TheBoomisBack!

StephenSliferNumberNomicswww.NumberNomics.com

TheHighlights1.  WhyhasGDPgrowthbeensoslow?

2.   HowcanwespeedupGDPgrowth?

3.   WhatimpactwillTrump’spolicieshave?

4.   WhatistheoutlookforGDP,inflaIonin2017/18?

5.   HowwillallofthisaffecttheFed?

6.   NorecessionunIl2020attheearliest.

WhyHasGDPGrowthSlowed?

EconomicSpeedLimit

GrowthinLaborForce+ProducIvity

EconomicSpeedLimit

LaborForce+ProducIvity=SpeedLimit1990’s

1.5%+2.0%=3.5%

EconomicSpeedLimit

LaborForce+ProducIvity=SpeedLimit1990’s

1.5%+2.0%=3.5%

20160.8%+1.0%=1.8%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%Jan19

90

Jan19

91

Jan19

92

Jan19

93

Jan19

94

Jan19

95

Jan19

96

Jan19

97

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98

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99

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00

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01

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Jan20

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14

Jan20

15

Jan20

16

LaborForce

Inthe1990’sthelaborforcegrewbyabout1.5%.Todayisgrowingby0.8%.Why?ThebabyboomersarereIring.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2000-Q1 2002-Q1 2004-Q1 2006-Q1 2008-Q1 2010-Q1 2012-Q1 2014-Q1 2016-Q1

NonfarmProducIvity--3yr.

4

Inthe1990’stheproducIvitygrewbyabout2.0%.Todayisbarelygrowing.Notclearwhysoslow.Longer-term1.0%?

EconomicSpeedLimit

LaborForce+ProducIvity=SpeedLimit1990’s

1.5%+2.0%=3.5%

20160.8%+1.0%=1.8%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

NonresidenIalInvest.

Year-over-year

NonresidenIalInvestment

ProducIvitygrowthisdeterminedlargelybypaceofinvestmentspending.

WhyAreFirmsSoReluctanttoSpend?

3

WhyAreFirmsSoReluctanttoSpend?

1.   Corporatetaxrateis35%.Restoftheworld=23%.Firmsareshicingtheirheadquartersoverseas.

3

WhyAreFirmsSoReluctanttoSpend?

2.   Firmsaretaxedtwiceoncorporateearnings–onceoverseasandagaininU.S.ifearningsrepatriated.

Thus,corporateearningsarelockedoverseas. EsImatesrangefrom$2.5-4.0trillion.

3

WhyAreFirmsSoReluctanttoSpend?

3.   Crushingregulatoryburden.Federalregisterismorethan80,000pages.

3

WhyAreFirmsSoReluctanttoSpend?

4.   DysfuncIonalhealthcaresystem.

Notenoughyoung,healthypeoplehavesignedup.PremiumsskyrockeIng.

Insurancecompaniesdroppingout.Unprofitable.

Businessesmorethan50employeesmustoffer.

3

WhyAreFirmsSoReluctanttoSpend?

5.   Unsustainablefiscalpolicy.

Treasurydebtoutstandingisfartoohigh.

3

WhyAreFirmsSoReluctanttoSpend?

1.   Corporatetaxrateis35%.2.   Unabletorepatriateoverseasearnings.3.   Crushingregulatoryburden.4.   DysfuncIonalhealthcaresystem.5.   Unsustainablefiscalpolicy.

3

TheyAllRequireAcIonByOurPolicyMakersinWashington

toSolve

3

HowWillTrump’sElecIonImpacttheEconomy?

3

WhyAreFirmsSoReluctanttoSpend?

1.   Corporatetaxrateis35%.Restoftheworld=23%.

TrumpsoluIon:Lowercorporatetaxrateto15%.

3

WhyAreFirmsSoReluctanttoSpend?

2.   Firmsaretaxedtwiceoncorporateearnings–onceoverseasandagaininU.S.ifearningsrepatriated.

TrumpsoluIon: Repatriateprofitsearnedoverseasata10%rate. WillbringthosefundsbacktotheU.S.

3

WhyAreFirmsSoReluctanttoSpend?

3.   Crushingregulatoryburden.Federalregisterismorethan80,000pages.

TrumpsoluIon: Eliminateallunnecessary,needlesslycomplex,and overlappingregulaIons. IfproposeanewregulaIon,musteliminate2

exisIngones.

3

WhyAreFirmsSoReluctanttoSpend?

4.   DysfuncIonalhealthcaresystem.

TrumpsoluIon:Offerhealthsavingsaccounts.OfferhighdeducIblehealthinsuranceplans.

3

WhyAreFirmsSoReluctanttoSpend?

5. Unsustainablefiscalpolicy.

TrumpsoluIon:Cutindividualandcorporateincometaxes.Repatriateoverseasearnings.Groweconomyat4%pace.Taxrevenueswillrisesharply.Deficitwillshrink.Simpson/Bowles-2010,HouseRepub.--2016

3

EconomicSpeedLimit

LaborForce+ProducIvity=SpeedLimit1990’s

1.5%+2.0%=3.5%

20160.8%+1.0%=1.8%

EconomicSpeedLimit

LaborForce+ProducIvity=SpeedLimit1990’s

1.5%+2.0%=3.5%

20200.8%+2.0%=2.8%

WhatAbout2017-2018?

ConsumpIon60%

Government15.0%

Trade10.0%

Investment15%

GDPComponents

50.0

55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

Jan20

07

Apr2

007

Jul200

7Oct2007

Jan20

08

Apr2

008

Jul200

8Oct2008

Jan20

09

Apr2

009

Jul200

9Oct2009

Jan20

10

Apr2

010

Jul201

0Oct2010

Jan20

11

Apr2

011

Jul201

1Oct2011

Jan20

12

Apr2

012

Jul201

2Oct2012

Jan20

13

Apr2

013

Jul201

3Oct2013

Jan20

14

Apr2

014

Jul201

4Oct2014

Jan20

15

Apr2

015

Jul201

5Oct2015

Jan20

16

Apr2

016

Jul201

6Oct2016

ConsumerSenIment

Recession

ConsumerconfidenceisatitshighestlevelsinceJanuary2004.

600

800

1000

1200

1400

1600

1800

2000

2200 S&P500

Thestockmarketisatarecordhighlevel.

14.50

15.00

15.50

16.00

16.50

17.00

17.50

18.00

18.50

FinancialObligaIonsRaIo

Trend

ConsumerdebtinrelaIontoincomeisthelowestithasbeensincethe1980’s.Wecanpickupthepaceofspendingifwechoosetodoso.

3.0

4.0

5.0

6.0

7.0

8.0Jan-00

Jul-0

0

Jan-01

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1

Jan-02

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Jan-14

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4

Jan-15

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5

Jan-16

Jul-1

6

30-yearMortgageRate

At4.2%30-yearmortgageratesaresIllverylow.

-9.0%

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

-6.0%

-1.0%

4.0%

9.0%

14.0%

Apr2

011

Jun2011

Aug2011

Oct2011

Dec20

11

Feb2012

Apr2

012

Jun2012

Aug2012

Oct2012

Dec20

12

Feb2013

Apr2

013

Jun2013

Aug2013

Oct2013

Dec20

13

Feb2014

Apr2

014

Jun2014

Aug2014

Oct2014

Dec20

14

Feb2015

Apr2

015

Jun2015

Aug2015

Oct2015

Dec20

15

Feb2016

Apr2

016

Jun2016

Aug2016

Oct2016

Dec20

16

ConsumerLoans(%)ConsumerLoans(L)Year-over-year(R)

Consumerloansbecomingmoreeasilyaoainable.Haverisen8.5%inthepastyear.

-900

-700

-500

-300

-100

100

300

500

Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16

PrivateEmployment

PayrollEmploy.3-mo.average

Employmentclimbingby170thousandpermonth.Generatesincomewhichenablesustokeepspending.

$1.70

$2.20

$2.70

$3.20

$3.70

$4.20

GasolinePrices

Gasolinepricesareexpectedtoremainlowthroughoutthisyearatabout$2.25pergallon.

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

ConsumpIonspendingYear-over-Year

ConsumpIonSpending(%)

Asaresultexpectconsumerspendingtobeabout2.4%in2017and2018.

WhatAboutHousing?

3,300

3,800

4,300

4,800

5,300

Jan20

08

Apr2

008

Jul200

8Oct2008

Jan20

09

Apr2

009

Jul200

9Oct2009

Jan20

10

Apr2

010

Jul201

0Oct2010

Jan20

11

Apr2

011

Jul201

1Oct2011

Jan20

12

Apr2

012

Jul201

2Oct2012

Jan20

13

Apr2

013

Jul201

3Oct2013

Jan20

14

Apr2

014

Jul201

4Oct2014

Jan20

15

Apr2

015

Jul201

5Oct2015

Jan20

16

Apr2

016

Jul201

6Oct2016

ExisIngHomeSales

Homesalesarethefastesttheyhavebeenthusfarinthecycle.

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

11.5

12.5Jan20

07

May2007

Sep2007

Jan20

08

May2008

Sep2008

Jan20

09

May2009

Sep2009

Jan20

10

May2010

Sep2010

Jan20

11

May2011

Sep2011

Jan20

12

May2012

Sep2012

Jan20

13

May2013

Sep2013

Jan20

14

May2014

Sep2014

Jan20

15

May2015

Sep2015

Jan20

16

May2016

Sep2016

ExisIngHomes--Inventory

Homesaleswouldbeevenfasterifitwerenotforanextremeshortageofhomesforsale.

145.0

155.0

165.0

175.0

185.0

195.0

205.0

215.0

Aug2009

Nov2009

Feb2010

May2010

Aug2010

Nov2010

Feb2011

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Aug2011

Nov2011

Feb2012

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Nov2012

Feb2013

May2013

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Nov2013

Feb2014

May2014

Aug2014

Nov2014

Feb2015

May2015

Aug2015

Nov2015

Feb2016

May2016

Aug2016

Nov2016

HousingAffordability--ExisIng

Evenwithmortgageratesat4.2%housingremainsaffordablebecauseconsumerincomeisrising.Consumerstodayhave57%moreincomethannecessarytopurchaseamedian-pricedhome.In2007thecomparablenumberwas15%.

4.5

5.5

6.5

7.5

8.5

9.5

10.5

1980:Q1 1985:Q1 1990:Q1 1995:Q1 2000:Q1 2005:Q1 2010:Q1 2015-Q1

RentalVacancyRate

ThereisanacuteshortageofrentalproperIesavailable.Thevacancyrateforrentalunitsisthelowestithasbeenin30years!

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%Jan20

07

Apr2

007

Jul200

7Oct2007

Jan20

08

Apr2

008

Jul200

8Oct2008

Jan20

09

Apr2

009

Jul200

9Oct2009

Jan20

10

Apr2

010

Jul201

0Oct2010

Jan20

11

Apr2

011

Jul201

1Oct2011

Jan20

12

Apr2

012

Jul201

2Oct2012

Jan20

13

Apr2

013

Jul201

3Oct2013

Jan20

14

Apr2

014

Jul201

4Oct2014

Jan20

15

Apr2

015

Jul201

5Oct2015

Jan20

16

Apr2

016

Jul201

6Oct2016

Shelter--Rent

TheshortageofavailablerentalproperIesispushinguprents.

525

725

925

1125

1325

1525

1725

1925

HousingStarts

Trend

HousingStarts(Projected)

BuildersaretryingtostepupthepaceofproducIonbutcannotfindenoughskilledworkers.ShouldconInuetoclimbtoperhaps1.4millionbytheendof2017.

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Jan20

08

Apr2

008

Jul200

8Oct2008

Jan20

09

Apr2

009

Jul200

9Oct2009

Jan20

10

Apr2

010

Jul201

0Oct2010

Jan20

11

Apr2

011

Jul201

1Oct2011

Jan20

12

Apr2

012

Jul201

2Oct2012

Jan20

13

Apr2

013

Jul201

3Oct2013

Jan20

14

Apr2

014

Jul201

4Oct2014

Jan20

15

Apr2

015

Jul201

5Oct2015

Jan20

16

Apr2

016

Jul201

6Oct2016

Car&TruckSalesInaddiIontohomes,carandtrucksalesaresteamy.Thisisabigdeal.HousesandcarsarethetwobiggestIcketitemsintheconsumer’sbudget.

ConsumpIon60%

Government15.0%

Trade10.0%

Investment15%

GDPComponents

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

NonresidenIalInvest.

Year-over-year

NonresidenIalInvestment

Investmentspendinghadbeencruisingalongataboutan8%paceunIloilpricescollapsed.Butsuchspendingdriedupattheendof2014.

$25

$35

$45

$55

$65

$75

$85

$95

$105

$1157/21/2009

10/21/200

1/21/2010

4/21/2010

7/21/2010

10/21/201

1/21/2011

4/21/2011

7/21/2011

10/21/201

1/21/2012

4/21/2012

7/21/2012

10/21/201

1/21/2013

4/21/2013

7/21/2013

10/21/201

1/21/2014

4/21/2014

7/21/2014

10/21/201

1/21/2015

4/21/2015

7/21/2015

10/21/201

1/21/2016

4/21/2016

7/21/2016

10/21/201

CrudeOilSpotPrices

Oilpricesdroppedfrom$107perbarrelinOctober2014to$50perbarrel.

400

600

800

1000

1200

1400

1600

1800

2000

2200

RigCount

Asoilpricesdropped,producersshutdown70%oftheoilrigsinoperaIon,cutspendingonoildrillingequipment,oilexploraIon,andresearch.Bighitoninvestmentspending.Asoilpriceshavereboundedsomedrillersareopeningpreviouslyclosedwells.Dragoninvestmenthasdisappeared.

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

800

1000

1200

1400

1600

1800

2000

2200

2400

2007-Q3

2007-Q4

2008-Q1

2008-Q2

2008-Q3

2008-Q4

2009-Q1

2009-Q2

2009-Q3

2009-Q4

2010-Q1

2010-Q2

2010-Q3

2010-Q4

2011-Q1

2011-Q2

2011-Q3

2011-Q4

2012-Q1

2012-Q2

2012-Q3

2012-Q4

2013-Q1

2013-Q2

2013-Q3

2013-Q4

2014-Q1

2014-Q2

2014-Q3

2014-Q4

2015-Q1

2015-Q2

2015-Q3

2015-Q4

2016-Q1

2016-Q2

2016-Q3

2016-Q4

CorporateProfitsw/oIVAandCCCorporateprofitshavereboundedfollowinganoil-relatedslump.Shouldgrowatadouble-digitpaceIn2017.

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

2007-Q1

2007-Q2

2007-Q3

2007-Q4

2008-Q1

2008-Q2

2008-Q3

2008-Q4

2009-Q1

2009-Q2

2009-Q3

2009-Q4

2010-Q1

2010-Q2

2010-Q3

2010-Q4

2011-Q1

2011-Q2

2011-Q3

2011-Q4

2012-Q1

2012-Q2

2012-Q3

2012-Q4

2013-Q1

2013-Q2

2013-Q3

2013-Q4

2014-Q1

2014-Q2

2014-Q3

2014-Q4

2015-Q1

2015-Q2

2015-Q3

2015-Q4

2016-Q1

2016-Q2

CorporateCash/Assets(%)CorporaIonshaveplentyofliquidassetsreadytoinvest.Theyneedacatalyst.

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

Jan2004 Jan2005 Jan2006 Jan2007 Jan2008 Jan2009 Jan2010 Jan2011 Jan2012 Jan2013 Jan2014 Jan2015 Jan2016 Jan2017

ISMIndex

Thepossibilityofcorporatetaxcuts,repatriaIonofoverseasearningsatafavorabletaxrate,andareducIonintheregulatoryburdenhasboostedconfidenceatmanufacturingfirmstoa2-yearhigh.Confidenceatservicesectorfirmshasalsoclimbed.

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

.NonresidenIalInvestment

Weexpectinvestmentspendingtopickuptoabout2.6%in2017and5.0%in2018.

ConsumpIon60%

Government15.0%

Trade10.0%

Investment15%

GDPComponents

Trump’sTradePolicyisDisturbing

Trumpwantsto:

BuildawallbetweenU.S.andMexico.ImposesteeptariffsonsomegoodsfromChinaImposeduIesonanyU.S.firmthatgoesoverseas.PulloutoforrenegoIateNAFTAPulltheplugontheTransPacificPartnership

3

Trump’sTradePolicyisDisturbing

AppearstobedisturbedbylossofU.S.jobsgoingto

ChinaandMexico.

3

ThereisaBeoerWay

3

ThereisaBeoerWay

KeepbusinessesintheU.S.

3

ThereisaBeoerWay

KeepbusinessesintheU.S.

1.   Offerthemlowtaxrates.

2.   Allowthemtorepatriateearningsatfavorablerate.

3.   Offerthemamorerelaxedregulatoryenvironment

3

-800.000

-700.000

-600.000

-500.000

-400.000

-300.000

-200.000

2007q1

2007q3

2008q1

2008q3

2009q1

2009q3

2010q1

2010q3

2011q1

2011q3

2012q1

2012q3

2013q1

2013q3

2014Q1

2014Q3

2015Q1

2015Q3

2016-Q1

2016-Q3

NetExports

Thetradedeficitwidenedearlyin2014and2015andbecameabigdragonGDPgrowth.

5

6

7

8

9

10

11

12

13

14

15

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

China--GDP%

Chinesegrowthhasslowedfromadouble-digitpaceacoupleyearsagoto6.8%lastyearandto6.3%in2016.

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

Jan2001Apr2002Jul2003Oct2004Jan2006Apr2007Jul2008Oct2009Jan2011Apr2012Jul2013Oct2014Jan2016

Trade-weightedValueoftheDollar

AsgrowthinChinaslowed,globalinvestorssoughtdollardenominatedinvestments.Thatcausedthedollartorise22%betweenOctober2014andtheendof2015.

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

Jan2001Apr2002Jul2003Oct2004Jan2006Apr2007Jul2008Oct2009Jan2011Apr2012Jul2013Oct2014Jan2016

Trade-weightedValueoftheDollarMakesU.S.exportsmoreexpensiveforforeignerstobuy.MakesforeigngoodscheaperforAmericanstobuy.Slowergrowthinexports,fastergrowthinimports.Tradedeficitwidens..

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

Jan2001 Jul2002 Jan2004 Jul2005 Jan2007 Jul2008 Jan2010 Jul2011 Jan2013 Jul2014 Jan2016 Jul2017

Trade-weightedValueoftheDollarGoingforwardthedollarshouldstrengthenfurtherastheeconomygathersmomentumandU.S.interestratesrise.Buttheincreaseshouldbeabout10%in2017vs.22%inearlierrun-up.

-800.000

-700.000

-600.000

-500.000

-400.000

-300.000

-200.0002007q1

2007q3

2008q1

2008q3

2009q1

2009q3

2010q1

2010q3

2011q1

2011q3

2012q1

2012q3

2013q1

2013q3

2014Q1

2014Q3

2015Q1

2015Q3

2016-Q1

2016-Q3

2017-Q1

2017-Q3

2018-Q1

2018-Q3

NetExports

Netexportssubtracted0.4%fromGDPgrowthin2015and2016.Tradeshouldsubtractabout0.2%fromGDPgrowthin2017and2018.

ConsumpIon60%

Government15.0%

Trade10.0%

Investment15%

GDPComponents

-17.0%

-12.0%

-7.0%

-2.0%

3.0%

8.0%

13.0%

FederalGovernment

Year-over-year

FederalGovernmentFederalgovernmentspendingdeclinedin2014-2015aswewounddownthewarsinIraq&Afghanistan.Thatslowdownhasnowended.Governmentspending(defense)shouldriseslightlyinthequartersahead.

GovernmentSpending

TransferPayments

70%

Interest6%Nondefense

8%

Defense16%

Butdefensespendingisonlyabout16%ofallgovernmentspending.Thebulkofsuchspending(70%)ison“enItlements”whichshouldshrink.

ConsumpIon60%

Government15.0%

Trade10.0%

Investment15%

GDPComponents

2017-2018Forecasts 201620172018

GDP 2.0%2.3%2.6%

3

Let’sTalkJobs

-900

-700

-500

-300

-100

100

300

500

Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16

PrivateEmployment

PayrollEmploy.3-mo.average

Employmentclimbingby170thousandpermonth.

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

UnemploymentRate

FullEmployment

Theunemploymentratenowstandsat4.7%.ButYellensaysthisrateismisleading.Itdoesnotincludepeoplewhoare“underemployed”.

200

400

600

800

1000

1200Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

Jan-13

May-13

Sep-13

Jan-14

May-14

Sep-14

Jan-15

May-15

Sep-15

Jan-16

May-16

Sep-16

Jan-17

DiscouragedWorkers

Discouragedworkers”arepeoplewhohavebeensearchingforajobforsolongthattheyhavegivenuplooking.HasfallensteadilybutsIllabithigherthanitwasatbeginningofrecession.

4000

5000

6000

7000

8000

9000

10000

PartTime-EconomicReasons

AlsoincludespeoplewhoareworkingpartImebutwouldlikeafullImeposiIon.SteadilydecliningbutsIllsomewhathigherthanitwasatbeginningofrecession.

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0 Broadvs.OfficialUnemploy.Rate

FullEmployment

FullEmployment

Yellensayswearesupposedtobewatchingthebroadunemploymentratewhichincludesallthesepeople.Itisat9.2%;officialrateisat4.7%.

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0 Broadvs.OfficialUnemploy.Rate

FullEmployment

FullEmployment

Iffullemploymentfortheofficialrateis5.0%thenfullemploymentforthebroadmeasureshouldbeabout9.0%.Thebroadmeasureisat9.2%.

2017-2018Forecasts 201620172018

GDP 2.0%2.3%2.6%Unemploy.Rate 4.7%4.5%4.3%

3

WillInflaIonAccelerate?

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

Broadvs.OfficialUnemploy.Rate

FullEmployment

FullEmployment

Withtheeconomyatfullemploymentfirmscannotfindenoughskilledlabor.FirmsmustofferhigherwagesormoreaoracIvebenefits.Wagesrepresent2/3ofafirm’stotalcost.

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Mar-07

Jul-0

7

Nov-07

Mar-08

Jul-0

8

Nov-08

Mar-09

Jul-0

9

Nov-09

Mar-10

Jul-1

0

Nov-10

Mar-11

Jul-1

1

Nov-11

Mar-12

Jul-1

2

Nov-12

Mar-13

Jul-1

3

Nov-13

Mar-14

Jul-1

4

Nov-14

Mar-15

Jul-1

5

Nov-15

Mar-16

Jul-1

6

Nov-16

HourlyEarnings

Acerrisingata2.0%paceforseveralyears,earningsarenowclimbingata3.0%pace.Butthereisoneotherthingtoconsider–producIvity.

UnitLaborCosts

CompensaIon–ProducIvity=UnitLaborCosts2016 2.3%-0.0%=2.3%

3

UnitLaborCosts

CompensaIon–ProducIvity=UnitLaborCosts2016 2.3%-0.0%=2.3%

2017 3.5%-1.0%=2.5%

3

60

80

100

120

140

160

180

200

220CommodiIes--Energyvs.Nonenergy

Non-energyEnergy

Commoditypricesaretheremaining1/3ofafirm’scosts.Oilpricesaswellascommoditypricesotherthanoil–copper,lead,zinc,gold,silver,beef,fish--fellsteadilyformorethanayear.HelpedpushinflaIonlower.Butnowallcommoditypriceshaveturnedupwards.DownwardbiastotheinflaIonratewilldisappear.

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%Jan20

07

Apr2

007

Jul200

7Oct2007

Jan20

08

Apr2

008

Jul200

8Oct2008

Jan20

09

Apr2

009

Jul200

9Oct2009

Jan20

10

Apr2

010

Jul201

0Oct2010

Jan20

11

Apr2

011

Jul201

1Oct2011

Jan20

12

Apr2

012

Jul201

2Oct2012

Jan20

13

Apr2

013

Jul201

3Oct2013

Jan20

14

Apr2

014

Jul201

4Oct2014

Jan20

15

Apr2

015

Jul201

5Oct2015

Jan20

16

Apr2

016

Jul201

6Oct2016

Shelter--RentTheshortageofavailablehousingispushinguprents.Theyarecurrentlyrisingat3.6%pace.Rentsare1/3oftheenIreCPI.

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%Jan20

07

Apr2

007

Jul200

7Oct2007

Jan20

08

Apr2

008

Jul200

8Oct2008

Jan20

09

Apr2

009

Jul200

9Oct2009

Jan20

10

Apr2

010

Jul201

0Oct2010

Jan20

11

Apr2

011

Jul201

1Oct2011

Jan20

12

Apr2

012

Jul201

2Oct2012

Jan20

13

Apr2

013

Jul201

3Oct2013

Jan20

14

Apr2

014

Jul201

4Oct2014

Jan20

15

Apr2

015

Jul201

5Oct2015

Jan20

16

Apr2

016

Jul201

6Oct2016

Medical

Medicalcostshaveacceleratedfrom2.5%ayearagotoabout4.0%.

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

CPIExFood&Energy

CPI--Projected

InflaIonispoisedtoaccelerate–butnotexplode,

2017-2018Forecasts 201620172018

GDP 2.0%2.3%2.6%Unemploy.Rate 4.7%4.5%4.3%InflaIon(CoreCPI) 2.2%2.7%2.7%

3

WhatIstheFedGoingtoDo?

TheFedWillRaiseRatesSlowly

2017-2018Forecasts 201620172018

GDP 2.0%2.3%2.6%Unemploy.Rate 4.7%4.5%4.3%InflaIon(CoreCPI) 2.2%2.7%2.7%FedFundsRate 0.5%1.3%2.0%

0

1

2

3

4

5

6

7

8

9Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

FedFundsRate--Projected

IftheFedraisesratesslowlyitwilltakeunIlmid-2020forratestobe“neutral”.Howhighis“neutral”?A“neutralrate”shouldbeabout3.0%.

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Jan-61

Jul-6

2Jan-64

Jul-6

5Jan-67

Jul-6

8Jan-70

Jul-7

1Jan-73

Jul-7

4Jan-76

Jul-7

7Jan-79

Jul-8

0Jan-82

Jul-8

3Jan-85

Jul-8

6Jan-88

Jul-8

9Jan-91

Jul-9

2Jan-94

Jul-9

5Jan-97

Jul-9

8Jan-00

Jul-0

1Jan-03

Jul-0

4Jan-06

Jul-0

7Jan-09

Jul-1

0Jan-12

Jul-1

3Jan-15

Jul-1

6

RealFundsRateOverthepast50yearsthefundsratehasaveraged1.0%higherthaninflaIon.Typicallyregardedasa“neutral”realrate.

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0Jan-61

Jul-6

2Jan-64

Jul-6

5Jan-67

Jul-6

8Jan-70

Jul-7

1Jan-73

Jul-7

4Jan-76

Jul-7

7Jan-79

Jul-8

0Jan-82

Jul-8

3Jan-85

Jul-8

6Jan-88

Jul-8

9Jan-91

Jul-9

2Jan-94

Jul-9

5Jan-97

Jul-9

8Jan-00

Jul-0

1Jan-03

Jul-0

4Jan-06

Jul-0

7Jan-09

Jul-1

0Jan-12

Jul-1

3Jan-15

Jul-1

6

RealFundsRate

Ifa“neutral”realfundsrateis1.0%andtheFedhasaninflaIontargetof2.0%,thenaneutralfundsrateshouldbeabout3.0%.

0

1

2

3

4

5

6

7

8

9Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

FedFundsRate--Projected

ItwilltakeunIlthemiddleof2020forratestoreachthe“neutral”levelof3.0%.

0.0

5.0

10.0

15.0

20.0 FedFundsRate

TheU.S.economyhasnevergoneintorecessionunlessthefundsratehasbeenhigherthan“neutral”.

0

1

2

3

4

5

6

7

8

9Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

FedFundsRate--Projected

Ifthefundsratedoesnotbecome“neutral”unIlmid-2020,theearliestdateforarecessionis2020.

Thelongestexpansiononrecord

LongrateswillconInuetoriseslowly

2017-2018Forecasts 201620172018

GDP 2.0%2.3%2.6%Unemploy.Rate 4.7%4.5%4.3%InflaIon(CoreCPI) 2.1%2.7%2.7%FedFundsRate 0.5%1.3%2.0%10-yearNote 2.5%2.9%3.4%30-yearMortgage 4.2%4.6%5.1%

3

ImportantTakeaways

1.   RaiseEconomicSpeedLimit–1.8%to2.8%

2.   Fastergrowthinwages–2.3%to3.5%.

3.   Fastergrowthinourstandardofliving.

4.   InflaIonacceleratesslightly–2.2%to2.7%.

5.   Fedraisesratesveryslowly--0.5%to1.3%

6.   Greatenvironmentforstocks.Newhighs.

ItDoesn’tGetMuchBeoer