PBCTPBCT 1 Economic Overview “ No Double-Dip?” September 2002 Todd P. Martin 1st VP & Chief Economist People’s Bank 203.338.4826 [email protected].

PBCT

1

Economic OverviewEconomic Overview

““No Double-Dip?”No Double-Dip?”September 2002

Todd P. Martin1st VP & Chief Economist

People’s Bank203.338.4826 [email protected]

PBCT

2

US Economic Outlook US Economic Outlook

• Economy still expanding, but recovery is losing momentum. Consumers continue to spend but job growth and capital spending remain weak.

• Fed likely to leave fed funds at 40 year lows through mid-2003 -- increased risks of economic weakness due to volatile financial markets and uncertainty surrounding corporate reporting and governance.

• Current data do not suggest a “Double-Dip” - Retail sales & housing are strong, initial jobless claims trending lower.

• Risks to the downside: Collapse of stock market bubble -- falling investor, business & consumer confidence -- widening Federal & State budget deficits -- weaker dollar -- Latin America -- Middle East -- Iraq -- more terrorist attacks?

• Mild recession last year = moderate and vulnerable recovery this year

PBCT

3

Revisions show weaker economic growth in 2001Revisions show weaker economic growth in 2001

Source: BEA, Conference Board People’s Bank

Real Chain Weighted Gross Domestic Product Growth - % change SAR

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Revised Previous

3rd Q 2002-4th Q 2003 are forecast

PBCT

4

Bubble Bursts: Lots of wealth lostBubble Bursts: Lots of wealth lost

Source: Bloomberg, People’s Bank

NASDAQ Index NASDAQ Index

Transformation: Level Source: RFA, User

0

1000

2000

3000

4000

5000

95 96 97 98 99 00 01 02

PBCT

5

Stocks undervalued based on “The Fed Model”Stocks undervalued based on “The Fed Model”

Source: Yardeni.com, Federal Reserve

PBCT

6

Fed to leave rates at 40-year lows through mid-2003?Fed to leave rates at 40-year lows through mid-2003?

Source: Conference Board, Bloomberg, People’s Bank

10 Year Treasury Note Yield vs. Targeted Fed Funds Rate %

Fed Funds vs. 10 Year T-Note

10 Year T-Note Yield Targeted Fed Funds Rate

1

3

5

7

9

90 91 92 93 94 95 96 97 98 99 00 01 02

PBCT

7

““Real” interest rates are historically lowReal” interest rates are historically low

Source: Conference Board, Bloomberg, People’s Bank

Targeted Fed Funds Rate less YOY% change in CPI - %

Real Fed Funds Rate

Transformation: Level Source: Bloomberg, User

-1

0

1

2

3

4

5

90 91 92 93 94 95 96 97 98 99 00 01 02

PBCT

8

The Yield Curve has steepened The Yield Curve has steepened

Source: Bloomberg, People’s Bank

US Treasury Yields % -- 3 month T-bills to 30 year T-bonds

1.0

2.0

3.0

4.0

5.0

6.0

7.0

12/29/2000 9/3/2002

PBCT

9

But has flattened since March 2002 But has flattened since March 2002

Source: Bloomberg, People’s Bank

US Treasury Yields % -- 3 month T-bills to 30 year T-bonds

1.0

2.0

3.0

4.0

5.0

6.0

7.0

3/28/2002 9/3/2002

PBCT

10

Confidence falling: Stocks - Scandals - War?Confidence falling: Stocks - Scandals - War?

Source: Conference Board, People’s Bank

Cons. Confid. Index, Composite

Transformation: Level Source: The Conference Board

0

50

100

150

90 91 92 93 94 95 96 97 98 99 00 01 02

PBCT

11

Consumer continues to spend - at a slower paceConsumer continues to spend - at a slower pace

Source: Conference Board, BEA, People’s Bank

Real Personal Consumption Expenditures - Quarterly % change AR

Consumer Spending (CW$)

Transformation: %Chg, AR Source: Bureau of Economic Analysis

-2

-4

0

2

4

6

8

89 90 91 92 93 94 95 96 97 98 99 00 01 02

PBCT

12

Jobless Claims starting to move higher again?Jobless Claims starting to move higher again?

Source: BEA, Stone & McCarthy Research

PBCT

13

Layoffs down from highs, but rising againLayoffs down from highs, but rising again

Source: Challenger Gray & Christmas, SMRA, People’s Bank

Challeger Report: Announced Layoffs

Transformation: Level Source: CG&C, User

0

50000

100000

150000

200000

250000

94 95 96 97 98 99 00 01 02

PBCT

14

The economy is not creating a lot of jobs yetThe economy is not creating a lot of jobs yet

Source: Conference Board, BLS, People’s Bank

Establishment Employment, Nonfarm

Transformation: Change Source: Bureau of Labor Statistics

-100

-200

-300

-400

-500

0

100

200

300

400

500

600

90 91 92 93 94 95 96 97 98 99 00 01 02

monthly change (thousands) SA

PBCT

15

Unemployment the highest since 1994Unemployment the highest since 1994

Source: Conference Board, BLS, People’s Bank

Unemployment Rate, Civilian

Transformation: Level Source: Bureau of Labor Statistics

3

4

5

6

7

8

90 91 92 93 94 95 96 97 98 99 00 01 02

PBCT

16

ISM index shows manufacturing losing steamISM index shows manufacturing losing steam

Source: Conference Board, ISM, People’s Bank

Institute of Supply Management Survey (formally NAPM)

Purchasing Managers' Index

Transformation: Level Source: NAPM

30

35

40

45

50

55

60

90 91 92 93 94 95 96 97 98 99 00 01 02

PBCT

17

Home Sales slowing some - but still very strongHome Sales slowing some - but still very strong

Source: Conference Board, People’s Bank

Housing Sales, New and Existing Homes

Transformation: Level Source: Bureau of the Census

3

4

5

6

7

90 91 92 93 94 95 96 97 98 99 00 01 02

(SAAR) in millions

PBCT

18

Mortgage refinance hits a new highMortgage refinance hits a new high

Source: MBA, People’s Bank

PBCT

19

State Tax Revenues are down sharplyState Tax Revenues are down sharply

Source:Stone & McCarthy Research, Rockefeller Inst. Of Gov..

PBCT

20

People's Bank Business Barometer stallsPeople's Bank Business Barometer stalls

Source: People’s Bank, Centerprise Advisors

People's Bank Business Barometer - 1992=100

Transformation: Level Source: Centerprise Advisors, User

50.0

57.8

65.6

73.3

81.1

88.9

96.7

104.4

112.2

120.0

69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01

PBCT

21

PBBB YOY shows mild recession in CT last yearPBBB YOY shows mild recession in CT last year

Source: People’s Bank, Centerprise Advisors

People's Bank Business Barometer - (YOY % change)

Transformation: %Chg, YA Source: Centerprise Advisors, User

-1

-2

-3

-4

-5

0

1

2

3

4

5

89 90 91 92 93 94 95 96 97 98 99 00 01 02

PBCT

22

Quarterly change in PBBB - CT not out of the woods yetQuarterly change in PBBB - CT not out of the woods yet

Source: People’s Bank, Centerprise Advisors

People's Bank Business Barometer - (Quarterly % change)

Transformation: %Change Source: Centerprise Advisors, User

-0.5

-1.0

0.0

0.5

1.0

1.5

98 99 00 01 02

PBCT

23

SummarySummary

• No “Double-Dip”, but growth likely to be sub-par

• Fed on hold through mid-2003 - but short-term rates should rise by year-end 2003

• Economy has been remarkably resilient last 12-months - Risks are to the downside

• Watch: Jobless Claims - employment - purchasing managers’ index - LEI - consumer confidence

PBCT

24

For more information...For more information...

Please check out our web site at www.peoples.com for Economic Perspectives and other bank products & services