Presented by Economic and Tax Revenue Outlook Mark Zandi Economy.com, Inc.

Presented by

Economic and Tax Revenue Outlook

Mark Zandi

Economy.com, Inc.

A Struggling Economy

129.5

130.5

131.5

132.5

'00 '01 '02 '03

Jobs, MillionsSource: BLS

Prolonged Suffering

-3

-2

-1

0

1

2

3

4

5

0 4 8 12 16 20 24 28 32 36

Months From Peak

% D

iffe

ren

ce F

rom

Pea

k

Previous

Cycles

Current

Cycle

Early ‘90s

Cycle

Sources: BLS, Economy.com

States In Recession

Recession

Flat

Expanding

Unprecedented State Budget Crisis

-75

-50

-25

0

25

50

75

'46 '51 '56 '61 '66 '71 '76 '81 '86 '91 '96 '01

-2

-1

0

1

2State and Local Government DeficitSource: BEA

Billions $ (L)

Share of GDP (R)

50

60

70

80

90

100

110

120

130

140

Jan Feb Mar Apr May June July August

Business Confidence SurveyJanuary 2003 = 1004 week Moving AverageSource: Economy.com

Businesses Confidence Rebounds

State Tax Revenues Hit Bottom

475

500

525

550

575

'99 '00 '01 '02 '03

State Government Tax RevenuesBillions $, 4- Quarter Moving SumSource: Census

Enormous Federal Tax Cutting

900

1000

1100

1200

1300

1400

'97 '98 '99 '00 '01 '02 '03

11.5

12.5

13.5

14.5

15.5

16.5

Source: BEA

Tax PaymentsBillions $ (L)

EffectiveTax Rate (R)

Low Interest Rates Juice-Up Housing

-1

0

1

2

3

4

5

'00 '01 '02 '03

Real GDP Growth% Change Year AgoSources: BEA, Economy.com

Actual

WithoutHousing

Amazing Productivity Growth...

-2

0

2

4

6

'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Nonfinancial Productivity Growth% Change Year Ago, 4-Quarter Moving AverageSource: BLS

...Supports Wage Growth...

-1

0

1

2

3

'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Real Wage Growth% Change Year Ago, 4-Quarter Moving AverageSources: BLS, BEA

...and Ultimately Profit Margins

7

8

9

10

11

12

13

'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Profit Margins of Nonfinancial Businesses4-Quarter Moving AverageSource: BEA

Near-Term Outlook Real GDP Year over Year Growth

-2

-1

0

1

2

3

4

5

6

'00 '01 '02 '03 '04 '05

Potential Growth

Raleigh

Orange CountyRiverside

Las Vegas

Miami

Baltimore

Road to RecoveryStable Economies

San Antonio

San Diego

Ft. Lauderdale

West Palm BeachTampa

Philadelphia

Washington, D.C.

Albuquerque

Los AngelesOrange County

Riverside

Las Vegas

Miami

Baltimore

Road to Recovery2003 H2

Computer Hardware, Distribution

San Antonio

Philadelphia

Washington, D.C.

San Diego

Ft. Lauderdale

West Palm BeachTampa

Austin

Phoenix

Norfolk

Memphis

SacramentoOakland

Raleigh

Orlando

Central NJ

Jacksonville

AlbuquerqueAtlanta

Los AngelesOrange County

Riverside

Las Vegas

Miami

Baltimore

Road to Recovery2004 H1

Software, Travel

San Antonio

Philadelphia

Washington, D.C.

San Diego

Ft. Lauderdale

West Palm BeachTampa

Portland

Austin

Phoenix

Norfolk

Memphis

SacramentoOakland

Raleigh

Orlando

Central NJ

San Jose

Atlanta

Charlotte

Minneapolis

Chicago

Houston

Indianapolis

Salt Lake City

Jacksonville

New Orleans

Albuquerque

Los AngelesOrange County

Riverside

Las Vegas

Miami

Baltimore

Road to Recovery2004 H2

Telecom, Money Management

San Antonio

Philadelphia

Washington, D.C.

San Diego

Ft. Lauderdale

West Palm BeachTampa

Portland

Austin

Phoenix

Norfolk

Memphis

SacramentoOakland

Raleigh

Orlando

Central NJ

San Jose

Atlanta

Charlotte

Minneapolis

Chicago

Houston

Indianapolis

Salt Lake City

San Francisco

Boston

DallasJacksonville

Denver

Kansas CIty

Pittsburgh

New Orleans

Albuquerque

Los AngelesOrange County

Riverside

Las Vegas

Miami

Baltimore

Road to Recovery2005 H1

Traditional Manufacturing

San Antonio

Philadelphia

Washington, D.C.

San Diego

Ft. Lauderdale

West Palm BeachTampa

Portland

Austin

Phoenix

Norfolk

Memphis

SacramentoOakland

Raleigh

Orlando

Central NJ

San Jose

Atlanta

Charlotte

Minneapolis

Chicago

Houston

Indianapolis

Salt Lake City

San Francisco

Boston

DallasJacksonville

Denver

Kansas CIty

DetroitPittsburgh

OH MSAs

Milwaukee

New Orleans

Albuquerque

Los AngelesOrange County

Riverside

Las Vegas

Miami

Baltimore

Road to Recovery2006 H1

Investment Banking, Commercial Aircraft

San Antonio

Philadelphia

Washington, D.C.

San Diego

Ft. Lauderdale

West Palm BeachTampa

Portland

Austin

Phoenix

Norfolk

Memphis

SacramentoOakland

Raleigh

Orlando

Central NJ

San Jose

Atlanta

Charlotte

Minneapolis

Chicago

Houston

Indianapolis

Salt Lake City

San Francisco

Boston

DallasJacksonville

Denver

Kansas CIty

DetroitPittsburgh

OH MSAs

Milwaukee

Seattle

Broad NYC Region

New Orleans

Albuquerque

State Tax Revenue Growth Outlook% Change

-5

0

5

10

FY '99 FY '00 FY '01 FY '02 FY '03 FY '04 FY '05

Long-Run Growth

Direct Budgetary Impact of Stock Market

0

50

100

150

200

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05

Stock OptionsRealized Gains

Tax RevenuesBillions $Source: Economy.com

-500

-450

-400

-350

-300

2000 2001 2002 2003

-115

-105

-95

-85

-75

-65

China (R)

Ballooning Trade Deficit

Total xOPEC (L)

Trade DeficitBillions $Source: Census

4.5

4.6

4.7

4.8

4.9

5.0

'85 '90 '95 '00

Erosion in Sales Tax Efficacy

Sales Taxes as a Share of Consumer SpendingSources: BEA, Economy.com