Recent Macroeconomic Forecast Errors, Forecasts Unbiased but Inefficient Structural Change: Inflation, Unemployment and Nominal Interest Rate Error Correlated. New England Economic Review, Jan/Feb 2001

Second Half of 1990s

Forecast Errors Persist: GDP, Unemployment Rate

Errors biased over short periods

Inflation: Underpredict 1970s

On Track 1990s

Inefficient Forecasts

Data on Inflation, Nominal Interest Rate Improves, GDP forecast

Not All Information on Inflation and Interest Rates are Incorporated into Average GDP Forecasts.

030199979593918987

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6%

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INCOME & SPENDING GROWTHYear to Year Percent Change, 12 Month Moving Average

OctoberReal Spending (Green Line) @ 3.0%Real, Disposable Income (Blue Line) @ 2.9%

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FINANCIAL OBLIGATIONS RATIOS (FOR)Total Financial Obligations as % of Disposable Personal Income

Blue Line = Homeowners FOR @ 14.1%

Green Line = Renters FOR @ 28.8%

3Q 2003

Red Line = Aggregate FOR @ 18.1%

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REAL BUSINESS EQUIPMENT & SOFTWARE SPENDINGSeasonally Adusted Annual Rate

3rd Quarter 2003@ 18.4%

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$1.4

$1.2

$1.0

$0.8

$0.6

$0.4

$0.2

$0.0

$1.4

$1.2

$1.0

$0.8

$0.6

$0.4

$0.2

$0.0

RENTAL COST OF CAPITALCents on the Dollar

Blue Line = Computers

Green Line = Software

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3%

Cost Of FundsAfter Tax Cost of Equity and Debt Financing

Green Line is After Tax Cost of Equity, 3Q @ 6.0%Blue Line is After Tax Cost of Debt, 3Q @ 3.8

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2.6

2.4

2.2

2.0

1.8

1.6

1.4

1.2

1.0

2.6

2.4

2.2

2.0

1.8

1.6

1.4

1.2

1.0

BB CORPORATE BOND YIELD /10-YEAR TREASURY YIELD

WorldCom

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CORPORATE PROFITSIn Billions of Dollars, SAAR

3rd Quarter 2003@ $1002.6 B

Adjusted for Inventory Valuation & Capital Consumption

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REAL FEDERAL FUNDS RATEVS. M2 MONEY GROWTH

Green Line = Real Fed Funds Rate*,Blue Line = M2 Growth, Yr/Yr % Change, October @ 6.2%

* Fed Funds Rate minus "Core" Consumer Price Index

October @ - 0.3%

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15%

23%

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18%

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16%

15%

FEDERAL SPENDING vs. REVENUEAs Percent of GDP

October '03

16.2%

SPENDING

REVENUE

19.7%

Latest 12 months:

Spending $ 2,183 TrillionRevenue $ 1,794 Trillion

(Blue Line)

(Green Line)

Financial Risk

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3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

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CONSUMER PRICE INDEXYear-over-Year Percent Change

OctoberBlue Line = Food, left scaleGreen Line = CPI, left scale

Red Line = Energy, right scale

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U.S. "Core" CPI - SERVICES VS GOODSYear to Year Percent Change

October

@ 2.9%Blue Line is "Core" Services

Green Line is "Core" Goods @ - 2.4%

"Core" = Ex. Food & Energy

Forecast Date 2003 2004

April 2002 2.5 NA

February 2003 2.3 2.3

July 2003 2.2 1.8

December 2003 2.3 1.9

Consumer Price Index

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4.0

3.5

3.0

2.5

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1.0

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3.0

2.5

2.0

1.5

1.0

0.5

10-YEAR TREASURY / FED FUNDS RATE

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2.0

1.8

1.6

1.4

1.2

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0.8

0.6

2.2

2.0

1.8

1.6

1.4

1.2

1.0

0.8

0.6

2-YEAR TREASURY / FED FUNDS RATE

Forecast Date 2003 2004

April 2002 5.8 NA

February 2003 4.3 5.2

July 2003 3.7 4.3

December 2003 4.0 4.8

10-Year Treasury Yield

Forecast Date 2003 2004

April 2002 5.3 NA

February 2003 6.0 5.6

July 2003 6.0 5.8

December 2003 6.0 5.8

Unemployment Rate

Bank Lending

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BANK C&I VS. CONSUMER LOANSYear-over-Year Percent Change

November 26

Blue Line = Consumer Loans @ 7.5%

Green Line = C&I Loans @ - 8.3%

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REVOLVING HOME EQUITY LOANSPercent Change in 13 week moving average

November 26

@ 29.6%Yr/Yr

13 WeekAnnual Rate

@ 28.9%

Blue Line is Yr/YrGreen Line is 13 Week, Annual Rate

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REAL ESTATE LOANSPercent Change in 13 week moving average

November 26

@ 13.8%Yr/Yr

13 WeekAnnual Rate

@ 8.6%

Blue Line is Yr/YrGreen Line is 13 Week, Annual Rate

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BANK CREDIT POLICY - C&I LOANSMeasures Net Easing or Tightening of Credit Standards

October '03

Above Zero = TighteningBelow Zero = Easing

Senior Loan Officer Opinion Surv ey by the Federal Reserv e

Blue Line = Large & Medium FirmsGreen Line = Small Firms

S

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BANK CREDIT POLICY - CONSUMER LOANSMeasures Net Easing or Tightening of Consumer Credit Criteria

October '03@ 14.3 %

Above Zero = EasingBelow Zero = Tightening

Senior Loan Officer Opinion Surv ey by the Federal Reserv e

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Fed Funds Rate and Construction andLand Development Assets in NonAccrual Status

Year-over-Year Percent Change

NonAccrual Assets - Constr./Land Devel. (left)Fed Funds Rate Level (Right)

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Real GDP and Construction/Land Development Charge-OffsYr/Yr % Change

Construction & Land Develop. Charge-Offs (left)Real GDP (Right)

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Real GDP and Assets Secured by MultifamilyResidential Properties in NonAccrual Status

Yr/Yr % Change

NonAccrual Assets - Multifamily Properties (left)

Real GDP (Right)

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Non-Accrual Assets, Federally Chartered Commercial BanksAssets in Nonaccrual Status Less Debt Securities and Other Assets

Blue line (left) is Non-Accrual Assets, Quarterly, in millions of dollarsGreen line (right) is Fed Funds Rate

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Total and Net Charge-OffsFederally Chartered Commercial Banks

Quarterly, in millions of dollars

Green line is total charge-offs

Blue line is net charge-offs

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