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US Economic Outlook

How Strong a Recovery?

Jan Hatzius
Ed McKelvey
Andrew Tilton

January 12, 2010

GS US Forecast vs. Consensus*

Ann. % chg. Growth (Real GDP) Ann. % chg. Unemployment Rate

6 6 Percent Percent
Forecast 11 11
4 4
10 10
2 2
9 9
0 0
8 8
-2 -2
7 7
-4 -4
6 6
-6 -6
5 5
-8 -8 Forecast
4 4
2006 2007 2008 2009 2010 2011
2006 2007 2008 2009 2010 2011

Inflation (Core PCE) Fed Funds Rate

Percent Percent
Percent change, year ago Percent change, year ago 6 6
3.0 3.0 Forecast
5 5
2.5 2.5
4 4
2.0 2.0
3 3
1.5 1.5

1.0 1.0 2 2

0.5 0.5 1 1

0.0 0.0 0 0
2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011

Actual Data Blue Chip Consensus Forecasts (January 2010)*

*Inflation Consensus from Philadelphia Fed (Survey of Professional Forecasters)
Goldman Sachs US Economics 1
Inventories and Fiscal Stimulus Abate…

Percentage points, annual rate Percentage points, annual rate

5 5
Inventory Contribution
4 4
Fiscal Stimulus*
3 Total Contribution 3
2 2
1 1
0 0
-1 -1
-2 -2
-3 -3
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2009 2010 2011
*Includes second-round (multiplier) effects on spending.
Source: Congressional Budget Office. Recovery.gov. Our calculations.

Goldman Sachs US Economics 2

…While Another
Jobless Recovery is Unfolding

Index, recession trough = 100 Index, recession trough = 100

105 105
Total Nonfarm Employment:
104 1954 - 1990 104
103 2001 103
102 102

101 101

100 100

99 99
t-6 t-4 t-2 t t+2 t+4 t+6 t+8 t+10 t+12
Months from Recession Trough
* Adjusted for preliminary 2009 benchmark revision.
Source: Department of Labor.

Goldman Sachs US Economics 3

The Economy Has Enormous Spare Capacity

Spare Capacity - At Or Near Record Highs

Current Long- Excess
Sector of economy level term avg. capacity (std.
(%) (%) deviations)

Goods sector
Manufacturing capacity utilization 68.4 80.8 1948 2.5
ISM manufacturing operating rate 70.1 82.3 1985 2.7
Mining capacity utilization 85.2 87.3 1967 0.6

Service sector
ISM non-mfg operating rate 81.3 85.9 1998 2.1
Hotel occupancy rate* 53.8 62.4 1987 3.5
Utilities capacity utilization 77.9 87.7 1967 2.0

Housing/real estate sector

Rental vacancy rate 11.1 7.2 1956 2.5
Owner-occupied vacancy rate 2.6 1.5 1956 2.7
Office vacancy rate 16.5 15.1 1986 0.6
Industrial vacancy rate 12.9 7.8 1981 2.2
Retail vacancy rate 18.6 14.0 1982 1.7

Labor mark et
Unemployment rate 10.0 5.6 1948 2.8
Underemployment rate** 17.2 9.4 1994 3.8

* Seasonally adjusted by GS using Census X-12 procedure.

** Labor Department's "U-6" unemployment rate.
Source: Dept. of Labor. Dept. of the Census. Federal Reserve. Institute for Supply Mgmt.
CB Richard Ellis. Property and Portfolio Research. Smith Travel Research.

Goldman Sachs US Economics 4

Spare Capacity is the Key
Driver of Core Inflation

4 Current Estimated
Change in Core PCE Inflation

Unemployment Gap
Over Next 2 Years

-3 -2 -1 0 1 2 3 4 5 6
Unemployment Gap (Actual minus CBO NAIRU)
Source: Congressional Budget Office. Our calculations.

Goldman Sachs US Economics 5

The Funds Rate “Should” Be Negative

Percent Percent
10 10.0
8 8.0
6 6.0
4 4.0
2 2.0
0 0.0
-2 -2.0
Federal Funds Rate: Using FOMC
-4 Forecasts -4.0
-6 GS Taylor Rule Using GS Forecasts -6.0
Using GS
-8 GS Taylor Rule Using FOMC Forecasts Forecasts -8.0
-10 -10.0
87 89 91 93 95 97 99 01 03 05 07 09 11
Source: Federal Open Market Committee. Our calculations.

Goldman Sachs US Economics 6

Loans Have Stagnated
Despite Skyrocketing Reserves

Billions of dollars Billions of dollars

1800 1200
C & I Loans: Bank Credit (left)
Adjusted Excess Reserves of
Despository Institutions (right)

1400 600


1000 0
2006 2007 2008 2009 2010
Source: Federal Reserve Board.

Goldman Sachs US Economics 7

We, Jan Hatzius, Ed McKelvey, Alec Phillips , Andrew Tilton and Sven Jari Stehn, hereby certify that all of the views expressed in this report accurately
reflect personal views, which have not been influenced by considerations of the firm’s business or client relationships.
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Goldman Sachs US Economics 8