The DE Recession Scorecard: Summary Table and Charts August 19, 2008

1. M. Cary Leahey Senior Managing Director Decision Economics cleahey@pdeeco.com The DE Recession Scorecard:Summary Table and ChartsAugust 19, 2008

2. 2 Outline The Recession Scorecard (Page 3) Is It Really a Recession? (Page 4) LEI (Page 5) Consumer Sentiment (Page 6) Retail Sales (Page 7) Employment (Page 8) Initial Claims (Page 9) Housing Starts (Page 10) ISM (Page 11) Yield Curve (Page 12) Corporate Quality Spreads (Page 13) Equity Prices (Page 14) Crude Oil Prices (Page 15)

3. 3 DE recession scorecard has been mixed. 8 of 11 components are in recession territory (compared to 8 in July, 7 in June and 4 in December). The financial market variables have stabilized--the equity market has improved slightly, the high yield spread has moved sideways in recession territory, and the yield curve is steady. Retail sales growth has weakened in July. Consumer sentiment is holding to near 30-year lows. Job declines have gotten no worse although weekly claims have jumped. Oil prices and other commodity prices have fallen a lot.

4. 4 Many analysts think there has been no recession since GDP growth was only barely negative in the revised 2007Q4 data and accelerated toward 2% in 2008H1. But the recession designation is based on monthly data, of which payrolls is the most important. The six-month change in payrolls has turned negative and every time it has turned negative, a recession has developed. Given past experience we may not know we are “officially” in a recession until after the recession is over.

5. 5 The LEI is approaching the -3% to -4% range that usually denotes a recession. In deep downturns, the year-ago growth rate could fall to -10%.

6. 6 The drop in gasoline prices has helped consumer sentiment stabilize at the mid-to lower end of recession ranges. Confidence has fallen to 50 in a deep recession.

7. 7 Real retail sales growth has weakened in July after solid gains in May and June in response to the rebate. They are just at the upper end of the recession range. While the bulk of the rebate has been delivered, it may take households another 6 to 9 months to decide how much of it to spend. So it is too soon to deem the rebate a failure or even disappointing. Interpreting the pace of consumption growth in 200H2 will be difficult. Real retail sales could fall to a -8% year-ago growth rate if things get really bad.

8. 8 Employment losses are stabilizing at 50K plus per month, a pace of decline far less than past downturns. The “mild” 2001 recession contained job losses of 150K per month for a time. This suggests that firms are holding the line on jobs cuts which may prevent the recession from “truly” unraveling. The risk, however, is that the slowdown will lead to further jobs declines and perhaps contribute to another round of financial stress—the so called “negative feedback loop” central bankers fret about.

9. 9 Initial claims have jumped recently to the 450K range, well into recession territory. But the figures may be distorted by legislative changes which allow some who have exhausted their initial benefits to reapply. In the deep 1982 downturn, initial claims peaked at 650K plus. In the last two downturns, claims rose to “only” 500K.

10. 10 Housing starts are well within recession ranges now. Starts bottomed at 800K during two of three last downturns. Are starts finally bottoming well before the expected bottoming in home prices?

11. 11 The national ISM remains well above the upper end of the typical recession range and appears to be bottoming. The index fell to 30 during the deep 1975 and 1982 downturns and to only 40 in the previous two downturns. Will the widening global recession mean an eventual drop in manufacturing?

12. 12 The funds rate has moved below the level of 10-year notes in late January. A steepening yield curve is an important ingredient of a recovery. The curve tends to steepen to 200 bps by the end of the recession.

13. 13 High yield spreads entered the lower end of recession-like territory in February. In the past two recessions, spreads peaked at +1000 bps. However, the absolute level of corporate yields is low compared to the past two downturns. The equity rally and subsequent bust mean that spreads left and then re-entered recession territory.

14. 14 Equity prices have rebounded and then sunk again and are about 20% from the highs. Declines of 20% are typical during recessions.

15. 15 Crude oil prices are definitely in recession territory at or near record highs after inflation. But they have dropped sharply on signs of a spreading and widening global recession.(Note: This crude oil price is refiners acquisition cost which runs about $10 below WTI).