Today’s Business Landscape and What’s on the Other Side

Economic Presentation: Today’s Business Landscape and What’s on the Other Side

Vistage-Austin, TexasJanuary 15h, 2009

THE ECONOMY

Gross Domestic Product2001Q1 - 2008Q3

Source: Bureau of Economic Analysis

Contributions to GDP Growth by Component

2007 Q3-2008 Q3

Source: Bureau of Economic Analysis

Corporate Profits (before tax)2003Q1 - 2008Q3

Source: Bureau of Economic Analysis

Industrial Production January 2007-November 2008

Source: Federal Reserve

Net Change in U.S. JobsJune 2005 – December 2008

Source: Bureau of Labor and Statistics

National Nonfarm Employment by Industry Sector GroupsDecember 2007 – December 2008

Source: Bureau of Labor Statistics

National Nonfarm Employment by Industry Sector Groups

January 2007 - December 2007

Source: Bureau of Labor Statistics

Continued Unemployment Claims January 2006 - December 27th, 2008

Source: Department of Labor

Source: (Left) Census Bureau (Right) Federal Reserve

Retail Sales Less Food and Fuel April 2007- November 2008

Consumer CreditQ4 2005 – November 2008

Existing Home SalesOctober 2001-November 2008

Source: (Left) National Association of Realtors, (Right) Census Bureau

New Home Sales Units Sold vs. Length on Market

February 2006-November 2008

S&P/Case-Shiller Home Price Index 2006 – October 2008

Source: Standard and Poors

Value of the Dollar (Broad Dollar Index) January 2000 – January 2009

Broad Dollar Index: a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.

Source: Federal Reserve Board

Commercial Mortgage Delinquency Rates among Major Investor Groups

2005 Q4-2008 Q3

Source: Mortgage Bankers Association

Consumer Confidence Survey and Consumer Sentiment Index

2005-December 2008

Source: Reuters and Polling Report

Changes in Consumer Price Index in Percentage Terms

2006 v. 2005

2007 v. 2006

6 months ended in Sep. 2008

6 months ended in Nov. 2008

All items 2.5% 4.1% 5.2% -1.9%Food at Home 1.4% 5.6% 8.6% 7.5%Food Away Home 3.2% 4.0% 5.4% 5.8%Rent of Primary Res 4.3% 4.0% 3.5% 3.9%Owners Equiv of Rent of Prim Res 4.3% 2.8% 2.0% 2.3%Household Energy 2.4% 5.3% 12.7% -4.4%Water/Sewer/Trash 4.8% 5.4% 7.1% 8.5%Houshold Ops 4.4% 2.2% 7.2% 2.1%Car Repair 3.8% 3.3% 6.8% 6.1%Pub. Transp 0.1% 7.2% 13.8% -3.0%Medical 3.6% 5.2% 2.3% 2.5%Education 6.3% 5.6% 6.1% 5.6%Energy 2.9% 17.4% 20.9% -36.1%Source: Bureau of Labor and Statistics

Source: Energy Information Administration

NYMEX Crude Oil Future Prices in U.S. Dollars

February 2001 – January 6th 2009

THE GOVERNMENT’S RESPONSE

Money Supply (M2): August 2007- November 2008

Source: Federal Reserve System

Source: Federal Reserve

Federal Reserve Balance Sheet: Reserve Bank Credit

January 2008 – January 7th 2009

Source: (Left) Federal Reserve, (Right) British Banker’s Associations

Federal Fund Rates, January 2008-

January 6th, 2009

3-month LIBOR rates lent in US dollars, January 2008-

December 31st, 2008

How do I get through it?Manage business on cash flow basisIncrease efficiency of asset turnover; increase liquidity Intensify customer service initiativesBecome innovative in controlling costs

Outsource where appropriate

Join Co-ops to spread costs over larger group

Look for new ways to leverage existing employees and infrastructure by investigating new sources of revenue from new products and markets. BE A SOLUTIONS PROVIDERSecure access to bank credit; firm up bank lines

How do I get through it? (cont.)Spend to increase productivity and market share

Take advantage of accelerated equipment write offs as part of government’s economic stimulus packageTake advantage of soft demand in economy to build for future by aggressive bargain purchasingIf access to capital and liquidity are not detriments, look to acquire troubled companies and/or strategic assets of other companiesTrain employees to be more productive and increase their value by enabling them to do more tasks

Increase networking and take advantage of trade associations for additional contacts and leadsPartner with other firms

What’s on the other side? 2009 - Recession Bottoms with Housing and Unemployment

Housing bottoms late this yearBank loan losses abate late this yearUnemployment peaks in the second half of this yearLower Energy Prices alleviate pressure on consumer spending – but virtually no economic growth or recovery

New Obama Administration Increased economic “bailout” and middle class spending programs. Increased federal budget deficits.

What’s on the other side? (cont.)2009 – Business

Cost of goods declines from current levels as interest rates, labor costs and commodity prices decline but business is facing zero consumer and business demand. Corporate profits in decline for most of this year despite easy year/year comparisons.Weak consumer spending but pent-up demand building

2010 – Economy Makes Gradual Cyclical Recovery

Increased employment = increased consumer spendingIncreased Corporate Sales = increased corporate profits = increased capital spendingIncreased interest rates and rising prices from higher demand and continuing federal budget deficits

Where are the opportunities?Healthcare – National ProgramEducationAgricultureEnergy ConservationEnvironmental Solutions Electric PowerTransportation – Increase Mass TransitExports

Water Conservation – New Supplies and RecyclingU.S. Government Procurement and Outsourcing – Base Realignment Program (BRAC)Real Estate – Recycle and Rehab Existing Commercial and Residential Property

ConclusionsWe are in a deep and protracted recession that began in the fourth quarter of 2007. It began in housing and has spread through the entire U.S. and overseas economies. Economic weakness has intensified through 2008 and will worsen through the first half of 2009. Increased near term economic and market pressures include:

stubbornly high inflation in food and basic serviceslower corporate profitsincreased unemploymentcontinued weak levels of corporate capital and consumer spending

Conclusions continuedSevere reductions in State and Local Government spendingWeak exports as overseas economies fall into recessionContinued credit pressures in residential housing and consumer lending spreading to commercial real estate markets and corporate lending

Conclusions continued

However, a bottoming of the housing cycle and an abatement in bank credit losses in the second half of this year, could set the stage for cyclical capital markets and economic improvements in 2009 and 2010. After an expected cyclical recovery in 2010-2012, we believe the longer term socio-economic issues facing this country will result in slower future economic growth for the United States. The availability and cost of credit, particularly to consumers, will be more restricted and expensive in the future.

Thank You

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