Forecasting

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Economic and Investment Outlook
Dr. Rajeev Dhawan Director
ECONOMIC FORECASTING CENTER
Presented at the Economic Outlook
Conference Monroe, Louisiana March 31st, 2006
Office 404-651-3291 email forecast_at_gsu.edu http
//www.robinson.gsu.edu/efc
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Its the economy, stupid!
Its housing, folks!
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Bernankes Headaches
Higher energy prices may pass through into the
prices of non-energy goods and services.inflation
expectations.
Another factor bearing on the inflation outlook
is that the economy now appears to be operating
at a relatively high level of resource
utilization..with aggregate demand exhibiting
considerable momentum, output could overshoot its
sustainable path, leading ultimately--
in the absence of countervailing monetary policy
action--to further upward pressure on inflation.
Source Testimony of Chairman Ben Bernanke on
February 15th, 2006
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Breakdown of Consumer Prices
Year-over-Year Year-over-Year Year-over-Year Year-over-Year
Category (Weight) Feb06 Jan06 Dec05 05Q4
1. Core (79) 2.1 2.1 2.2 2.1
2. Non Durables (29) 4.5 5.5 3.8 4.8
3. Durables (11) -0.7 -0.7 -0.5 -0.2
4. Services (60) 4.0 4.1 3.8 3.8
5. Housing (40) 4.0 4.3 4.0 4.0
6. Commodities (40) 3.2 3.8 2.7 3.6
7. Food (15) 2.7 2.6 2.3 2.2
8. Gasoline (3) 20.6 27.4 15.9 23.0
9. New Cars (5) -0.4 -0.4 -0.4 0.2
10. Medical (6) 4.1 4.0 4.3 4.3
Overall 3.6 4.0 3.4 3.7
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Two Gloomy Forecasts from George Soros and Bill
Gross
As the housing boom cools off, the savings rate
is likely to rise, and that will lead to a
shortfall in demand that I think will bring a
global slowdown I expect a slowdown in 2007,
which will probably cast its shadow over the
markets in 2006.
Yields have peaked in the bond market and will
soon peak in Fed Funds producing an economic
slowdown in 2006. If the Fed goes beyond 4.5 and
inverts the yield curve, the possibility of
recession will increase.
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• Thou Shalt Not Take
• The R Word
• in Vain

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Breakdown of Retail Sales
Year-over-Year Year-over-Year Year-over-Year Year-over-Year
Category (Weight) Feb06 Jan06 Dec05 05 Q4
1. Motor Veh. (26) -0.9 5.6 -1.9 -2.8
2. Furnishings (6) 6.7 11.3 5.2 6.2
3. Build. Mat. (10) 20.5 17.6 9.8 12.0
4. Food (15) 5.4 4.5 5.1 5.1
5. Health (6) 7.1 7.3 7.6 7.1
6. Gasoline (8) 17.7 22.1 16.5 20.1
7. Clothing (5) 1.6 8.1 6.5 6.8
8. Gen. Merch. (14) 5.3 7.1 5.3 6.2
9. Non-store (5) 13.3 9.4 13.4 12.6
Overall 6.7 9.4 5.7 6.2
Excl. Autos 8.9 10.4 8.0 8.8
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EFC_at_GSU Forecast vs. Blue Chip Consensus
GDP
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U.S. Short-Term Forecast
2005 2006 2007 2008
Real GDP Growth 3.5 3.2 2.5 2.7
06q1 5.3 06q2 2.7 06q3 2.6 06q4 2.5 07q1 2.4
Consumption Growth 3.6 3.1 2.6 2.8
06q1 4.5 06q2 3.0 06q3 2.9 06q4 2.6 07q1 2.6
Bus. Investment Growth 8.5 7.6 5.9 4.7
Federal Purchases 2.0 5.5 3.6 1.5
State Local Purchases 1.5 1.2 1.7 1.2
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Hurricanes Katrina and Rita
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Anonymous Vent
In January my electric bill was 180 and my gas
bill was 338.
I purchased electric space heaters and stopped
using the gas heater. My electric bill was only
195 in February.
(/Thou. Cubic Feet)
(Bil. Cubic Feet)
Bye bye, gas!
Source AJC, February 19th, 2006
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2005 Jet Orders
1031 1111 86
Projections based on 10-Q filings
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Geographical Distribution of Boeing Suppliers
Source Boeing.com EFC Mapping
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Ongoing Recovery
Tech Bust
Roaring 90s
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Winners
and Losers
in the Job Market
Sector Job Gains (000) Job Gains (000)
Since 2001 In 2005 of 05
1. State Government 77.0 29.0 1.5
2. Mgmt/Companies -1.1 14.8 0.7
3. Durable manuf. -1,033.0 10.0 0.5
4. Utilities -38.1 4.7 0.2
5. I-net publishing -11.0 -0.4 -0.0
6. ISP, Data Providers -97.6 -1.5 -0.1
7. Federal Government -50.0 -13.0 -0.7
8. Telecom -289.5 -18.6 -0.9
9. Air Transportation -113.6 -23.4 -1.2
10. Nondurable manuf. -727.0 -91.0 -4.6
Sector Job Gains (000) Job Gains (000)
Since 2001 In 2005 of 05
1. Education and Health 1,681.0 362.0 18.3
2. Construction 610.0 293.0 14.8
3. Admin and Support 624.4 266.7 13.5
4. Leisure and Hospitality 881.0 253.0 12.8
5. Retail Trade 132.2 163.2 8.3
6. Local Government 573.0 143.0 7.2
7. Finance and Insurance 276.2 97.9 5.0
8. Wholesale Trade 59.1 84.1 4.3
9. Real Estate, Rent 118.7 50.8 2.6
10. Mgmt. Sci. Tech 126.3 49.2 2.5
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Momentum Carries Over From 2004
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Fiscal Deficit
Trade Deficit vs.
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Anonymous Vent
With as much Chinese-made merchandise as Wal-Mart
sells, perhaps they should change their name to
Great Wall Mart.
Source AJC, January 12th, 2006
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• High Trade Deficit Numbers Keep US Long Term
  Interest Rates Low!

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Global Current Account Balances (Billions of
U.S. Dollars)
Countries 1996 2003
Industrial 46.2 -342.3
United States -120.2 -530.7
Japan 65.4 138.2
Euro Area 88.5 24.9
France 20.8 4.5
Germany -13.4 55.1
Italy 39.6 -20.7
Spain 0.4 -23.6
Other 12.5 25.3
Australia -15.8 -30.4
Canada 3.4 17.1
Switzerland 21.3 42.2
United Kingdom -10.9 -30.5
Countries 1996 2003
Developing -87.5 205.0
Asia -40.8 148.3
China 7.2 45.9
Hong Kong -2.6 17.0
Korea -23.1 11.9
Taiwan 10.9 29.3
Thailand -14.4 8.0
Latin America -39.1 3.8
Argentina -6.8 7.4
Brazil -23.2 4.0
Mexico -2.5 -8.7
Middle East and Africa 5.9 47.8
E. Europe and ex-USSR -13.5 5.1
Source Remarks by Governor Ben S. Bernanke,
March 10, 2005
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Global Savings Glut Is Showing up in T-Bond
Holdings
Source FRB Flow of Funds Data
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Trade and Holding of US Treasuries by Central
Banks
Trade in Goods and Services Trade in Goods and Services Trade in Goods and Services U.S. Treasury Securities Holdings U.S. Treasury Securities Holdings U.S. Treasury Securities Holdings Currency
2005 03-05 ? 2005 03-05 ? Appreciation
Japan -75.2 -9.3 702 353.7 4.3
China -183.6 -69.6 243.7 96.6 0.0
South Korea -19.3 -7.0 59.6 -0.6 13.4
Taiwan -12.8 1.6 71.3 28.3 6.7
Hong Kong 4.9 4.8 28.9 3.5 0.0
Singapore 7.3 5.9 48.2 5.2 4.1
   
Germany -48.6 -9.5 61.1 19.5 8.0
UK -10.0 -1.8 145.5 93.4 7.1
Japan -80.6 -11.4 681 220.7 4.3
UK -10.0 -1.8 145.5 93.4 7.1
Japanese Bought 220 Bil. worth of Treasuries
to Keep their Currency from Appreciating
Period from July 1st 2004 to June 30th 2005
All numbers are in billions of U.S. dollars
Source BEA (Trade) and US Treasury Department
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10-Year Bond Rate and Trade Deficit
10-Year Bond Regression
2005 2006 2007 2008
10-Year Bond Rate 4.3 5.1 5.4 5.7
Trade Deficit (Bil. ) -726 -780 -779 -771
CPI Inflation 3.4 3.3 2.2 2.0
Core 2.2 2.3 2.2 2.1
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2004 US Balance in International Trade
What They Buy From Us What They Buy From Us
Airplanes 13.2
Chemicals (Plastic) 10.9
Airplane parts 10.5
Soybeans 6.6
Corn 6.0
Wheat 5.0
Scientific Instruments 4.5
Cotton 4.2
Metal ores 3.2
Animal Feeds 3.0
What We Buy From Them What We Buy From Them
Crude Oil -135.7
Vehicles -123.2
Clothing -67.9
Home Electronics -67.8
Office Electronics -65.6
Petroleum Preparations -28.3
Furniture and Bedding -23.7
Natural Gas -21.1
Electrical Machinery -20.2
Toys, Sporting good -19.1
Billions of Dollars
Source US Bureau of Economic Analysis
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2003 Total Vehicle Production Sales
Country Production Sales Deficit/Surplus
U.S. 12,116,061 16,967,442 -4,851,381
Japan 10,286,318 5,828,178 4,458,140
Germany 5,506,629 3,501,303 2,005,326
China 4,443,686 4,390,806 52,880
France 3,620,056 2,440,692 1,179,364
S. Korea 3,177,870 1,318,312 1,859,558
Spain 3,031,192 1,716,204 1,314,988
Canada 2,552,862 1,625,050 927,812
U.K. 1,846,429 2,942,737 -1,096,308
Brazil 1,827,038 1,314,882 512,156
Mexico 1,577,205 1,001,040 576,165
India 1,162,159 1,076,318 85,841
Sweden 323,032 295,484 27,548
ü
ü
Source Wards World Motor Vehicle Data 2004
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GMs Financials in the Eye of Wall Street
Assets Assets
Market Value 10-30B
GMAC 25B
Cash 14B
Cash Burn -6B
Total 63B
Liabilities Liabilities
Debt -32B
Current Pension Plan 6B
Future Pension Plan -31B
Foreign Plans -9B
Health Care Costs -27B
Delphi -12B
Total -105B
How to fill the hole?
Bankruptcy? Liability ? 43
Source The Wall Street Journal, January 14th,
2006
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END OF AN ERA
DAWN OF A NEW DAY
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• But Statistically One Cant Prove That There is a
  Home Price Bubble!

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Red Zone
Safe Zone
Source EFC May 2005 Conference Presentation
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Source The 2005 National Association of
Realtors, Profile of International Home Buyers
in Florida
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Source The 2005 National Association of
Realtors, Profile of International Home Buyers
in Florida
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FEDs Alan Greenspan
CHAIRMANS CORRECT DIAGNOSIS To the American
Bankers Association Annual Convention
September 26th, 2005
These estimated LTVs are highest in states, such
as California and Massachusettsmost people
buying a home in California are probably also
selling a home in California and using at least
part of their accumulated home equity capital
gains as a down payment on their new house.
Apparently, many households are foregoing some
consumption to lower their new mortgage balances.
These estimated LTVs are highest in states, such
as California and Massachusettsmost people
buying a home in California are probably also
selling a home in California and using at least
part of their accumulated home equity capital
gains as a down payment on their new house.
Apparently, many households are foregoing some
consumption to lower their new mortgage balances.
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Top 5 National Predictions
Expect a Soft Landing in 2007
1. Enjoy 2006,
2. Housing Market Displays Orderly Moderation
3. Long-Term Rates Will Rise Mildly
4. Bet on Manufacturing of the RIGHT Type!
5. Oil Remains Above 50/Barrel for Next Few Years
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Special Thanks to the Centers Executive Sponsors
Carl R. Zwerner Chair of Family Owned Businesses
Morgan Keegan
Sponsors