The State of the Consumer Kathleen Stephansen Director of Global Economics 212-538-3260 [email protected] May 2003 I, Kathleen Stephansen, certify.

The State of the ConsumerThe State of the Consumer

Kathleen StephansenKathleen StephansenDirector of Global Economics

[email protected]

May 2003

I, Kathleen Stephansen, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was,Iis or will be directly or indirectly related to the specific recommendations or views expressed in this report.

2

A Global OverviewA Global Overview

Global consumer spending is set to remain steadyLabor Markets Not Yet StableTax cuts are likely to be an important buffer in the US

3

G3 real consumption growthG3 real consumption growth

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04

G3+ US

Euro area Japan

yoy %

Sources: Datastream International Limited, CSFB estimates

4

Unemployment Rates Rising In The OECDUnemployment Rates Rising In The OECD

Sources: Datastream International Limited, CSFB estimates

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

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

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0USEuro areaJapan (rhs)

%

5

Further Rise In Unemployment ExpectationsFurther Rise In Unemployment Expectations

Sources: Datastream International Limited, CSFB estimates

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03

10

15

20

25

30

35

EU-12 unemploy. exp next 12mUK unemp exp next 12mUS fewer jobs next 6m (rhs)

6

Weak Labor Markets Have Contributed To The Decline In Weak Labor Markets Have Contributed To The Decline In Consumer ConfidenceConsumer Confidence

Sources: Datastream International Limited, CSFB estimates

40.0

60.0

80.0

100.0

120.0

140.0

Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02

-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

US - Conference boardJapanEuro area - Eu Comm survey (rhs)

7

G4 Savings RatesG4 Savings Rates

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03

US UK

Germany Japan

%

Sources: Datastream International Limited, CSFB estimates

8

Slowing Disposable Income Slowing Disposable Income (Real Disposable Income)

Sources: Datastream International Limited, CSFB estimates

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02

US UK

Japan euro area

yoy%

9

Rising House Prices: A Buffer To Household Wealth Rising House Prices: A Buffer To Household Wealth

Sources: Datastream International Limited, CSFB estimates

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

'88 '90 '92 '94 '96 '98 '00 '02

US Japan

Euro area UK

yoy %

10

A Closer Look At The USA Closer Look At The US

What the 2001 Consumer Survey tells usHousehold wealth shakenRefi WaveEquity Extraction From HousingConsumption Holds On

11

Household Survey 1998-2001Household Survey 1998-2001(thousands of 2001 dollars)

Income Growth(percent change by income group)

Net Worth Growth(percent change by income group)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

All Families Less than 20 20-39.9 40-59.9 60-79.9 80-89.9 90-100

Median % change Mean % change

0%

10%

20%

30%

40%

50%

60%

70%

80%

All Families Less than 20 20-39.9 40-59.9 60-79.9 80-89.9 90-100

Median Mean

Sources: FRB, CSFB

12

US Household Wealth ShakenUS Household Wealth Shaken($ billion, annual changes)

-3000

-2000

-1000

0

1000

2000

3000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002-400

-200

0

200

400

600

800

Corporate Equities(LHS)

Real Estate (LHS)

Consumer Spending (RHS)

Sources: BEA, Flow of Funds, CSFB estimates

13

Refi Applications BoomRefi Applications Boom(Index of Number of mortgage refinancing applications (SA, 3/16/1990=100))

Sources: MBA, CSFB

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '035.5

6.5

7.5

8.5

9.5

10.5

11.5

Mortgage Refi Index (left)

30-Year Fixed Fannie Mae Interest Rate (%, right)

14

Strength in Housing: US Home Sales..Strength in Housing: US Home Sales..(Thousands of Units, SAAR)

Sources: Census, NAR, CSFB

300

400

500

600

700

800

900

1000

1100

1200

1992-Jan 1994-Jan 1996-Jan 1998-Jan 2000-Jan 2002-Jan1000

2000

3000

4000

5000

6000

7000

New Home Sales, Left

Existing Home Sales, right

Mar '03

15

……And Housing StartsAnd Housing Starts(SAAR, Thousands of Units)

800

1000

1200

1400

1600

1800

2000

Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03

Mar '03

Building Permits

Housing Starts

Sources: Census, CSFB

16

The 2002 Home Mortgage Results: SourcesThe 2002 Home Mortgage Results: Sources

$200 billion accumulated home equity “cash-outs” $350 billion in mortgage net debt increase

(from $600bn in mortgage originations) $130 billion in net increase of home equity loans $680 billion in total equity extraction

Source: Estimates Provided by the Federal Reserve Board

17

The 2002 Home Mortgage Results: UsesThe 2002 Home Mortgage Results: Uses

Consumption of big ticket items/ home improvementRepayment of higher-cost consumer debt

18

Consumer Spending GrowthConsumer Spending Growth(year/year % change)

Source: BEA, CSFB

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1960-Q1 1964-Q3 1969-Q1 1973-Q3 1978-Q1 1982-Q3 1987-Q1 1991-Q3 1996-Q1 2000-Q3

Real PCE

Spending on Durable Goods

Q1 '03

19

US Auto Sales SofteningUS Auto Sales Softening(but incentives help)

Sources: BEA, CSFB

14

15

16

17

18

19

20

21

22

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03

Apr '03

20

Household: Debt Restructuring Is Taking PlaceHousehold: Debt Restructuring Is Taking Place

-4

-2

0

2

4

6

8

10

12

14

16

18

Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-030.0

2.0

4.0

6.0

8.0

10.0

12.0

Consumer Credit, yr/yr%(Left)

Savings Rate (Right)

Sources: FRB, BEA, CSFB

21

Homeowners’ Equity as a % of Household Real EstateHomeowners’ Equity as a % of Household Real Estate

50

55

60

65

70

75

'60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02

Source: FRB, CSFB

22

Mortgage Debt Servicing Costs Relatively StableMortgage Debt Servicing Costs Relatively Stable(Household Debt Service Ratio)

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

1980-Q1

1981-Q4

1983-Q3

1985-Q2

1987-Q1

1988-Q4

1990-Q3

1992-Q2

1994-Q1

1995-Q4

1997-Q3

1999-Q2

2001-Q1

2002-Q4

10.00

10.50

11.00

11.50

12.00

12.50

13.00

13.50

14.00

14.50

15.00

Debt Service Payments (RHS)

Mortgage Debt Service Payment (LHS)

Consumer Debt Service Payment (LHS)

Sources: FRB, CSFB

23

……Even though Mortgage Debt Ratio Rose SharplyEven though Mortgage Debt Ratio Rose Sharply(Household Debt)

8.00

8.50

9.00

9.50

10.00

10.50

11.00

11.50

12.00

12.50

13.00

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 20020

100

200

300

400

500

600

700

800

Mortgage Debt As a % of Total Assets

Consumer Debt

Motgage Debt

Sources: Flow of funds, CSFB

24

The Consumer Needs Additional BufferThe Consumer Needs Additional Buffer

Low Interest RatesTax Cuts

25

US: 2002 Tax Cuts Helped Income GrowthUS: 2002 Tax Cuts Helped Income Growth(Yr/Yr % change)

Sources: BEA, CSFB

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1992-Q1 1993-Q1 1994-Q1 1995-Q1 1996-Q1 1997-Q1 1998-Q1 1999-Q1 2000-Q1 2001-Q1 2002-Q1 2002-Q5

Real Wage & Salary Growth

Real Disposable Personal Income

26

2003 Tax Cuts2003 Tax Cuts(Impact on budget by quarters, $ billion)

Q3:03 Q4:03 Q1:04 FY03 FY04Tax Rate Cuts 5.5 9.0 14.5 5.5 36.0Marriage Penalty Relief 3.0 6.0 10.0 3.0 27.0Child Credit 15.0 1.0 0.0 15.0 5.0Expansion of 10% Bracket 1.0 2.0 2.0 1.0 8.0Increase Expensing Limits 1.0 1.0 0.0 1.0 1.0AMT-held harmless 3.0 0.0 5.0 3.0 9.0Unemployment 0.0 0.0 0.0 4.0 0.0Total (1) 28.5 19.0 31.5 32.5 86.0

Dividends 4.0 0.0 16.0 4.0 25.0

Total (2) 32.5 19.0 47.5 36.5 111.0

Baseline Budget Deficit 49.0 114.0 134.0 281.0 316.0

Budget including the measures 81.5 133.0 181.5 317.5 427.0

Note: We assume the final settlements to 2003 income tax returns will be accomplished in Q1:2004. People who are getting a refund may file earlier than the April 15th deadline. Alternate assumptions would change the numbers on a quarterly but not annual basis.

Sources: Dept. of Treasury, CSFB

27

Real Disposable Income Under The Bush PlanReal Disposable Income Under The Bush Plan(billions $, annual rate)

6400

6600

6800

7000

7200

7400

7600

7800

q101 q201 q301 q401 q102 q202 q302 q402 q103 q203 q303 q403 q104 q204

Level of real disposable income 1.0% higher than baseline by mid-year 2004

w/ stimulus Plan

Baseline

Sources: BEA, CSFB estimates

28

US Forecast Table

Source: CSFB

q102 q202 q302 q402 q103 q203 q303 q403 01 02 03E 04E 01 02 03E 04EReal GDP 5.0 1.3 4.0 1.4 1.6 2.3 3.7 3.7 0.1 2.9 2.8 3.5 0.3 2.4 2.4 3.5Consumer Spending 3.1 1.8 4.2 1.7 1.4 3.2 3.5 3.7 2.8 2.7 2.9 3.6 2.5 3.1 2.6 3.7Residential Investment 14.3 2.6 1.0 9.4 12.0 4.2 2.9 1.9 1.1 6.8 5.3 1.1 0.3 3.9 6.3 1.7Business Investment -5.8 -2.4 -0.8 2.3 -4.2 -0.9 3.5 3.8 -9.2 -1.7 0.5 5.2 -5.2 -5.7 -0.4 4.3 Equipment & Software -2.7 3.3 6.7 6.2 -4.4 2.5 6.2 6.1 -8.7 3.4 2.6 6.9 -6.4 -1.7 2.6 6.4 Non-Res Structures -14.2 -17.6 -21.3 -9.9 -3.5 -3.2 -3.8 -1.9 -9.7 -15.8 -3.1 1.9 -1.7 -16.4 -8.1 0.2Total Government 5.6 1.4 2.9 4.6 0.9 4.4 2.1 2.1 5.2 3.6 2.3 2.7 3.7 4.4 2.7 2.6 Federal Government 7.4 7.5 4.3 11.0 2.6 10.5 5.6 5.6 7.6 7.6 6.1 5.4 4.8 7.5 6.7 5.8 State & Local 4.6 -1.7 2.2 1.2 -0.1 0.8 0.0 0.0 4.0 1.6 0.2 1.1 3.1 2.8 0.5 0.6Domestic Demand 3.0 1.3 3.3 2.6 1.2 3.3 3.4 3.5 1.6 2.6 2.8 3.7 1.6 2.4 2.5 3.6Net Exports (contr. to GDP) -0.8 -1.4 0.0 -1.9 1.0 -0.1 -0.1 -0.7 -0.1 -1.0 0.0 -0.6 -0.2 -0.8 -0.3 -0.6 Real Exports 3.5 14.2 4.7 -5.8 -3.2 2.3 7.8 8.8 -11.3 4.1 3.9 9.1 -5.4 -1.6 1.4 8.5 Real Imports 8.5 22.2 3.3 7.4 -7.9 2.0 5.9 10.7 -7.9 10.3 2.7 9.7 -2.9 3.7 2.7 9.2Inventories (contr. to GDP) 2.6 1.3 0.6 0.3 -0.5 -0.9 0.4 0.9 -1.5 1.2 0.0 0.2 -1.4 0.7 0.0 0.3Nominal GDP 6.5 2.5 5.1 3.2 4.2 3.4 5.1 5.8 2.0 4.3 4.6 5.4 2.6 3.6 4.1 5.4CPI (Y/Y%) 1.2 1.3 1.6 2.2 2.9 2.2 1.9 2.0 1.8 2.2 2.0 1.9 2.8 1.6 2.2 1.8Core CPI (Y/Y%) 2.5 2.4 2.3 2.1 1.8 1.5 1.4 1.4 2.7 2.1 1.4 1.8 2.7 2.3 1.5 1.7Corp. Profits w/CCadj and IVA (Y/Y%) 12.9 8.8 12.2 -1.9 4.4 6.8 12.9 14.8 8.2 -1.9 14.8 9.0 -7.2 7.6 9.7 8.5Industrial Production (y/y%) -3.8 -1.3 0.8 1.4 1.2 -0.2 0.2 2.2 -5.7 1.4 2.2 4.7 -3.5 -0.8 0.8 4.5Unemployment Rate (qtr. avg.) 5.6 5.8 5.8 5.9 5.8 6.1 6.1 6.0 4.9 5.8 6.0 5.8Current Account (% GDP) -3.9 -4.7 -4.6 -4.6Federal Budget Balance (% GDP) 1.3 -1.5 -4.2 -5.1Fed Funds Rate 1.75 1.75 1.75 1.25 1.25 1.25 1.25 1.2530yr Mortgage Rate 6.95 6.48 5.67 5.75 5.50 5.50 5.50 5.50

Ann. Avg2002 2003E Q4/Q4

29

Global Forecast

Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E 01E 02E 03E 04E 01 02E 03E 04EGlobal Real GDP (y/y) 1.7 2.6 3.2 3.4 3.2 2.4 2.5 2.8 1.1 3.4 2.8 3.8 1.9 2.8 2.7 3.7

IP (y/y) -0.3 3.0 4.3 5.6 5.6 3.4 3.7 5.0 -2.1 5.6 5.0 6.2 0.2 3.1 4.4 6.1Inflation (y/y) … … … … … … … … ... … … … 3.1 2.8 3.0 2.6

US Real GDP (q/q ann) 5.0 1.3 4.0 1.4 1.6 2.3 3.7 3.7 0.1 2.9 2.8 3.5 0.3 2.4 2.4 3.5IP (y/y) -3.8 -1.3 0.8 1.4 1.2 -0.2 0.2 2.2 -5.7 1.4 2.2 4.7 -3.5 -0.8 0.8 4.5Inflation (y/y) 1.2 1.3 1.6 2.2 2.9 2.2 1.9 2.0 1.8 2.2 2.0 1.9 2.8 1.6 2.2 1.8Policy rate 1.8 1.8 1.8 1.3 1.3 1.3 1.3 1.3 ... … … … ... … … …

Japan Real GDP (q/q ann) 0.4 5.5 3.1 2.2 -1.8 1.0 -0.3 -1.6 -2.4 2.8 -0.7 1.9 0.4 0.3 0.7 1.0IP (y/y) -9.9 -3.8 3.1 5.9 7.4 5.8 4.3 2.3 -14.2 5.7 2.3 0.4 -6.8 -1.4 4.9 -0.2Inflation (y/y) -1.4 -0.7 -0.7 -0.7 -0.2 -1.3 -1.3 -0.9 -1.0 -0.5 -0.9 -0.8 -0.7 -0.9 -0.9 -0.8Policy rate 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ... … … … ... … … …

Euro-12 Real GDP (q/q ann) 2.0 1.5 1.3 0.3 0.9 0.6 1.6 1.4 0.5 1.3 1.1 2.6 1.4 0.9 1.0 2.3IP (y/y) -2.7 -1.0 -0.3 1.1 1.4 0.1 -0.3 0.6 -3.0 1.1 0.6 5.4 0.6 -0.7 0.5 3.5Inflation (y/y) 2.5 2.1 2.1 2.3 2.3 2.0 1.8 1.7 2.1 2.3 1.7 1.0 2.3 2.3 2.0 1.3Policy rate 3.3 3.3 3.3 2.8 2.5 2.3 2.3 2.0 ... … … … ... … … …

UK Real GDP (q/q ann) 0.5 2.4 4.3 1.5 1.2 2.4 2.9 2.7 1.6 2.2 2.3 3.2 2.0 1.8 2.3 3.0IP (y/y) -5.6 -4.0 -2.8 -1.3 0.1 0.2 0.3 1.6 -5.0 -1.3 1.6 2.2 -2.1 -3.5 0.6 2.1Inflation (y/y) 2.4 1.9 2.0 2.5 3.0 3.3 3.0 2.8 2.0 2.5 2.8 2.5 2.1 2.2 3.0 2.5Policy rate 4.0 4.0 4.0 4.0 3.8 3.8 3.8 4.0 ... … … … ... … … …

NJ Asia Real GDP (q/q ann) … … … … … … … … … … … … 5.2 6.7 5.6 6.4IP (y/y) 8.8 13.6 12.9 14.8 14.9 10.4 10.4 11.5 6.2 14.8 11.5 12.9 6.1 12.5 11.8 13.2Inflation (y/y) ... ... … … … … … … … … … … 2.1 0.9 1.4 1.8

Lat. America Real GDP ... ... … … … … … … ... … … … 0.4 -0.4 1.4 3.0IP (y/y) -3.8 0.6 1.6 4.2 4.4 3.0 4.0 5.7 -4.3 4.2 5.7 3.7 -0.8 0.7 4.3 4.7Inflation (y/y) ... ... … … … … … … ... … … … 5.4 10.0 11.1 8.3

Annual Avg.2002E Q4 to Q42003E

30

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