U.S. Economic Outlook of New York, Research and Statistics Group

April 13, 2012

Contents

FRBNY Staff Outlook Overview 1

FRBNY Staff Risk Assessment 3 Inflation 4

Real Activity 6 Labor Market 7 Productivity and Costs 9 10 Confidence 12 Household Financial Conditions 13 Housing 14 and Inventories 16 Manufacturing 18 FRBNY Staff Foreign Outlook 19 Trade 20 Financial Markets 21 Bank Lending Standards 25 Corporate Profits 26 27 FRBNY Staff Federal Fiscal Outlook 27 Reference 28

This document reflects the views of the Research staff at the Federal Reserve Bank of New York and does not necessarily reflect the official views of the Federal Reserve Bank of New York, the Federal Open Market Committee, or the Federal Reserve System.

Evolution of FRBNY Staff Forecast Growth, AR or 2012 2012 2012 2012 2013 2012 (Q4/Q4) 2013 (Q4/Q4) Q4/Q4 gth. rate Q1 Q2 Q3 Q4/Q4 Q4/Q4 2/10/12 4/13/12 2/10/12 4/13/12

Real GDP Real GDP 2.6 2.8 2.8 2.9

FRBNY Staff 2.7 2.2 3.2 2.8 2.9 PCE Deflator 1.5 1.9 1.7 1.8 Consensus** 2.2 2.3 2.4 2.4 2.7 Core PCE Deflator 1.4 1.8 1.6 1.8 PCE Deflator Unemp. Rate (Q4 Avg.) 7.6 7.5 7.1 6.7 FRBNY Staff 2.3 1.9 1.8 1.9 1.8

Core PCE Deflator FRBNY Staff 2.2 1.7 1.7 1.8 1.8

Unemp. Rate (Annual Data is Q4 Average) FRBNY Staff 8.3 8.0 7.7 7.5 6.7 Consensus** 8.3 8.2 8.1 8.0 7.5 **Blue Chip Forecast (4/10/2012) FRBNY Staff Outlook Overview points between September and March—a large Based on the current estimate, real GDP grew at a decline by standards of the past 25 years—to 8.2%, 3.0% annual rate in 2011Q4, the best performance the lowest since January 2009. However, the since the first half of 2010. Real PCE grew at a employment to population ratio was 58.5% in 2.1% annual rate in the fourth quarter, led by strong March, about where it has been since 2009Q4. growth of spending on durable goods. The rate of With the decline of energy prices over the growth of business fixed investment slowed some, second half of 2011, the 12-month change in the the net export growth contribution was -0.3 PCE price index has slowed to 2.3% as of February percentage point, and government spending fell from a recent peak of 2.9% in September. Although sharply. Inventory investment contributed 1.8 limited by the recent rise in gasoline prices, further percentage points to the fourth quarter growth rate, slowing is likely in time. The 12-month change in and such large contributions are rarely followed by the core PCE price index was 1.9% in February, a similar contribution in the next quarter. little different from December. But slowing of trend With the firming of growth we have also inflation is still in the pipeline: the 6-month change seen some improvement in labor market conditions. in the core PCE deflator was 1.6 in February Aggregate hours worked by all private sector compared to 2.3% in August. employees rose at a 3.7% annual rate in 2012Q1, up Staff Outlook and Risks: For 2012 we expect real from increases of 1.1% and 2.6% (annual rate) in GDP to increase around 2¾% (Q4/Q4), up from 2011Q3 and 2011Q4 respectively. The 1½% in 2011. This is likely to lead to further unemployment rate fell a cumulative 0.8 percentage declines of the unemployment rate, perhaps to

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Real and Potential GDP Nonfarm Payroll Employment Billions of 2005 Dollars Billions of 2005 Dollars Millions Millions 14500 14500 139 139 14000 14000 138 138 CBO Estimate 137 137 13500 of Potential 13500 136 136 13000 13000 135 135

12500 12500 134 134

12000 12000 133 133 132 132 11500 Real GDP 11500 131 131 11000 11000 130 130 10500 10500 129 129 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012 Note: Throughout text, shading Source: Bureau of Economic Analysis and Congressional Office Source: Bureau of Labor Statistics represents NBER .

around 7½% by the end of the year, although the We regard risks for growth to be skewed to path will depend on the behavior of the labor force the downside, with risks to inflation being roughly participation rate. balanced. Private domestic demand is expected to In large part, these conclusions are based on gradually strengthen as conditions ease and the lackluster recovery to date and the economy’s confidence improves. Growth of exports is expected vulnerability to further negative shocks at a time to be well maintained. However, spending at both when the policy rate is stuck at its zero lower the federal and state and local levels of government bound. For example, events in the Euro Area could is expected to continue to decline. Overall inflation deteriorate again and turn out to be worse than will be affected near term by the recent rise in expected, with substantial negative spillovers to gasoline prices, but it should slow later in the year global financial markets and economic activity. so that overall PCE inflation for 2012 is expected to However, there are upside risks as well. be a little below 2% (Q4/Q4; core inflation should Given the possible extent of pent up demand, we be slightly lower). This forecast is predicated on may be pleasantly surprised by the strength of low levels of resource utilization restraining firms’ as access to credit continues to marginal costs and prices, as well as on stable - improve. In addition, the recent softness of business term inflation expectations. investment spending may be even more transitory All else equal, growth in 2013 would be and could rebound more than expected. Regarding somewhat stronger than in 2012 as the economy inflation, a key upside risk is that if world growth continues to heal. However, there are numerous turns out to be stronger than expected, energy prices fiscal policy issues on the table for 2013 which will are likely to rise over the forecast horizon rather have a very significant impact on the actual than being essentially flat, as is currently reflected outcome; for now, we see growth near 3%. in futures prices.

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Core PCE Inflation Forecast Distribution Real GDP Growth Forecast Distribution

% Change – Year to Year % Change – Year to Year % Change – Year to Year % Change – Year to Year 4 4 10 10

8 8 3 3 6 6 2 2 4 4

1 1 2 2

0 0 0 0 -2 -2 -1 -1 -4 -4

-2 -2 -6 -6 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Source: FRBNY Staff Calculations Source: FRBNY Staff Calculations FRBNY Staff Risk Assessment Staff Real Activity Outlook. Although we recently Staff Inflation Outlook. The economic and financial have reduced some of our downside risks and raised market developments since February indicate some our upside risks, the balance of risks for real activity increase in upside risks and decrease in downside remains to the downside. We still have notable risks to the inflation outlook, and the risks are now weights on the downside scenarios of Fiscal roughly balanced. Near term, the higher probability Consolidation (which includes larger-than-expected of stronger expansion dynamics offset the continued fiscal restraint and higher risks of -term supply notable probability of significant resource slack shocks), Global Deflation, and Global Credit leading to downside inflation risks. One additional Crunch (both reflecting risks from the European near-term upside risk is a politically-related oil sovereign crisis, falling home prices, and supply shock. Longer term, we still place notable balance sheet adjustments). As has been the case weight on downside scenarios—the Fiscal recently, the Fiscal Consolidation scenario is the Consolidation, Global Deflation, and Global Credit most likely alternative scenario. We have a higher Crunch scenarios—and relatively less weight on the weight on Faster Growth, as the recent data releases Loss of Credibility scenario. We do have more overall suggest a greater probability of stronger weight on the Faster Growth scenario. In part, the expansion dynamics; its weight is now only relatively low weight on Loss of Credibility reflects somewhat below that of Fiscal Consolidation. With that many measures of longer-term inflation this forecast distribution, the probability of a expectations have remained fairly stable at low through end-2012 is lower than it was a levels. Our forecast distribution has less probability few months back, and any recession would most of deflation between mid-2012 and mid-2013 than likely be mild. At the same time, there is notable previously, but the probability of high (>3%) probability of strong growth (>6%), which inflation is still fairly low. There remains higher illustrates the continued considerable uncertainty than usual uncertainty around the inflation outlook. around the real outlook.

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Total and Core CPI Total and Core PCE Deflator % Change - Year to Year % Change - Year to Year % Change - Year to Year % Change - Year to Year 6 6 5 5 Total PCE 5 Total CPI 5 4 4

4 4 3 3 3 3 2 2 2 2 1 1 1 1 Core CPI Core PCE 0 0 0 0 -1 -1 -1 -1 -2 -2 -3 -3 -2 -2 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012 Source: Bureau of Labor Statistics Notes: Not seasonally adjusted. Source: Bureau of Economic Analysis

Inflation core CPI (SAAR) was 2.2% in March, down from a Developments. Inflation continues its stabilization peak of 2.8% in July. Over the three months to process around mandate-consistent levels, which February, the change of the core PCE price index started during the fall of last year after the notable (SAAR) was 2.1%, down from the July peak of rise between the fall of 2010 and the summer of 2.5%. 2011. The retrenchment in energy prices since the In March, the 12-month change in the non- summer has mainly driven the deceleration in seasonally-adjusted (NSA) core Consumer Price headline measures of inflation. Headline CPI Index (CPI less food and energy) was 2.3%, similar increased 2.7% in March (NSA) over a year before, to recent readings, but a small uptick relative to the compared to the 3.9% peak in September. The 12- February increase of 2.2%. The core CPI has been month change in the PCE price index was 2.3% in steadily increasing for over a year now, following February, compared to 2.4% in January and a peak the historical low of 0.6% in October 2010, but its of 2.9% in September. pace appears to be stabilizing. In addition to the available core indexes, we The 12-month change in the seasonally also look at several alternative measures to assess adjusted (SA) core Personal Consumption the underlying inflation trends. These alternatives Expenditure (PCE) price index was 1.9% in include smoothed inflation, trimmed mean, and our February, the same as in the previous two months. own underlying inflation gauge (UIG) and signal- At shorter horizons, the momentum that component (SiCo) indicator for PCE inflation. inflation had displayed throughout the summer of Similar to core, most of these measures currently 2011 has slowed. The three-month change of signal that inflation is stabilizing, or as in the case

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Measures of PCE Inflation Since 2000 vulnerable to further negative shocks almost three

% Change - Year to Year % Change - Year to Year years after the official end of the recession. 3.5 3.5 Smoothed Inflation 3.0 3.0 (FRBNY) Offsetting this downside risk, however, there are 2.5 2.5 signs that the recovery may be finally gaining 2.0 2.0 Signal 1.5 Component 1.5 firmer ground. PCE (FRBNY) Core PCE 1.0 1.0 0.5 0.5 Underlying 0.0 0.0 Inflation Gauge Trimmed Mean -0.5 (FRBNY) -0.5 (Dallas Fed) -1.0 -1.0 2000 2002 2004 2006 2008 2010 2012 Source: Bureau of Economic Analysis, Dallas Fed, and FRBNY Staff of the UIG and smoothed inflation measures, slightly decreasing. Staff Outlook and Risks. In our central projection, core inflation, which was slightly higher than expected in 2012Q1, slows down in the course of 2012, and we expect core PCE inflation to remain below mandate-consistent levels over the forecast horizon. In the medium run, this forecast is predicated on the continuing restraint exercised by low levels of resource utilization on firms’ marginal costs and prices. These factors, however, are expected to subside over time, as the economy finally regains a firmer footing. At the same time, the broad stability of long-term inflation expectations should contribute to keeping inflation relatively close to mandate-consistent levels. The continuing unprecedented slow growth of wages also points to fairly stable inflation expectations and subdued cost pressures. Around this central scenario, risks are roughly balanced. With the policy rate effectively at its zero lower bound, the economy remains

Page 5 of 37 Quarterly Real GDP Growth Level of Real GDP (Series Set to 1.00 at NBER Peak) % Change - Annual Rate % Change - Annual Rate Ratio Ratio 8 8 1.20 1.20 6 6 1.15 1981 Cycle 1.15 4 4 1.10 1.10 2 2 1990 Cycle 0 0 1.05 1.05 2001 Cycle 1973 Cycle -2 -2 1.00 1.00 -4 -4 -6 -6 0.95 0.95 Current Cycle -8 -8 0.90 0.90 -10 -10 -20 2 4 6 8 101214161820 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Quarters Since NBER Peak Note: Dashed line represents FRBNY Source: Bureau of Economic Analysis Source: Bureau of Economic Analysis Staff forecast.

2011Q4. The unemployment rate fell a cumulative Real Activity 0.8 percentage points from September to March, Developments. Based on the third estimate, real and stands at 8.2% in March, the lowest rate since GDP grew at a 3.0% annual rate in 2011Q4, the best February of 2009. However, the employment to performance since the first half of 2010. However, population ratio remained at 58.5% in March, about 1.8 percentage points were due to inventory where it has been since 2009Q4. accumulation. Real final sales increased only 1.1% Staff Outlook and Risks. For 2012 we expect real in the fourth quarter, compared with an increase of GDP to increase around 2.8% (Q4/Q4), up from 3.2% in the third quarter. Real PCE grew at a 2.1% 1.6% in 2011. This is likely to lead to further annual rate in the fourth quarter, led by strong declines of the unemployment rate, perhaps to growth of spending on durable goods. The rate of around 7 ½% by the end of the year, although the growth of business fixed investment slowed relative exact path will depend on the behavior of the labor to the third quarter, with nonresidential investment force participation rate. Private domestic demand is growing by 5.2%, compared to 15.7% growth in the expected to strengthen somewhat as credit third quarter. The net export growth contribution conditions continue to ease and confidence was -0.3 percentage point, reflecting a decline in the improves. Federal fiscal policy will weigh rate of growth of exports, and a marked pickup in negatively on the outlook, as state and local the rate of growth of imports relative to the third government spending and employment are expected quarter. Government spending fell sharply, led by a to decline. very steep decline of defense spending. All else equal, growth in 2013 is expected to With the firming of growth we have also be somewhat stronger than in 2012 as the economy seen some improvement in labor market conditions. continues to heal. However, there are numerous Aggregate hours worked by all private sector fiscal policy issues on the table for 2013 that will employees rose at a 3.7% annual rate in the first have a very significant impact on the actual quarter of 2012, following an increase of 2.6% in outcome.

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Private Nonfarm Payroll Employment and Total Hours Measures of the Employment Situation Worked Percent Percent 3-Month Moving Average of One-Month Change 12 68 Percent Percent 1.0 1.0 Unemployment 10 Rate (left axis) 67

0.5 All Employment 0.5 8 66 Labor Force Participation Rate 6 (right axis) 65 0.0 0.0 4 64

Unemployment Rate: -0.5 Aggregate -0.5 2 Men 25-54 (left axis) 63 Weekly Hours

0 62 -1.0 -1.0 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012 Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics Labor Market Developments. The labor market conditions After fluctuationg in a fairly narrow range improved in the first quarter of the year. The pace of 8.9% to 9.1% from January to October of 2011, of the improvement was faster in January and the unemployment rate has been nudging down and February and somewhat slower in March. While the reached 8.2% this March This is the lowest level of March labor market report suggests the possibility the unemployment rate since February 2009. of some moderation in the recent pace of The improvement in the unemployment rate improvement in labor market conditions, some of has been particularly pronounced for male workers. the weakness in March’s payroll numbers might be The unemployment rate for male workers decreased consequence of unseasonably warm weather in from 10.0% in December 2010 to 8.3% in March January and February, which may have pulled 2012. The unemployment rate for women went forward some hiring. Given this possibility, the down only by 0.5 percentage points from 8.6% to average three-month increase of private payroll 8.1% during the same period. The gender employment (210,000) may be a more accurate unemployment gap, which reached a post-war high gauge of conditions, and it still suggests a fairly level of 2.7 percentage points in August 2009, has robust pace for job creation. Job gains in the first almost disappeared in March. So far during the quarter was mostly concentrated in the service- recovery, male workers have been doing relatively providing sector, and the diffusion index—the better than female workers, and this discrepancy is fraction of industries increasing employment—was not a consequence of gender differences in sectoral 59.6 in March. distribution of employment. Aggregate weekly hours has seen a recovery in the last three months and has risen 0.5% from December 2011 to March 2012. The length of the average work week was 34.5 hours.

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Employment Declines During Recessions March 2012 Unemployed Persons by Duration (Series Set to 1.00 at NBER Peak) (In comparison to 2007 Average) Ratio Ratio Percent of Total Percent of Total 1.12 1.12 50 50 2007 Average 45 45 March 2012 1.08 1990 Cycle 1.08 40 40 1981 Cycle 35 35 1.04 1.04 30 30 1973 Cycle 25 25 1.00 1.00 20 20 2001 Cycle 15 15 0.96 Current Cycle 0.96 10 10 5 5 0.92 0.92 0 0 -6 0 6 12 18 24 30 36 42 48 5 Weeks or Less 5-14 Weeks 15-26 weeks 27 Weeks+ Months Since NBER Peak Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics

Despite the improvement in the Staff Outlook and Risks. The labor market indicators unemployment rate, the employment-to-population suggest that labor market conditions improved in ratio continues to remain low. The employment-to- the first three months of the year, especially in population ratio was 58.5% in March, only 0.2 January and February. While the March labor percentage points higher than its value in December market report was weak, given the crosscurrents in 2010. The labor force participation rate stood at the March report, the possibility of weather effects, 63.8% in March, down from 64.3% in December and the typical noise in the monthly data, we will 2010. need to monitor the upcoming data to assess The duration of unemployment continued to whether the March labor market report signals a be high. The median duration of unemployment more fundamental change in the pace of the labor stood at 19.9 weeks in March, down from its market recovery. postwar high of 25.0 weeks in June 2010, but still at We expect the labor market to continue to elevated levels. When the recession started in improve, though at a slow pace. In the second December 2007, the median duration of quarter of 2012, we project the average monthly unemployment was 8.4 weeks. The continued high change in payroll employment to be roughly level of this measure indicates that long-term 237,000 jobs, and the unemployment rate to decline unemployment remains a significant issue for the to around 8.1%. labor market.

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Productivity Compensation and Unit Labor Costs Nonfarm Business Sector Nonfarm Business Sector % Change - Year to Year % Change - Year to Year % Change - Year to Year % Change - Year to Year 8 8 9 9 Compensation per Hour 6 6 6 6

4 4 3 3

2 2 0 0 Unit Labor 0 0 -3 Costs -3

-2 -2 -6 -6

2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012 Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics

With ongoing weakness in productivity growth and Productivity and Costs recent strength in compensation growth, unit labor Developments. Output per hour in the nonfarm costs increased 2.8% (annual rate) in 2011Q4, business sector rose 0.9% (annual rate) in 2011Q4, following a rise of 3.9% in the previous quarter; the below the 1.8% increase in Q3. Productivity growth four-quarter change was 3.1%. Unit labor costs was weak during 2011, and remains below the pace showed some firming during 2011 after declining observed during the last two years. The four-quarter for most of the previous two years. change in productivity was 0.3%, which is below Taken together, the slower growth of our 1½-1¾% estimate of trend productivity growth. productivity, the gradual increase in hours worked, Hours worked rose 2.7% (annual rate) in and stronger compensation growth are consistent 2011Q4, up from 1.0% in the previous quarter. The with an ongoing recovery in the labor market. four-quarter change was 1.9%. Since 2009Q3, hours Staff Outlook and Risks. An issue of great worked has increased every quarter and its growth importance is the outlook for trend productivity rate now appears to have stabilized and returned to growth. Evidence from a model developed to levels observed over the 2004-06 period. analyze this issue has recently alternated between Compensation growth showed robust growth viewing the robust productivity growth from 2009 during the last two quarters of 2011: it rose 3.7% through 2010 as indicative of a shift to a higher (annualized) in 2011Q4, after increasing 5.7% in trend growth or as a largely cyclical fluctuation. As Q3. The four-quarter change in compensation per a consequence of sizeable downward data revisions hour was 3.5%, the largest increase since 2008Q3. in August as well as recent data, the model remains This increase marked the first time in three years very firm in its conclusion that productivity has that compensation per hour was close to the 4% been in a low growth regime since 2004 and that growth rate typically observed during the 2003-08 robust growth during 2009 was only cyclical and period. transitory.

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Real PCE, Disposable Income and Personal Saving Rate Real Personal Consumption Expenditures % Change – Year to Year % Change – Year to Year % Change - Year to Year % Change - Year to Year 25 25 9 9 8 8 20 20 Personal 7 7 Real PCE Saving Rate 15 Durable Goods 15 6 (left axis) (right axis) 6 5 5 10 10 4 4 3 3 5 5 2 2 0 0 1 1 Nondurables Services 0 0 -5 Goods -5 -1 -1 -2 Real Disposable -2 -10 -10 Income -3 -3 -15 -15 -4 (left axis) -4 -5 -5 -20 -20 2000 2002 2004 2006 2008 2010 2012 1999 2000 2001 2003 2004 2005 2007 2008 2009 2011 2012 Source: Bureau of Economic Analysis Source: Bureau of Economic Analysis

Consumption February and was responsible for most of the Developments. Real personal consumption acceleration in real PCE growth. expenditures (PCE) increased at a 2.1% annual rate Staff Outlook and Risks. Our modal forecast now in the fourth quarter, up somewhat from the 1.7% assumes that the 2 percentage point payroll cut, growth rate of the third quarter. This strengthening which was extended for all of 2012, will not be was due primarily to a pickup in spending on renewed for 2013. We expect growth of real PCE durable goods, particularly motor vehicles. Sales of during 2012 to be slightly above the 2.1% rate of light weight motor vehicles averaged 13.5 million 2011Q4, with the saving rate somewhat below that (annual rate) in 2011Q4, the highest quarterly of 2011. Real disposable income declined during average sales pace since the first half of 2008. The January and February, and we expect it to be flat strengthening in real PCE has extended into 2012, during the first quarter of 2012. Over the remainder with January and February showing monthly gains of the year, however, we expect modest growth in of 0.2% and 0.5%, respectively. Spending growth real disposable income due to ongoing growth in continues to be led by durable goods – up 1.6% in hours worked and some firming in wages. Taken February, following a 1.4% rise in January. Sales of together, we still view as being cautious light weight motor vehicles have shown further and unlikely to continue to have spending run strength and have averaged 14.5 million (annual significantly faster than disposable income. In rate) during the first 3 months of 2012. In contrast addition, some of the increase in consumer spending to spending on durable goods, growth of real on durable goods during the fourth quarter and early consumer spending on nondurable goods remains into this year was “catching up” for depressed sales sluggish, edging up 0.1% in February. While real earlier in 2011. spending on services had remained essentially flat for a number of months, it expanded by 0.4% in

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Consumer Debt by Credit Score Quintile households are likely to want to boost saving for % Change – 4 Quarter % Change – 4 Quarter 25 25 and college educations due to low 3rd Quintile 20 20 rates and equity losses since 2007. 15 15 Regarding upside risk, real personal 10 10

5 5th Quintile 5 consumption expenditures in December of 2011

0 0 4th Quintile were only 1.6% above the previous peak level in 1st Quintile -5 -5 December of 2007. This sustained sluggishness of -10 2nd Quintile -10 consumer spending is unprecedented in the post -15 -15 2006 2007 2008 2009 2010 2011 2012 WWII period. This pattern suggests substantial pent Source: FRBNY Consumer Credit Panel Note: Excludes Student up demand for durable goods such as light-weight We regard the risks to our forecast for vehicles, appliances, and furniture, in addition to consumer spending to be reasonably balanced. On nondurables such as apparel. Despite the low level the downside, the level of the unemployment rate of the personal saving rate and household net worth, remains relatively high. Even though credit we may be surprised by the strength of consumer standards appear to be easing somewhat, demand spending once the labor market begins a more for consumer credit may remain weaker than substantial improvement and households become expected due to a pervasive uncertainty regarding more confident about their income prospects. employment and future income prospects. And while lending standards may be easing, the absolute level remains relatively stringent, limiting the supply of credit. In addition, home prices remain under some downward pressure. For most people, the home they own is their primary source of net worth. Another concern is the large run-up in gas prices starting in February and the impact on purchasing power if the price increases were to persist. Finally, the demographic profile of the country is such that the number of households headed by an individual 45 years of age or older has increased substantially over the last decade, while the number of households headed by someone younger than 45 has declined. These older

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Components of Conference Board Index /Sentiment Indices

Index Index Index Index 200 200 150 120 180 Consumer 180 Conference Board 130 110 Confidence Consumer Confidence, 160 160 Present 1985=100 140 Situation 140 110 100 1985=100 120 120 90 90 100 100 70 80 80 80 Michigan Consumer 60 Consumer 60 50 70 Sentiment, Expectations 40 40 1985=100 1985=100 30 60 20 20 0 0 10 50 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012 Source: The Conference Board Source: University of Michigan and the Conference Board Consumer Confidence Staff Outlook and Risks. Although consumer Developments. The major consumer confidence confidence is not the predominant determinant of measures—based on the Conference Board and consumer spending, it has been shown to have some University of Michigan monthly surveys and effect; thus it is likely that the persistently low Bloomberg’s weekly survey—moved up sharply in levels of confidence have held back consumption the final months of 2011 and continued to advance somewhat. Given that job market perceptions are a modestly in early 2012. Michigan’s index climbed factor influencing consumer confidence, it is a to a one-year high in March, while the Conference channel through which a pickup in the labor market Board’s edged back from a one-year high. Both would buoy consumer spending. Tracking the these measures are just a shade below their cyclical Conference Board’s Present Situation component highs set in February 2011. Bloomberg’s weekly index can be helpful in identifying incipient shifts in index has given even more positive signals recently, the job market before they show up in the surging to a four-year high at the end of March. All employment numbers. This series tends to correlate three of these measures are still at low levels by closely with the unemployment rate, often with a historical standards, but the recent improvement is slight lead—partly due to its early release. The fact nonetheless encouraging. that the Conference Board’s Present Situation index While the Conference Board’s headline is at a multi-year high bolsters the view that there index was little changed in March, the Present has been fundamental improvement in the labor Situation component chalked up its fourth gain in market. the past five months and stands at its highest level Moreover, Michigan’s March survey points since September 2008. That measure, which closely to increasingly widespread confidence in the job tracks the labor market, has now more than reversed outlook: The net proportion of respondents its 6-month decline from last April to last October. anticipating declining unemployment over the next 12 months climbed to its highest level since 1984.

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Household Net Worth 90+ Days Delinquency Rate by Type As a Percent of Disposable Income Percent of Balance Percent of Balance Percent Percent 16 16 700 700 14 14 650 650 12 12 Credit Card 600 600 10 Loans 10

550 550 8 8 6 6 500 500 Mortgage 4 Loans 4 Auto Loans 450 450 HELOC 2 2

400 400 0 0 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 2012 1999 2001 2003 2005 2007 2009 2011 Source: Flow of Funds, Federal Reserve Board Source: FRBNY Consumer Credit Panel (Equifax)

Household Financial Conditions decline. Serious delinquencies on auto loans and Developments. US households experienced a steep home equity lines of credit have stabilized. decline of net worth over the past few years, the Staff Outlook and Risks. Uncertainty about the pace result of a substantial increase in liabilities during of further deleveraging by the household sector is a the period when home prices and equity values were source of both upside and downside risk for growth rising followed by steep declines of those asset over the forecast horizon. Lending standards, while values. In response, households have increased tight in absolute terms, appear to be easing. At the their saving out of current income, and total same time, consumers have substantial pent-up household indebtedness has been declining since demand for durable goods. Therefore, consumer 2008 through a combination of paying down debt spending could turn out to be stronger than we and debt being charged off. More recently, expect. However, net worth is still well below the nonmortgage consumer credit has begun to levels reached at the peak. With a large fraction of increase, but total household liabilities continue to households approaching normal retirement age decline due to ongoing contraction of mortgage amid increasing uncertainty about future retirement debt. In addition, many households have been able benefits, it is also possible that households will to refinance existing debt at lower interest rates. As want to push the personal saving rate higher over a result, the ratio of financial obligations, defined as the forecast horizon, resulting in a lower path for debt service plus other housing related financial consumer spending. obligations, over disposable income has declined to levels that prevailed in the mid 1990s. While still high, serious (90+ day) delinquencies on first mortgage loans and credit cards have begun to

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Housing Starts Single-family Home Sales and Prices Units (Thousands) Units (Thousands) Single-Family Homes 525 2000 Sales per 1,000 People Index 30 225 450 200 1600 CoreLogic National 375 25 Home Price Index 175 (Right Axis) 1200 300 Total Multifamily (Left Axis) 150 20 225 1 Unit 800 125 (Right Axis) 150 100 15 New and Existing 400 Home Sales 75 (Left Axis) 75

0 0 10 50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1990 1994 1998 2002 2006 2010 Source: Census Bureau Source: CoreLogic, National Association of Realtors, Census Bureau Housing Despite this impressive gain, the absolute level of Developments. Single family housing starts peaked multi-family starts remains relatively low. around 1.75 million units (annual rate) in 2006Q1. Home Prices. As measured by the CoreLogic They then plunged to just 356,000 in the first repeat sales home price index, home prices peaked quarter of 2009, a decline of 80%. In January and in the second quarter of 2006. Over the next three February, single-family starts averaged about years they declined by nearly 30%. The index then 480,000 units, a bit above the pace over the past rose modestly through 2010Q2, aided by the couple of years. stronger demand resulting from the home buyer tax A number of factors continue to affect the credit. However, as the effects of that credit began single-family housing market adversely despite to wane, home prices came under renewed record high levels of -flow affordability downward pressure. From a recent peak in the indices. Mortgage underwriting standards are spring of 2010 through February 2012, the index reported to be quite restrictive, with even good including distressed sales is down 10.5% while the credit risk applicants required to make substantial index excluding distressed sales is down 5.2%. down payments. In addition, the continued weak Although the pace of decline has moderated labor market and general uncertainty about the recently, home prices are likely to remain under outlook for the economy and home prices continue downward pressure due to a continued high volume to dampen demand. Finally, there is still a of distressed sales. Staff projections indicate that significant excess supply of housing units. the volume of homes flowing into lenders’ REO Due to rising demand for rental housing, through will remain high well into multi-family housing starts have begun to rebound 2013. more significantly, with the January-February

average up almost 170% from the 2009Q4 trough.

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Price to Earnings Ratios Ratio Ratio

35 1 S&P 500 30 Composite Price/Operating 0.75 25 Earnings Ratio (Left Axis) 20 0.5 15 Home Price/Rent 10 (Right Axis) 0.25 5

0 0 1985 1989 1993 1997 2001 2005 2009 Source: S&P, BLS, and CoreLogic Staff Outlook and Risks. Our modal forecast anticipates a very gradual recovery of housing market activity over 2012-13. In addition, given that the base from which this recovery is starting is so low, the housing contribution to real GDP growth will be relatively modest, especially compared to prior recoveries. The risks around our outlook for housing market activity and home prices are reasonably balanced. Mortgage interest rates are quite low and home prices have declined substantially in some markets, leading to a significant improvement in cash flow affordability. It is certainly possible that home sales and starts could improve considerably more than we are assuming. However, ratios of home prices to rents have declined from its 2006 peak but are not particularly low relative to the standards of the previous two decades. With underwriting standards still tight and uncertainty regarding the future path of home prices prevalent, demand may not recover as anticipated, leading to further price declines. This, of course, could produce self-reinforcing downward pressure on prices and retard any recovery in activity.

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Real Business Investment: Equipment and Software Business Investment in Nonresidential Structures % Change - Year to Year % Change - Year to Year % Change - Year to Year % Change - Year to Year 30 30 20 20

20 20 10 10

10 IT 10 0 0 0 0 Total E&S -10 -10 -10 -10

-20 -20 -20 -20

-30 -30 -30 -30 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012 Source: Bureau of Economic Analysis Source: Bureau of Economic Analysis

Investment and Inventories Developments—Equipment and Software. Real Nonresidential Structures. Real expenditures on spending on equipment and software (E&S) nonresidential structures decreased 0.9% (annual increased 7.5% (annual rate) in 2011Q4, somewhat rate) in 2011Q4 after rising strongly in the two below its average growth during this expansion. previous quarters. These expenditures are 30% The E&S expansion in this cycle overall has been below their peak set in 2008Q2. Most categories of faster than its recovery following the 2001 nonresidential structures are still well below their recession. The level of real outlays in 2011Q4 was peaks, with the exceptions of spending on oil and only 4.0% above its previous peak in 2007Q4. In gas wells as well as power and communications 2011Q4, a decline in spending for “other structures, both of which are relatively modestly equipment” (including mining machinery) partially below their peaks. offset increases in other categories of E&S Outside of energy (where relatively high spending. energy prices support investment), the fundamentals Orders and shipments of nondefense capital for investment in nonresidential structures remain goods excluding aircraft, monthly proxies for fairly soft, with elevated vacancy rates and still- equipment spending, fell sharply in January and tight financing for new construction. In addition, rebounded only partially in February. nonresidential construction fell in January and Consequently, growth of E&S expenditures will February. Thus, the prospects for the sector remain likely be a little softer in 2012Q1. However, orders tepid such that nonresidential construction could be for nondefense capital goods excluding aircraft depressed for some time. In sum, it now appears continued to run above shipments, which is that a recovery in this sector probably has begun, consistent with some near-term momentum for the but it still appears to be very slow. sector.

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Inventory / Sales: Total Business Nondefense Capital Goods Excluding Aircraft

Ratio Ratio Millions of Dollars Millions of Dollars 1.50 1.50 75000 75000

1.45 1.45 70000 New Orders 70000

1.40 1.40 65000 65000

1.35 1.35 60000 60000

Shipments 1.30 1.30 55000 55000

1.25 1.25 50000 50000

1.20 1.20 45000 45000 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012 Source: Census Bureau Source: Census Bureau

Inventories. Real inventories increased notably in Staff Outlook and Risks. With inventories-sales 2011Q4, resulting in an inventory investment ratios near desired levels, we expect somewhat contribution to real GDP growth of +1.81 slower pace of accumulation than in 2011Q4; percentage points for the quarter. Inventories rose therefore, inventory investment is projected to have in most industries, indicating that the positive a small negative GDP growth contribution over contribution from inventory investment was 2012H1 and then have little contribution thereafter. widespread. One notable exception to this pattern Growth of equipment and software spending is was inventories at motor vehicle dealers. expected to pick up modestly from the recent pace While they are slightly higher than they over the rest of 2012 and 2013. We project spending were in the early part of 2011, inventory-sales ratios on nonresidential structures to be flat in 2012Q1 remain low: the January level of the ratio for total and then to rise at a moderate rate over the rest of business was modestly above its historical low. The 2012 and 2013, as the effects of high vacancies and ratio for retailers was below pre-recession figures tight financial conditions fade. and just above its historical low. The February Because of the downside risks to real manufacturing ratio was somewhat above its pre- activity, the balance of risks to the equipment and recession levels, particularly those in the mid- software outlook is to the downside. Risks to 2000s. The February wholesale trade ratio was inventory investment are also to the downside due slightly above its historical low. At this point, to the sales risks; the uncertainty is sizable because inventories-sales ratios appear to be fairly near of uncertainties about desired levels. Risks to firms’ desired levels, suggesting that the near-term nonresidential structure expenditures are to the pace of inventory accumulation will largely reflect downside, reflecting continuing financial problems perceived sales prospects. and downward pressures on property values.

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Manufacturing Output Growth ISM Manufacturing Index

% Change - Year to Year % Change - Year to Year Index: 50+ = mfg. expands Index: 50+ = mfg. expands 10 10 70 70

5 5 60 60 0 0

-5 -5 50 50

-10 -10 40 40 -15 -15

-20 -20 30 30 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012

Source: Federal Reserve Board Source: Institute for Supply Management

Manufacturing Developments. Manufacturing production growth in Staff Outlook and Risks. Because we see transitory January and February was 9.4% (annual rate), factors as having contributed to relatively weak above the 4.3% growth over 2011. Part of the manufacturing production in 2011, we expect recent rebound reflects stronger motor vehicle manufacturing to rise moderately over 2012-13. The production as sales in the sector have improved. recent survey data have been at levels that typically Outside of motor vehicles, production has picked up point to moderate growth in the manufacturing recently in non high-tech industries, but has sector, although orders have been a bit softer. declined slightly over January and February in high- Concerns about growth in final demand from tech industries. The ISM index and the regional foreign sources could limit near-term U.S. Fed survey indices have been at levels typically manufacturing growth. consistent with moderate growth in the sector. With continued downside risks to final Despite the rebound in the overall sector since demand, the risks to the manufacturing outlook are mid-2009, production in many major manufacturing skewed to the downside. Beyond these general industries remains below earlier peaks, with some risks, intense competition from foreign producers, exceptions being the computer, aerospace, food, and especially if global downside risks are realized, may petroleum industries. As such, the capacity exacerbate the downside risks for domestic utilization rate in manufacturing was 77.6% in manufacturers. Finally, given the shrinkage in February, somewhat below the long-term average of capacity over the past few years, there is the about 80%. These utilization estimates incorporate potential for bottlenecks in some sectors to hinder an assumption that manufacturing capacity has risen expansion in the overall manufacturing sector if only modestly over the past year—reflecting the growth prospects rebound more substantially. limited levels of net capital spending in the sector.

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GDP Growth Inflation Percent Change (Q4/Q4) Percent Change (Q4/Q4)

f f 2010 2011 2012 2010 2011 2012 Euro Area 2.0 0.7 0.5 Euro Area 2.0 2.9 1.7 3.2 -0.6 1.4 Japan -0.3 -0.3 -0.2 U.K. 1.7 0.7 0.7 U.K. 3.4 4.7 1.1 3.3 2.2 2.1 Canada 2.2 2.7 2.0 9.8 8.8 8.3 China 4.6 4.0 4.0 Asia-4 NIEs 6.2 3.1 3.4 Asia-4 NIEs 3.1 3.1 2.5 4.4 3.7 3.0 Mexico 4.4 3.8 3.9 5.3 1.4 5.2 Brazil 5.9 6.5 5.5 Foreign Economies 3.9 2.2 2.5 Foreign Economies 2.5 2.9 2.1 Source: Haver and FRBNY Staff Source: Haver and FRBNY Staff

FRBNY Staff Foreign Outlook Emerging Asia: China’s growth slowed in Q1, with The foreign growth outlook is essentially output up 8.1% over the year. Confidence measures unchanged since the last meeting as global point to a slowing economy from weakness in the confidence measures have stabilized after falling property market sector and in exports. The rest of during the second half of 2011. Emerging Asia appears to be rebounding, with

firmer soft trade, production, and confidence data in Euro area: Output fell in 2011Q4 1.3% (SAAR). Q1 2012. The region’s economy is faltering with the turmoil in periphery countries leading to tighter credit Latin America: Growth in Brazil grew at a subdued conditions throughout the region and the broad shift 1.3% rate in Q4 after contracting slightly in Q3. The to tighter fiscal policy. Another weak result is weakness is tied to previous policy tightening. expected in Q1. The ECB policy to significantly Mexican GDP was up 1.7% in Q4, helped by increase liquidity in the banking system has helped consumption and exports. calm financial markets, but concerns about have increased recently.

Japan: GDP fell 0.7% in Q4, with a drop in exports tied to the flooding in . The floods limited needed components for export production. A rebound is expected to have occurred in Q1.

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Current Account Balance U.S. Trade SAAR, Bill$, BOP Basis Percent of GDP % Change - Year to Year % Change - Year to Year 0 0 20 20 -100 -1 15 Real Imports 15 -200 -2 10 10 -300 -3 -400 -4 5 5 -500 -5 0 0 -600 -6 -5 Real Exports -5 -700 -7 Percent of GDP -10 -10 -800 (Right Axis) -8 -15 -15 -900 Current Account Balance -9 (Left Axis) -1000 -10 -20 -20 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012

Sources: BEA, FRBNY Staff Note: Dashed lines represent Staff forecast Sources: BEA, FRBNY Staff Note: Dashed lines represent Staff forecast

Trade

Developments. The US trade deficit narrowed to $46.0 These data suggest that net exports will add billion in February, down from a revised $52.5 billion 0.3 percentage point to GDP growth in 2012 Q1, deficit in January. following a negative 0.3 percentage point contribution Export volumes fell 1.0 percent in February in 2011 Q4. over the previous month, offsetting the increase in January. All major categories were down, except Staff Outlook and Risks. The forecast for 2012 is for consumer goods. Over the 12 months ending in net exports to add 0.3 percentage point to GDP growth February, real exports of goods moved up 7.3 percent. over the year (Q4/Q4). The current account deficit is Nonoil import volumes decreased 2.9 percent projected to be 3.3 percent of GDP in 2012. in February, following increases of around two The risk for net exports is largely tied to the percent in each of the last two months. All major U.S. and foreign growth outlooks. The uncertainty categories were down, with the largest decline in surrounding the forecast for Europe is a particular risk consumer goods. Over the year, real nonoil import to the outlook given the size of its market. An volumes advanced only 4.4 percent. additional risk to the forecast is tied to the of The current-dollar oil bill only fell US$1.6 the US dollar relative to its major trading partners. billion, due to lower oil prices and lower oil volumes.

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Zero Coupon Curves TIPS Implied Inflation Compensation: 0-5, 5-10 Year Horizons Percent Percent Percent Percent 3 3 4 4 5-10 Year Jan 10 3 3

2 Feb 7 2 2 2 Apr 10 0-5 Year 1 1 Apr 10: 2.63 1 1 0 0 Apr 10: -1 1.90 -1

0 0 -2 -2 012345678910 2005 2006 2007 2008 2009 2010 2011 2012 Maturity (Years) Source: Federal Reserve Board Source: Federal Reserve Board Note: Carry-adjusted.

Financial Markets Inflation Compensation. Long- and short-dated Nominal Interest Rates. Treasury yields are TIPS implied measures of inflation compensation currently only slightly above their levels at the time were little changed since the last Directors’ meeting of the last Directors’ meeting in February. The in February. Near-term market implied breakeven yield on the 10-year benchmark is now trading at measures declined modestly, with inflation 2.06%, up only 6 basis points from its level on compensation over the next 5 years falling from February 7, but down approximately 35 basis points 2.04% on February 7 to 1.90%. Meanwhile, 5- to from its peak in mid-March as a result of mixed 10-year inflation compensation declined slightly to economic data and renewed concerns about the 2.57% from 2.61%. European fiscal situation with particular emphasis Survey-based measures of medium- to long- on the Euro-area periphery. Shorter dated yields term inflation expectations are also little changed were also little changed since the last meeting since the last Directors’ meeting. The median 5- owing to the maintained forward policy guidance in year inflation expectations as measured by the the FOMC statement. University of Michigan’s Survey of Consumers rose implied volatilities in Treasury and slightly to 3.0% from 2.9% in February, well within markets as measured by the 3-month MOVE the range of values observed over the recent past. and SMOVE indices are modestly below their level This suggests that inflation expectations remain at the time of the last Directors’ meeting and are well-anchored. now trading near the bottom of the range observed since the end of the recession in mid-2009.

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Expected Fed Funds Target Rate Federal Reserve Securities Holdings Percent Percent Billions of Dollars Billions of Dollars 0.8 0.8 2750 2750 2500 2500 Apr 10 2250 2250 0.6 Feb 7 0.6 2000 2000 Jan 10 1750 1750 1500 1500 0.4 0.4 1250 1250 1000 1000 750 750 0.2 0.2 500 500 250 250 0 0 0.0 0.0 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Agency Coupon Debt Agency MBS Treasuries Note: Estimated using OIS quotes. Source: Federal Reserve Board Source: Federal Reserve Board

Large-Scale Asset Purchases. In its March Expected Policy Rate Path. The expected path of statement, the FOMC decided to maintain its policy the federal funds rate as inferred from market data to reinvest principal payments from its holdings of was little changed, on balance, since the February agency debt and agency mortgage-backed securities Directors’ meeting. Consistent with the conditional in agency mortgage-backed securities, as well as to language in the “late-2014” forward policy extend the maturity of the SOMA by purchasing guidance in the FOMC statement, market quotes longer-dated Treasuries with maturities over 6 years imply that the federal funds rate will remain in the and selling an equal amount of Treasury securities current range until the second half of 2013 with a with remaining maturities of less than 3 years. The small rise before the end of 2014. total size of the SOMA was little changed at about Survey responses from the Blue Chip $2.6 trillion. Financial Forecasts’ April 2012 panel (survey The April 2012 Blue Chip Financial period: March 26-27) were approximately in line Forecasts Survey included a special question about with the market implied expectations. Indeed, the expectations of future changes in the Federal according to the median forecast, the federal funds Reserve’s balance sheet. Only 34% of respondents rate is expected to trade in its current range until at expected a continuation in the policy of extending least the second half of 2013. The survey also the average maturity of holdings beyond June 2012. conducted special questions about future Federal Reserve actions. 73% of respondents expected that the FOMC would raise its target rate before late 2014.

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S&P 500 Index: Price Level and Volatility Corporate Credit Spreads Percent Index Basis Points Basis Points 100 1600 2500 2500 S&P 500 Apr 10: (right axis) 1359 80 1400 2000 2000 Apr 10: 20.39 High Yield Apr 10: 1500 632 1500 60 1200 Apr 10: 202 VIX 1000 1000 40 1000 (left axis) 500 500 20 800 Investment Grade 0 0 0 600 2005 2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012 Source: Bloomberg Source: Bloomberg Note: Option-adjusted spreads.

Equity Markets. Broad market indexes moved Credit Spreads. Broad measures of corporate credit higher through March, only to reverse course since spreads continued to decline, although the levels the beginning of April. On net, the S&P500 index remain above the recent lows seen in the first half of is only about 1% higher than its level on February 2011. High-yield corporate spreads to 7, now standing at about 1360. Despite the recent comparable maturity Treasuries declined only decline, the index has risen appreciably since the modestly since the last Directors’ meeting and are fall of last year, up from a low of about 1100. now at about 630 basis points. Meanwhile, Over the same period, implied equity investment grade spreads declined volatility, as measured by the VIX, followed a by a similar magnitude over the same period and are similar pattern. The VIX moved from about 18 on now at approximately 200 basis points. February 7, to about 14 in late March, and now stands at about 20. That said, the VIX is substantially lower than the levels observed in the late summer and early fall of last year. That rise in US equity realized and was generally attributed to concerns about the European fiscal situation.

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Nominal Broad Dollar Index Oil Prices Index, Average = 100 Monthly Average 130 130 160 160 Apr: 120 120 140 140 $116.56 120 110 Apr: 110 120 90.2 100 100 100 100 80 80 90 90 60 60 80 80 40 40 70 70 20 20

60 60 0 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2000 2002 2004 2006 2008 2010 2012

Source: Federal Reserve Board Source: Haver/Bloomberg. Oil is average of WTI, Brent, and Bonny Light prices.

Foreign Exchange. The trade-weighted dollar index Petroleum Prices. An index of oil prices had been is roughly 10% below its average over the last relatively stable at around $110 a barrel since June fifteen years. The dollar strengthened in Q1 2012 in 2011 until moving modestly higher to around $115 response to relatively solid U.S. data and ongoing in response to geopolitical worries. concerns about the sovereign in the euro Oil demand is projected to rise 0.9% this area. year, with all the additional demand coming from The yen settled near 77 yen/dollar after the emerging economies. China accounts for almost earthquake and was stable at that level for the half of the projected growth, with increases also in second half of 2011. The yen then weakened to the Middle East and Latin America. Demand is set above 80 yen/dollar in Q1 2012 reflecting the to fall in the and Europe. relative performance of the two economies and The crisis in reduced global expansionary policy moves by the Bank of Japan. production by 1.5 million barrels a day. Production China’s yuan’s started appreciating in mid- has since recovered to 1.3 million barrels per day. 2010 and is now almost 10% stronger. The pace of Nevertheless, has not cut from the appreciation against the dollar stayed near a 5% production boost that helped make up for the Libya annual rate until Q4 and has eased considerably in shortfall. Notable increases in 2012 are expected 2012. The rate of reserve accumulation by Chinese from Canada and the United States. monetary authorities slowed significant from $110 billion in Q3 to $18 billion in Q4. Reserve Other Commodities. Wheat and corn prices have purchased totaled $375 billion in 2011, down from been stable so far in 2012 as have prices for $470 billion in 2010. industrial metals and raw materials.

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Net Percentage of Loan Officers Tightening Standards and C&I Loan Growth -- Actual and Forecasted Raising Spreads for Loans to Large and Mid-Sized Firms (With Various Degrees of Easing Standards) Net Percentage Net Percentage % Change - Year to Year % Change - Year to Year 100 100 25 25 Estimated 80 80 20 Loan Growth with -5.9% 20 60 60 15 net 15 10 tightening 10 40 40 Standards 5 5 20 20 0 Estimated 0 0 0 with 5.4% -5 net -5 -20 -20 -10 tightening -10 -40 -40 -15 -15 -60 Spreads -60 -20 -20 -25 -25 -80 -80 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012 Source: FRB Senior Loan Officer Opinion Survey Source: FRB Senior Loan Officer Opinion Survey, FRBNY Staff Calculations

Bank Loan Standards

Developments. According to the latest Senior Loan According to a model maintained at the FRBNY, Officers’ Opinion Survey, the net percent of loan the tightening in standards is predicted to flatten officers reporting tightening standards for growth in C&I loan growth over the next year.1 approving loans to large and mid-sized firms rose Under the previous level of standards (-5.9 percent from -5.9 percent last quarter to 5.4 percent this net tightening), loan growth was predicted to be quarter. The tightening this quarter reverses eight growing at 14.2 percent rate by 2013:Q1. Under the consecutive quarters of easing standards. The most current level, loan growth is predicted to only be commonly cited reason for the tightening was a growing by 9.1 percent by 2013:Q2. diminished (or more uncertain) economic outlook; 88.9 percent of loan officers reported the outlook as a somewhat or very important reason for tightening standards. Reduced tolerance for risk was cited as somewhat or very important by 62.5 percent of loan officers. The same fraction of loan officers cited “increased concerns about legislative changes, supervisory actions, or changes in standards” as somewhat or very important.

1 For detail on the model, see “Listening to Loan Officers,” Lown, Morgan, and Rohatgi, FRBNY Economic Policy Review, July 2000.

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Corporate Profits as a Percent of National Income

Percent Percent 16 16

14 14

12 12

10 Long-Run 10 Average

8 8

6 6 2000 2002 2004 2006 2008 2010 2012 Source: Bureau of Economic Analysis

Corporate Profits Corporate profits were 14.6% of national income in 2011Q4, around the highest shares of national income in the history of the series dating back to 1947. Profits in the domestic nonfinancial corporate sector were 8.2% of national income in 2011Q4, the highest since 2006Q3 but well below average levels of the 1950s and 1960s. Profits of the domestic financial corporate sector were 3.4% of national income in the fourth quarter, somewhat below the 3.6% to 3.7% range reached in 2005- 2006 and again in 2010, but well above average levels of the 1950s and 1960s. (Note that the profits of the financial corporate sector include those of the Federal Reserve System, which have risen to around 0.6% of national income from 0.2% to 0.3% before the expansion of the balance sheet.) Profits from the rest of the world, defined as receipts flowing into the US less receipts flowing out of the US, were 3.0% of national income in 2011Q4, somewhat below the third quarter share of 3.4%. In the 1950s and 1960s this series averaged less than 1% of national income.

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Real Government Consumption and Gross Investment FY2010* FY2011* FY2012 FY2013 % Change - Year to Year % Change - Year to Year 10 10 Receipts $ Billions 2,163 2,303 2,456 2,968 8 8 % of GDP 15.1 15.4 15.8 18.7 Federal 6 6 Outlays 4 4 $ Billions 3,456 3,603 3,627 3,580 % of GDP 24.1 24.1 23.4 22.5 2 2 0 0 Balance State & Local $ Billions -1,2941,300 -1,171 -612 -2 -2 % of GDP -9.0 -8.7 -7.6 -3.8 -4 -4 2000 2002 2004 2006 2008 2010 2012 Debt Held by the Public Source: Bureau of Economic Analysis % of GDP 62.8 67.7 73.2 75.8 Source: Congressional Budget Office Government Spending * indicates actual values On a year-over-year basis, real spending at both the federal and the state and local levels FRBNY Staff Federal Fiscal Outlook continued to decline in 2011Q4, with the rate of For FY2011, the deficit was $1.3 trillion, or 8.7% of decline showing no sign of abating. As of 2012Q1, GDP. Federal debt held by the public rose to 67.7% excluding employment in the postal service, of GDP at the end of the fiscal year. employment at the federal level is up by about The Congressional Budget Office released 250,000 or about 13% since 2007Q2. In contrast, its updated “current law” baseline in mid-March. As employment in the state and local government shown in the chart, the deficit is expected under sector is down by about 640,000, or 3.2% from its current law to decline to 3.8% of GDP in FY2013. peak in 2008Q3. However, this is not a realistic projection. Under State and local government tax receipts grew current law there will be substantial restraint on at a subdued pace in 2011Q4 and remain below spending stemming from the Budget Control Act their previous cyclical peak in 2008Q2. At the same enacted in August 2011. In addition, revenues are time, grants-in-aid from the federal government projected to rise to 18.7% of GDP in FY2013, as the continue to decline through 2011Q4 and were down payroll tax cut and the tax cuts of the early 2000s 16% from the peak in 2010Q4. As a result, total expire. A more modest pace of fiscal consolidation state and local receipts remained roughly unchanged is more likely: an alternative CBO scenario projects in 2011Q4 at a level below their previous peak in considerably higher deficits such that the public 2010Q4. debt-to-GDP ratio rises to over 90% by FY 2021. Total government spending is expected to continue to decline over the forecast horizon, with a slower rate of decline at the state and local level.

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FRBNY Staff Forecast Summary

2011 Q4 2012 Q1 2012 Q2 2011 Q4/Q4 2012 Q4/Q4 2013 Q4/Q4

Summary Final 2/9 4/13 2/9 4/13 Final 2/9 4/13 2/9 4/13 Real GDP 3.0 1.9 2.7 2.7 2.2 1.6 2.6 2.8 2.8 2.9 Total PCE Deflator 1.2 1.5 2.3 1.5 1.9 2.7 1.5 1.9 1.7 1.8 Core PCE Deflator 1.3 1.4 2.2 1.3 1.7 1.8 1.4 1.8 1.6 1.8 Nonfarm Business Sector Output 3.7 2.5 3.2 3.5 3.2 2.3 3.3 3.5 3.5 3.6 Hours 2.7 2.5 3.0 2.5 2.2 1.9 2.2 2.4 1.7 1.9 Productivity Growth 0.9 0.0 0.2 1.0 1.0 0.3 1.1 1.1 1.7 1.7 Compensation 3.7 1.8 2.5 1.8 2.5 3.5 1.7 2.5 2.1 2.7 Unit Labor Costs 2.8 1.8 2.3 0.8 1.5 3.1 0.7 1.4 0.4 1.0 Real GDP Grow th Contributions** F ina l Sa les t o D omes t ic Pur c ha s er s 1.4 2.1 2.3 2.3 2.4 1.5 2.4 2.5 2.5 2.5 Consumption 1.5 1.3 1.7 1.6 1.6 1.2 1.6 1.7 1.5 1.5 BFI: Equipment and Software 0.6 0.4 0.4 0.6 0.6 0.7 0.6 0.6 0.8 0.8 BFI: Nonresidential Structures 0.0 0.2 0.0 0.2 0.1 0.1 0.2 0.1 0.2 0.2 Residential Investment 0.3 0.2 0.2 0.3 0.5 0.1 0.3 0.3 0.2 0.3 Government: Federal -0.6 0.3 0.2 -0.3 -0.3 -0.3 -0.1 -0.2 -0.3 -0.3 Government: State and Local -0.3 -0.2 -0.2 -0.2 -0.2 -0.3 -0.2 -0.1 0.0 0.0 Inventory Investment 1.8 -0.6 0.0 0.1 -0.4 0.1 -0.1 0.0 0.1 0.1 Net Exports -0.3 0.4 0.3 0.3 0.3 0.0 0.2 0.3 0.3 0.3 Real GDP Components' Grow th Rates F ina l Sa les t o D omes t ic Pur c ha s er s 1.3 2.0 2.3 2.2 2.3 1.4 2.3 2.4 2.4 2.4 Consumption 2.1 1.8 2.4 2.2 2.2 1.6 2.2 2.3 2.1 2.1 BFI: Equipment and Software 7.5 6.0 6.0 8.0 8.0 9.6 8.5 8.5 10.0 10.0 BFI: Nonresidential Structures -1.0 6.0 0.0 8.0 5.0 4.4 7.5 5.2 8.0 8.0 Residential Investment 11.7 6.8 10.0 15.0 25.0 3.5 11.0 15.4 10.0 10.0 Government: Federal -7.0 3.4 2.0 -3.3 -3.3 -3.2 -1.7 -2.0 -3.3 -3.3 Government: State and Local -2.2 -1.7 -1.3 -1.4 -1.4 -2.5 -1.3 -1.2 -0.3 -0.3 Inventory Investment n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Net Exports n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Exports 2.7 6.8 7.1 6.9 7.2 4.7 7.5 7.9 8.2 8.1 Imports 3.7 3.0 3.8 3.5 4.2 3.6 4.5 4.4 5.2 4.6 Labor Market Nonfarm Payroll Employment 151 247 212 276 237 147 238 238 162 214 (Average per Month, Thousands) Unemployment Rate*** 8.7 8.3 8.3 8.0 8.0 8.7 7.6 7.5 7.1 6.7 Inc ome Real Disposable Personal Income 1.7 1.5 0.4 2.4 1.1 0.8 2.1 1.6 1.2 1.3 Personal Saving Rate*** 4.5 3.6 4.1 3.8 3.9 4.5 3.7 3.8 2.8 3.1

**Grow th contributions may not sum to total due to rounding. ***Quarterly values are the average rate for the quarter. Yearly values are the average rate for Q4 of the listed year. Blue and italic text indicate released data; darker colors indicate the most recent forecast.

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Evolution of FRBNY Staff Forecasts

Real GDP Growth Core PCE Inflation % Change – Q4/Q4 % Change – Q4/Q4 % Change – Q4/Q4 % Change – Q4/Q4 6 6 2.5 2.5

5 5 2.0 2.0 2011 Actual 4 2012 4 1.5 2013 1.5 2013 3 2011 3 2011 2012 1.0 1.0 2 2 2011 Actual 0.5 0.5 1 1 0 0 0.0 0.0 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Forecast Vintage Forecast Vintage

Unemployment Rate Average Q4 Level Average Q4 Level 12.0 12.0

11.0 11.0

10.0 10.0

9.0 2011 Actual 9.0

8.0 2011 8.0

7.0 2013 7.0 2012 6.0 6.0

5.0 5.0 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Forecast Vintage

Note: Forecast vintage represents date at which forecast was produced.

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Alternative GDP and Inflation Forecasts

Real GDP Growth

Release Date 2012Q1 2012Q2 2012Q3 2012 Q4/Q4 2013 Q4/Q4 FRBNY Staff 4/13/2012 2.7 2.2 3.2 2.8 2.9 Blue Chip 4/10/2012 2.2 2.3 2.4 2.4 2.7 Median SPF 2/10/2012 2.2 2.3 2.6 2.3 2.7 Macro Advisers 4/11/2012 2.2 2.6 2.6 2.6 3.3 Core PCE Inflation Release Date 2012Q1 2012Q2 2012Q3 2012 Q4/Q4 2013 Q4/Q4 FRBNY Staff 4/13/2012 2.2 1.7 1.7 1.8 1.8 Median SPF 2/10/2012 1.6 1.7 1.7 1.6 1.8 Macro Advisers 4/11/2012 2.1 1.6 1.7 1.8 1.8 CPI Inflation Release Date 2012Q1 2012Q2 2012Q3 2012 Q4/Q4 2013 Q4/Q4 FRBNY Staff 4/13/2012 2.5 2.4 2.2 2.3 2.3 Blue Chip 4/10/2012 2.5 2.4 2.2 2.3 2.2 Median SPF 2/10/2012 2.0 2.0 2.1 2.0 2.2 Macro Advisers 2/9/2012 2.5 2.7 2.0 2.3 2.0 Core CPI Inflation Release Date 2012Q1 2012Q2 2012Q3 2012 Q4/Q4 2013 Q4/Q4 FRBNY Staff 4/13/2012 2.0 2.0 2.1 2.1 2.2 Median SPF 2/10/2012 1.9 1.8 1.9 1.9 2.1 Macro Advisers 2/9/2012 2.0 1.8 2.1 2.0 2.2

Source: FRBNY Staff, Blue Chip Consensus Forecasts, Survey of Professional Forecasters, and Macro Advisers

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PCE and CPI Measures of Inflation since 2000

Total and Core PCE Deflator Total and Core CPI Deflator

% Change - Year to Year % Change - Year to Year % Change - Year to Year % Change - Year to Year 5 5 6 6 Total PCE 4 4 5 Total CPI 5 4 4 3 3 3 3 2 2 2 2 1 1 1 1 Core PCE Core CPI 0 0 0 0 -1 -1 -1 -1 -2 -2 -2 -2 -3 -3 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012

Source: Bureau of Economic Analysis Source: Bureau of Labor Statistics

Measures of PCE Inflation Measures of CPI Inflation

% Change - Year to Year % Change - Year to Year % Change - Year to Year % Change - Year to Year 3.5 3.5 5 5 Smoothed Inflation 3.0 (FRBNY) 3.0 4 Trimmed Mean 4 Median CPI CPI 2.5 2.5 3 3 2.0 2.0 Signal 1.5 Component 1.5 2 2 PCE (FRBNY) Underlying Core PCE 1.0 1.0 1 Inflation Gauge 1 Underlying Core CPI (FRBNY) 0.5 Inflation Gauge 0.5 0 0 (FRBNY) 0.0 0.0 Smoothed Inflation Trimmed Mean -1 (FRBNY) -1 -0.5 (Dallas Fed) -0.5 -1.0 -1.0 -2 -2 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012

Source: Bureau of Economic Analysis, Dallas Fed, and FRBNY Staff Source: Bureau of Labor Statistics and FRBNY Staff

Core PCE Inflation over Various Horizons Core CPI Inflation over Various Horizons

% Change - Annual Rate % Change – Annual Rate % Change – Annual Rate % Change – Annual Rate 4 4 4 4 6 Month 3 Month 3 Month 3 3 3 3

2 2 24 Month 2 2 1 1 24 Month 6 Month 12 Month 1 1 0 0 12 Month

0 0 -1 -1

-2 -2 -1 -1 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012

Source: Bureau of Economic Analysis Source: Bureau of Labor Statistics

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Exports and Industrial Production

Exports Industrial Production Jan 2005 = 100 Jan 2005 = 100 Jan 2005 = 100 Jan 2005 = 100 180 180 120 120 Jan Euro Area 170 155 170 Euro Area 160 160 110 Jan 110 150 150 101 140 140 130 130 100 100 120 120 UK 110 110 Feb Jan UK 90 94 90 100 131 100 90 90 80 80 80 80 2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012 Source: Haver Note: In Dollar Terms Source: Haver

Exports Industrial Production Jan 2005 = 100 Jan 2005 = 100 Jan 2005 = 100 Jan 2005 = 100 160 160 120 120 Feb Japan 150 141 150 110 110 140 140 Japan Feb 130 130 100 94 100 120 120 90 90 110 110 100 100 80 80 90 90 70 70 80 80 70 70 60 60 2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012 Source: Haver Note: In Dollar Terms Source: Haver

Exports Industrial Production Jan 2005 = 100 Jan 2005 = 100 Jan 2005 = 100 Jan 2005 = 100 325 325 275 275 300 300 250 250 275 China Mar 275 321 225 Feb 225 250 250 257 225 225 200 China 200 200 200 175 175

175 175 150 150 150 150 Feb 125 159 125 125 Mar 125 Korea Korea 200 100 100 100 100 75 75 75 75 2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012 Source: Haver Note: In Dollar Terms Source: Haver

Page 32 of 37

Global Interest Rates and Equity Markets

Euro Area Short- and Long-Term Interest Rates Euro Area: OIS Rate (Six Months) Percent Percent Percent Percent 4 4 10-Year German Yield © 1.50 Refi Rate 1.50

3 3 Apr 10 1.20 Apr 10 1.20 1.64 1.00

2 2 0.90 Swap Rate 0.90 Apr 10 0.37

1 1 0.60 0.60 3-Month LIBOR Rate Apr 10 0.67 0 0 0.30 0.30 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Source: Bloomberg Source: Bloomberg

Japan Short- and Long-Term Interest Rates Japan: OIS Rate (Six Months) Percent Percent Percent Percent 1.5 1.5 0.12 0.12

Apr 10 0.11 Policy Rate 0.11 0.10 0.10 0.10 1.0 1.0

Apr 10 0.09 Apr 10 0.09 10-Year Government Bond Yield 0.96 Swap Rate 0.08 0.08 0.08 0.5 0.5 3-Month LIBOR Rate Apr 10 0.07 0.07 0.20 0.06 0.06

0.0 0.0 0.05 0.05 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Source: Bloomberg Source: Bloomberg

Euro Area Equity Price Indices Japan Equity Price Indices Index (4/1/2011 = 100) Index (4/1/2011 = 100) Index (4/1/2011 = 100) Index (4/1/2011= 100) 120 120 115 115 Apr 10 EuroStoxx 50 110 110 84.3 110 110 Nikkei Eurostoxx Gen Financial Apr 10 105 105 100 78.4 100 Apr 10 100 100.6 100 90 90 95 95

90 Apr 10 90 80 80 98.2 85 85 Nikkei 225 70 70 80 80

60 60 75 75 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Source: Bloomberg Source: Bloomberg

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Exchange Rates

Dollar-Euro Exchange Rate Yen-Dollar Exchange Rate Dollar/Euro Dollar/Euro Yen/Dollar Yen/Dollar 1.1 1.1 105 105 1.2 Dollars per Euro Apr 10 Yen per Dollar 1.31 1.2 1.2 95 95 1.3 1.3 1.3 Apr 10 1.4 85 80.7 85 1.4 1.4 1.5 75 75 1.5 1.6 1.5 1.6 1.7 65 65 2009 2010 2011 2012 2009 2010 2011 2012 Source: Bloomberg Note: Exchange rate scale is inverted. Source: Bloomberg

Nominal Effective Exchange Rates Euro and Yen One-Month Implied FX Option Volatility Index (2006=100) Index (2006=100) Percentage Points Percentage Points 110 110 40 40

105 105 35 35 Nominal Broad Apr 6 Dollar Index 91.2 30 30 100 100

25 Apr 10 25 95 95 Euro 10.0 20 20 90 90 15 15 85 85 10 10 80 Apr 6 80 5 5 Nominal Narrow Dollar Index 88.6 Yen Apr 10 10.3 75 75 0 0 2009 2010 2011 2012 2008 2009 2010 2011 2012 Source: Board of Governers Source: Bloomberg

Euro Area and Japan Effective Exchange Rates China Exchange Rates Index (2006=100) Index (2006=100) Dollar/Yuan, Index (2006=100) Dollar/Yuan, Index(2006=100) 150 150 140 140

140 135 135 140 Current Exchange Rate Apr 10 Yen 130 130 126.32 130 Apr 10 130 136.5 120 125 125

110 120 120 120

100 115 115 110 Euro Apr 10 90 110 110 97.4 100 80 105 105 2009 2010 2011 2012 2009 2010 2011 2012 Source: Bloomberg and JPMorgan Source: Bloomberg

Page 34 of 37 Treasury Yields and Inflation Expectations

Zero Coupon Yield Curves Zero Coupon Yield Curves: One-Year Forward Rates Percent Percent Percent Percent 3 3 5 5

Jan 10 Jan 10 4 4 Feb 7 Feb 7 2 2 Apr 10 Apr 10 3 3

2 2 1 1

1 1

0 0 0 0 012345678910 012345678910 Maturity (Years) Maturity (Years) Source: Federal Reserve Board Source: Federal Reserve Board

Option and Volatility Expectations Short- and Long-Term Treasury Yields Basis Points Basis Points Percent Percent 250 250 6 6 225 225 10-Year 5 5 200 200 Apr 10: 3-Month Apr 10: 1.98 175 MOVE 76 175 4 4 150 3-Month Apr 10: 150 3 3 SMOVE 75 2-Year 125 125

2 2 100 100 Apr 10: 75 75 1 0.29 1 50 50 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Federal Reserve Board, Barclays, and FRBNY Staff Source: Bloomberg Note: On-the-run securities.

5-10 Year Forward Rates TIPS Implied Inflation: 4-5 and 5-10 Year Horizons Percent Percent Percent Percent 8 8 4 4 Apr 10: 2.63 3.5 5-10 Years Nominal Apr 10: 6 3.26 6 3 3

2.5

4 4 2 2 Real Apr 10: 0.64 4-5 Years 1.5 Apr 10: 2 2 1 2.31 1

0.5

0 0 0 0 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 2005 2006 2007 2008 2009 2010 2011 2012

Source: Federal Reserve Board Source: Federal Reserve Board Note: Carry-adjusted

Page 35 of 37

Market Policy Expectations and Uncertainty

Expected Fed Funds Target Rate Percent Percent 0.8 0.8

Apr 10 0.6 Feb 7 0.6 Jan 10

0.4 0.4

0.2 0.2

0.0 0.0 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Note: Estimated using OIS quotes. Source: Federal Reserve Board

Fed Funds Probabilities December 2012 Fed Funds Probabilities December 2012 Percent Percent Percent Percent 100% 100% 80%

80% <=0.25% 80% 0.00 60%

60% 60% 40% 0.25 40% 40% 20% 20% >=0.5% 20% 0.50 0% 0% 0% 10-Oct 10-Nov 10-Dec 10-Jan 10-Feb 10-Mar 10-Apr 10-Oct 10-Nov 10-Dec 10-Jan 10-Feb 10-Mar 10-Apr

Source: Bloomberg Note: Estimated from Fed Funds Futures Source: Bloomberg Note: Estimated from Fed Funds Futures

Expected Fed Funds from March 2012 Survey Expected Fed Funds from April 2012 Survey Percent Percent Percent Percent 0.40 0.40 0.40 0.40

0.30 0.30 0.30 Mean 0.30 Average of March 26-27 Average of February 22-23 75th Market-Implied FFR Market-Implied FFR 75th Percentile 0.20 0.20 0.20 Percentile 0.20 Median Mean Median 25th 0.10 0.10 0.10 0.10 25th Percentile Percentile

0.00 0.00 0.00 0.00 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Note: Implied FFR estimated from OIS quotes. Note: Implied FFR estimated from OIS quotes. Source: The Blue Chip Financial Forecast conducted on February 22-23. Source: The Blue Chip Financial Forecast conducted on March 26-27.

Page 36 of 37 Equity Markets and Corporate Credit Risk

Equity Indices Equity Indices: One-Month Implied Volatility Index Level Index Level Percent Percent 3200 1600 90 90

NASDAQ 100 Apr 10: 2800 1400 (VNX) 21.59 70 70 S&P 500 Apr 10: 2400 1200 (VIX) 20.39 50 50

2000 1000 NASDAQ Apr 10: Composite 2991 30 30 (left axis) 1600 800 S&P 500 Apr 10: (right axis) 1359 1200 600 10 10 2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012 Source: Bloomberg Source: Bloomberg

Corporate Credit Spreads CDS Spreads Basis Points Basis Points Basis Points Basis Points 2500 2500 2000 2000

1750 1750 2000 2000 1500 1500 High Yield Apr 10: 1500 632 1500 1250 1250 High Yield Apr 10: Apr 10: 1000 626 1000 1000 202 1000 750 750

500 500 500 500 Investment Grade Investment Grade Apr 10: 250 104 250 0 0 2005 2006 2007 2008 2009 2010 2011 2012 0 0 2008 2009 2010 2011 2012

Source: Bloomberg Note: Option-adjusted spreads. Source: Bloomberg

Mortgage Secondary Market Mortgage Market Rates Basis Points Basis Points Percent Percent 275 275 7 7

225 Zero Volatility Spread 225 Primary Apr 10: to LIBOR 6 Market 3.89 6 Apr 10: Apr 10: 175 69 175 5 2.86 5 Apr 10: 125 39 125 Option Adjusted Spread 4 4 to LIBOR 75 75 Secondary 3 Market 3 25 25

2 2 -25 -25 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Note: 30-year fixed mortgage rate and Source: J.P. Morgan Note: 30 year current coupon Fannie Mae MBS. Source: Bloomberg Fannie Mae current coupon yield.

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