National Economy First Quarter 2010

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					National Economy
First Quarter 2010
                                THE NATIONAL ECONOMY
                                 FIRST QUARTER 2010

                                    Good Riddance 2009;
                              2010 Heralds Recovery, Albeit Slow

The nation can now focus on the recovery, as             Worker productivity (output per hour) has
2009, one of the worst years in modern history           surged during the past three quarters.
for the U.S. economy, is now in the rearview             Productivity increased 6.2% during the 12
mirror. However, the nation has to play catch            months ending December 2009. This compares
up, as 8.4 million jobs have been lost and over          to the long-term average of 2.0%. Productivity
$14 trillion in net worth has been eliminated            typically spikes at the end of a recession due to
since the start of the recession. These losses           companies significantly reducing costs – by
have lowered consumer sentiment to record                eliminating workers and reducing or capping
levels – and re-set consumer spending patterns           salaries and overhead costs.
at a “new norm.”

We believe the national recession ended about
                                                                                                                   U.S. Productivity
mid-year 2009. Although we expect further
                                                                                                               Employee Output per Hour
decline in the labor market, as unemployment                                                   10%

lags, we believe a handful of indicators show                                                  8%
recovery is underway:
                                                          Change in Employee Output per Hour




                                                                                               6%                                   25-Year Average = 2.0%

x   Job losses have significantly moderated.
                                                                                               4%
x   The hiring of temporary help is on the rise.
x
                                                                                               2%
    GDP has increased two consecutive
    quarters.                                                                                  0%


x   Claims for unemployment insurance peaked                                                   -2%
                                                                                                     Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

    in April 2009 and are declining.                                                                    2003        2004        2005        2006        2007        2008        2009


x
                                                          Source: Bureau of Labor Statistics; March 2010.
    Business investment in equipment and
    software is starting to rise, albeit modestly.
                                                         The spike in productivity during the past three
Although the national recession has ended, in            quarters, coupled with reduced costs, has
our view, warning signs suggest a slow                   encouraged companies to ease layoffs and
growth recovery:                                         start hiring temporary staff until they regain
                                                         confidence to hire full-time staff. A rise in
x   Increased worker productivity: This in
                                                         temporary employment indicates companies
    turn leads to reduced job growth – fewer
                                                         need workers in order to keep up with demand,
    workers can accomplish more.
                                                         but do not want to hire full-time staff until they
x   Reduced consumer sentiment: This in turn
                                                         are certain economic recovery is underway.
    has led to a “new norm” in spending that is
    depressing the consumer side of the                  Temporary help expanded by 3.9% during the
    economy, which represents two-thirds of the          12 months ending February 2010. This
    GDP.                                                 compares to a decline of 2.5% in payroll jobs.
                                                         We believe temporary employment will continue
                                                         to rise during the balance of 2010, as
                                                         companies test their confidence in the
                                                         economy.



Delta Associates                                     1                                                                                                  First Quarter 2010
In addition, this number will be inflated by the                                                                                                                                                                       The University of Michigan’s monthly index of
U.S. Census hiring temporary staff for the 2010                                                                                                                                                                        consumer sentiment is a valuable measure,
Census. After confidence has been gained, we                                                                                                                                                                           as it provides a look into the consumer mindset
expect temporary staffing to level off and                                                                                                                                                                             – indicating if consumers are confident enough
companies to slowly start to fill full-time                                                                                                                                                                            to part with their money. The index rose to 73.6
positions.                                                                                                                                                                                                             in February 2010 – rising unevenly since the
                                                                                                                                                                                                                       low of 56.3 in February 2009, one year ago.

                                                            Trends in Non-Farm Payroll and                                                                                                                             Although the index is on the rise, it has been
                                                             Temporary Help Employment                                                                                                                                 wavering as consumers remain unsure about
                                       4%                                                                                                                    20%
                                                                                                                                                                                                                       the economy due to an elevated unemployment




                                                                                                                                                                        Temporary Help Job Change Year-Over-Year
                                       3%
                                                                                                                                                                                                                       rate. In addition, the index remains below the
   Payroll Job Change Year-Over-Year




                                       2%
                                                                                                                                                             10%
                                                                                                                                                                                                                       long-term average of 88.2 and low enough to
                                       1%
                                                                                                                                                                                                                       hamper robust spending.
                                                                                                                                                             0%
                                       0%



                                       -1%
                                                                                                                                                             -10%

                                       -2%
                                                                                                                                                                                                                                                                     Consumer Sentiment
                                       -3%                        Payroll Jobs
                                                                                                                                                             -20%
                                                                  Temp Help
                                       -4%



                                       -5%                                                                                                                   -30%                                                                         115
                                             91   92   93    94    95     96   97   98   99    00    01   02   03   04    05     06    07   08   09     10
                                                                                                                                                                                                                                                       Long-Term Average = 88.2
                                                                                                                                              *Through February 2010;
 Source: Bureau of Labor Statistics, Delta Associates; March 2010.                                                                           Bars represent recessions.                                                                   105


                                                                                                                                                                                                                                           95


                                                                                                                                                                                                                                           85
                                                                                                                                                                                                                         Index


Business investment in equipment and
software stopped declining during the 2nd
                                                                                                                                                                                                                                           75


quarter of 2009. Since mid-year, investment                                                                                                                                                                                                65


increased 0.4% during the 3rd quarter and 3.2%                                                                                                                                                                                             55


during the 4th quarter. Although investment                                                                                                                                                                                                45
                                                                                                                                                                                                                                                1980   1982   1984   1986   1988   1990   1992   1994   1996   1998   2000   2002   2004   2006   2008   2010*

remains low, businesses are starting to show                                                                                                                                                                            Source: University of Michigan, Federal Reserve Bank of St. Louis; March 2010.                                *Through February 2010

signs of confidence.

                                                                                                                                                                                                                       Consumer spending declined during the 4th
                                                                   Capital Investment in                                                                                                                               quarter of 2008 and 1st quarter of 2009. Since
                                                                  Equipment and Software                                                                                                                               then, spending has increased. However, most
                                             $1,150
                                                                                                                                                                                                                       of this spending has favored non-durable
                                             $1,100
                                                                                                                                                                                                                       goods.
                                             $1,050
    Billions of $




                                             $1,000


                                              $950
                                                                                                                                                                                                                                            Personal Consumption Expenditures
                                              $900
                                                                                                                                                                                                                                          2.5%
                                              $850
                                                                                                                                                                                                                                          2.0%

                                              $800                                                                                                                                                                                        1.5%
                                                        Q1        Q2    Q3     Q4   Q1    Q2        Q3    Q4   Q1   Q2      Q3        Q4    Q1   Q2      Q3        Q4

                                                                   2006                       2007                       2008                         2009
                                                                                                                                                                                                                                          1.0%
                                                                                                                                                                                                                         Percent Change




                                                                                                                                                                                                                                          0.5%
 Source: Bureau of Economic Analysis; March 2010.                                                                           Note: Figures are seasonally adjusted.

                                                                                                                                                                                                                                          0.0%
                                                                                                                                                                                                                                                   Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009
                                                                                                                                                                                                                                          -0.5%

                                                                                                                                                                                                                                          -1.0%
Rising productivity, hiring of temporary workers
                                                                                                                                                                                                                                          -1.5%
and business investment are good signs for the                                                                                                                                                                                            -2.0%
economy. However, consumer spending                                                                                                                                                                                                       -2.5%
drives job growth, as it accounts for two-thirds                                                                                                                                                                        Source: Bureau of Economic Analysis; March 2010.

of the GDP. Although showing signs of modest
gains,    confidence       remains    low,    as
unemployment remains elevated.

Delta Associates                                                                                                                                                                                                   2                                                                                                  First Quarter 2010
Unemployment: A Lagging Indicator                                                                                                                                    Federal Intervention
We believe it will take time for consumers to                                                                                                                        The American Recovery and Reinvestment Act
regain confidence in the economy – not until                                                                                                                         (ARRA), more commonly known as the 2009
material job gains are felt and consumer wealth                                                                                                                      Stimulus Program, was signed into law on
is regained. Until this time, consumers will likely                                                                                                                  February 17, 2009, at a cost to taxpayers of
refrain from spending on most non-essential                                                                                                                          $787 billion.
items.
                                                                                                                                                                     Under this program, President Obama plans to
Given the unemployment rate likely will not gain                                                                                                                     save or create 3.5 million jobs nationally. Of the
downward traction until mid-2010, we believe                                                                                                                         $787 billion, the largest share, $288 billion, is
consumers will not regain spending confidence                                                                                                                        devoted to tax relief, with another $144 billion
until mid-2010 – and even then spending will be                                                                                                                      set aside to aid government budget crunches at
sporadic until 2011. Not until 2012 will                                                                                                                             the state and local levels.
spending be robust – as consumers regain a
sizable portion of the $14 trillion in wealth                                                                                                                        Only $308 billion of the $787 billion stimulus
that evaporated during the recession. Until                                                                                                                          money has been allocated so far, according to
then, recovery will be slow-paced.                                                                                                                                   recovery.gov. Additional job growth should
                                                                                                                                                                     continue through 2011 as more of the stimulus
We believe the economic outlook is as                                                                                                                                money filters through the economy.
follows:
x                                                   GDP: 3.0% growth in 2010.
x                                                   Payroll jobs: positive 500,000 for 2010; 1.7                                                                                                      American Recovery and Reinvestment Act
                                                    million in 2011.                                                                                                                                           Overview of Funding
                                                                                                                                                                                                   $350

x                                                   The housing market: Stabilization by year-                                                                                                     $300
                                                                                                                                                                                                                          Funds Spent      Funds Remaining


                                                    end 2010, leading to traction in 2011. Some
                                                                                                                                                                                                   $250
                                                    local markets sooner.
                                                                                                                                                                       Total Funds (in billions)




                                                                                                                                                                                                   $200
x                                                   Long-term interest rates: up 100- 300 basis                                                                                                            $195.20
                                                                                                                                                                                                                                         $193.40                  $90.70
                                                                                                                                                                                                   $150
                                                    points in the next 1 to 3 years.
                                                                                                                                                                                                   $100

                                                                                                                                                                                                                                                                  $133.30
                                                                                                                                                                                                    $50    $92.80                         $81.60

                                                            U.S. Economic Trends and Forecast                                                                                                        $0
                                                                                                                                                                                                           Tax Benefits                 Contracts/Grants          Entitlements


                                                                       1981 – 2014
                                                                                                                                                                      Source: Recovery.gov; March 2010.
                                                   12%     51 months:                  32 months:                    32 months:          53 months:
                                                           Recession +                 Recession +                   Recession +         Recession +
     Unemployment Rate and Annualized GDP Change




                                                           Recovery                    Recovery                      Recovery            Recovery
                                                   10%

                                                   8%

                                                   6%
                                                                                                                                                                     There has been some discussion of inflation
                                                   4%
                                                                                                                                                                     worries. The Fed has kept the Federal Funds
                                                   2%                                                                                                                Rate at its current low, with little fear of inflation,
                                                   0%                                                                                                                given businesses continue to shed jobs. The
                                                         81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
                                                   -2%                                                                                                               Fed has promised to do what it takes to get the
                                                   -4%                                                                                                               economy back on track while balancing the
                                                                         Percent Change in GDP            Unemployment Rate
                                                   -6%
                                                                         Recession                        Recovery                                                   issue of inflation. We believe the Fed will start
                                                   -8%                                                                                                               to increase short-term rates modestly, to
    Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Delta Associates; March 2010.
                                                                                                                                                                     around 0.75%, by late 2010. And long-term
                                                                                                                                                                     rates we believe will rise as much as 300 basis
                                                                                                                                                                     point in the next three years – further
                                                                                                                                                                     dampening economic activity and pricing
                                                                                                                                                                     pressure.




Delta Associates                                                                                                                                                 3                                                                                         First Quarter 2010
                                                                                                                                                                     We expect GDP to rise 3.0% during 2010, as
                                                                              Federal Funds Rate                                                                     consumers continue to lag the economy due to
                                                                                                                                                                     high unemployment and little income growth.
                                                       20%


                                                       16%
                                                                                                                                                                     Index of Leading Economic Indicators
  Interest Rate




                                                       12%                                                                                                           The index of leading economic indicators has
                                                                                                                                                                     increased for the tenth consecutive month –
                                                       8%
                                                                                                                                                                     rising to 107.4 in January 2010. The index is
                                                       4%                                                                                                            above 99.5 experienced one year ago and has
                                                                                                                                                                     risen 9.6% since its low in March 2009 – both
                                                       0%
                                                             78    80    82   84   86   88        90    92   94   96    98    00   02   04      06        08*        positive signs for the economy.
 Source: Federal Reserve Board; March 2010.                                                                              *Unchanged since December 16, 2008.
                                                                                                                                                                     This index suggests the recovery is unfolding
                                                                                                                                                                     and economic conditions should continue to
                                                                                                                                                                     improve through the balance of 2010. However,
Now, for a look at the components that
                                                                                                                                                                     at this level, we expect growth to be slow.
make up our economy:

Gross Domestic Product (GDP)
                                                                                                                                                                                                             Leading Economic
The GDP shot up 5.9% (annualized rate) during                                                                                                                                                                 Indicators Index
the 4th quarter of 2009, compared to rising a
revised 2.2% during the 3rd quarter.
                                                                                                                                                                               108
                                                                                                                                                                               107
                                                                                                                                                                               106
                                                                                                                                                                               105
                                                                                                                                                                               104
                                                                                                                                                                               103
                                                                                                                                                                       Index




                                                                                                                                                                               102
                                                                             GDP Percent Change                                                                                101
                                                                                                                                                                               100
                                        %                                       2007 – 2009                                                                                     99
                                                                                                                                                                                98
                                                        8%
                                                                                                                                                                                97
                                                                                                                                                                                96
                                                        6%
                                                                                                                                                                                95
                  GDP Growth in Chained 2005 Dollars




                                                                                                                                                                                     Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan.
                                                        4%
                                                                                                                                                                                     2007                            2008                                                        2009                            2010

                                                        2%
                                                                                                                                                                      Source: The Conference Board; March 2010.                           Note: Index has been re-benchmarked, with 2004 as the base year.

                                                        0%

                                                       -2%

                                                       -4%                                                                                                           Payroll Jobs
                                                       -6%

                                                       -8%                                                                                                           Approximately 8.4 million jobs have been
                                                              Q1        Q2    Q3   Q4        Q1        Q2    Q3    Q4        Q1    Q2    Q3          Q4
                                                                                                                                                                     eliminated since the start of the recession in
 Source: Bureau of Economic Analysis; March 2010.                                                                                            Note: Annualized.       December 2007 – a 6.1% decline.

                                                                                                                                                                     On a month-to-month decline, the peak in job
The GDP experienced a surge during the 4th                                                                                                                           losses was experienced during January 2009.
quarter due primarily to stronger business                                                                                                                           Since January, the nation continued to shed
investment – not consumer demand, which                                                                                                                              jobs at a reduced rate. Most notably, the nation
remains a concern. Demand had less of an                                                                                                                             shed only 36,000 jobs in February 2010. This
impact to the quarter’s GDP as consumer                                                                                                                              compares to the monthly average of 324,000
expenditures increased at a tepid 1.7%.                                                                                                                              jobs lost since the start of the recession.

GDP contracted 2.4% during 2009, compared
to a slight rise of 0.4% during 2008. Although
the economy grew during the second half of
2009, it was the worst year for GDP since a
10.9% decline during 1946.


Delta Associates                                                                                                                                                 4                                                                                                      First Quarter 2010
                                                         U.S. Payroll Job Change                                                                                                                                                            Purchasing Managers’ Index

                                                                                                                                                                                                                            60
                                         200                                                                                                                                                                                                             Rating of 50 Separates Growth and
                                                                                                                                                                                                                                                        Contraction of Manufacturing Sector
   Payroll Job Change (in thousands)




                                         100
                                                                                                                                                                                                                            55




                                                                                                                                                                         Manufacturing Index Rating
                                            0
                                        -100
                                                                                                                                                                                                                            50
                                        -200
                                        -300                                                                                                                                                                                45
                                        -400
                                        -500                                                                                                                                                                                40

                                        -600
                                        -700                                                                                                                                                                                35

                                        -800
                                                                                                                                                                                                                            30
                                        -900                                                                                                                                                                                     Dec. Jan. Feb. Mar. Apr.May.Jun. Jul. Aug.Sep. Oct.Nov.Dec. Jan. Feb. Mar. Apr.May.Jun. Jul. Aug.Sep. Oct.Nov. Dec.Jan. Feb.
                                                Dec. 07 Feb. 08 Apr. 08 Jun. 08 Aug. 08 Oct. 08 Dec. 08 Feb. 09 Apr. 09 Jun. 09 Aug. 09 Oct. 09 Dec. 09 Feb. 10
                                                                                                                                                                                                                                 2007                            2008                                                       2009                              2010

 Source: Bureau of Labor Statistics; March 2010.                                                                                                                       Source: Institute for Supply Management; March 2010.




Not all sectors are cutting jobs, as the                                                                                                                              Business inventories grew at an above-average
Health/Education sector added 320,000 new                                                                                                                             pace during 2004 through 2008. However, with
jobs during the 12 months ending February                                                                                                                             the recession hampering consumer spending,
2010. The Construction and Manufacturing                                                                                                                              businesses have been working to reduce
sectors experienced the most job cuts during                                                                                                                          stockpiles. During the 12 months ending
this period, at 880,000 and 820,000 jobs,                                                                                                                             December       2009,    companies        slashed
respectively.                                                                                                                                                         inventories by 9.7%. With reduced inventories,
                                                                                                                                                                      the supply/demand ratio will gradually balance.

                                                       U.S. Payroll Job Change
                                                   12 Months Ending February 2010                                                                                                                                                U.S. Total Business Inventories
                                            Education/Health

                                                  Government                                                                                                                                                                 10%
                                                                                                                                                                            12-month Percent Change in Business Inventory




                                                Other Services

                                                   Information                                                                                                                                                                   5%

                                          Leisure/Hospitality

                                                     Financial                                                                                                                                                                   0%

                                                        Retail

                                       Professional/Business                                                                                                                                                                 -5%

                                                Manufacturing

                                                 Construction                                                                                                                                                               -10%

                                                             -1000         -800         -600          -400         -200           0           200           400

                                                                                                   Thousands of Jobs                                                                                                        -15%
                                                                                                                                                                                                                                        Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec.
 Source: Bureau of Labor Statistics; March 2010.
                                                                                                                                                                                                                                      2007                             2008                                                        2009

                                                                                                                                                                       Source: U.S. Census; March 2010.                                                                                                                                Note: Seasonally adjusted.




An indicator of market health, the Purchasing
Managers’ Index (PMI) was at 56.5 in February                                                                                                                         Unemployment Rate
2010, compared to 35.8 one year earlier. The
PMI has risen above 50 (an indication of                                                                                                                              The U.S. unemployment rate is 9.7% at
expansion) for the past seven months, the first                                                                                                                       February 2010, up from 8.2% one year ago.
time since January 2008. We expect the                                                                                                                                The under-employed rate is 16.8%. This rate
demand for goods and services will remain slow                                                                                                                        includes employees working part-time and
during the balance of 2010, as consumers                                                                                                                              overqualified workers taking a lower-skilled
gradually regain confidence in spending.                                                                                                                              position.




Delta Associates                                                                                                                                                  5                                                                                                                                                  First Quarter 2010
Although the unemployment rate has ticked                                                                                                           In each case, the recession ended within a
down from 10.0% at year-end, we anticipate the                                                                                                      month of the peak in initial claims. The peak in
rate will not edge down materially in the short                                                                                                     claims during the 2007-2009 recession was in
run, as formerly discouraged job applicants                                                                                                         early April 2009. Recently, the initial claims
start the application process again. We believe                                                                                                     figure has been volatile, possibly a result of
unemployment will hold in this range before                                                                                                         severe winter weather in the northeast as well
declining to around 9.5% at year-end. Of note,                                                                                                      as some workers gaining and losing temporary
although economic recovery is underway,                                                                                                             assignments.
unemployment is a lagging indicator.

                                                                                                                                                                                                            U.S. Initial Unemployment Claims
                                                                                                                                                                                                               Four-Week Moving Average
                                          U.S. Unemployment Rate                                                                                                                                            December 2007 to February 2010
                                                                                                                                                                                            700,000
                                                                                                                                                                                                           Peak in Initial Unemployment
                          12%




                                                                                                                                                              Initial Unemployment Claims
                                                                                                                                                                                                           Claims (Week of 4/4/09) = 658,750
                                                                                                                                                                                            600,000
                          10%
 U.S. Unemployment Rate




                          8%
                                                                                                                                                                                            500,000


                          6%
                                                                                                                                                                                            400,000
                          4%


                                                                                                                                                                                            300,000
                          2%


                          0%                                                                                                                         Note: Data is seasonally adjusted.
                                70   72   74   76   78   80   82   84   86   88   90   92   94   96    98    00    02   04    06    08    10         Source: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis, Delta Associates; March 2010.
                                                                                            Note: Through February 2010; seasonally adjusted;
         Source: Bureau of Labor Statistics; March 2010.                                    shaded bars represent recessions.




                                                                                                                                                    Inflation
Unemployment Claims
                                                                                                                                                    Prices increased 2.6% during the 12 months
Initial unemployment claims peaked in April                                                                                                         ending January 2010. We believe that inflation
2009 – indicating the recession is over by the                                                                                                      will be controlled at 1.5% to 2.5% during 2010,
single best barometer. In each of the past five                                                                                                     as an elevated unemployment rate staves off
recessions, dating back to 1975, the                                                                                                                rising prices. As consumer confidence returns,
recession’s end has coincided with the peak in                                                                                                      the Fed will watch for inflationary effects on
the four-week moving average in initial                                                                                                             commodity prices.
unemployment claims.
                                                                                                                                                    In the intermediate term we expect inflation to
This observation, made by Robert J. Gordon (a                                                                                                       be an issue, as the economy transitions from
member of the Business Cycle Dating                                                                                                                 recovery to expansion.
Committee of the National Bureau of Economic
Research, the agency that determines when
recessions began and ended), is startling in its
                                                                                                                                                                                                                           U.S. Inflation
simplicity.
                                                                                                                                                                                        14%

  Duration of         Peak in Initial       End of
                                                                                                                                                                                        12%
  Recession       Unemployment Claims     Recession
                                                                                                                                                      Percentage Change in CPI-U




  16 Months           February 1975      March 1975                                                                                                                                     10%
   6 Months             June 1980          July 1980
                                                                                                                                                                                            8%
  16 Months           October 1982      November 1982
   8 Months            March 1991        March 1991                                                                                                                                         6%
   8 Months           October 2001      November 2001
                                                                                                                                                                                            4%
Source: Smart Money via MSN.com, NBER, BLS, St. Louis Fed,
Delta Associates; March 2010.                                                                                                                                                               2%


                                                                                                                                                                                            0%
                                                                                                                                                                                                 76   78    80   82   84   86   88   90   92   94   96    98   00    02    04   06    08   10*



                                                                                                                                                     Source: Bureau of Labor Statistics; March 2010.                                            *12-month percentage change through January 2010.




Delta Associates                                                                                                                                6                                                                                                        First Quarter 2010
Energy Prices
                                                                                                                                                                                                                                      Dow Jones
Oil prices are starting to rise again, after sinking                                                                                                                                                                               Industrial Average
to a cyclical low of $39 per barrel in February
                                                                                                                                                                                                          15,000
2009. Since this bottom, prices have gradually                                                                                                                                                            14,000




                                                                                                                                                                           Dow Jones Industrial Average
increased to $76 a barrel in February 2010.                                                                                                                                                               13,000

                                                                                                                                                                                                          12,000

                                                                                                                                                                                                          11,000

                                                                                                                                                                                                          10,000
                                                                 Oil Prices                                                                                                                                9,000

                                                                                                                                                                                                           8,000
                 $140
                                                                                                                                                                                                           7,000

                 $120                                                                                                                                                                                      6,000
                                                                                                                                                                                                                   2000   2001     2002     2003     2004     2005    2006     2007     2008     2009     2010

                 $100
  $ Per Barrel




                                                                                                                                                                Source: Dow Jones; March 2010.                                                                                         Note: Through February 2010.

                  $80

                  $60

                  $40                                                                                                                                          Mortgage Rates
                  $20
                                                                                                                                                               The 30-year fixed mortgage rate is currently
                   $0
                        Jan. Feb. Mar. Apr. May. Jun. Jul Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb.
                         08 08 08 08 08 08 .08 08 08 08 08 08 09 09 09 09 09 09 09 09 09 09 09 09 10 10
                                                                                                                                                               under 5% – a boon to home buyers. A low
                                                                                                                                                               interest rate, coupled with the first-time home
 Source: GASearch; March 2010.                                                                                               Note: WTI NYMEX prices.
                                                                                                                                                               buyer tax credit – now expanded to move-up
                                                                                                                                                               buyers – has sparked a jump in home sales.
Gasoline prices have increased to $2.70 per                                                                                                                    And an increase in optimism that the housing
gallon at this writing, a 40% rise during the past                                                                                                             market is finally stabilizing. However, tight
year. Although prices have increased, the price                                                                                                                underwriting requirements have kept some
of gas remains lower than the peak of over                                                                                                                     buyers out of the market. The first-time buyers’
$4.00 a gallon during the summer of 2008, as                                                                                                                   credit expires during the first half of 2010.
gas consumption declined 10.6% during 2009.
We expect oil prices to steadily rise to around
$80 per barrel by mid-year 2010, in time for the                                                                                                                                                                                   Mortgage Rates
summer driving season. However, for the year,                                                                                                                                                                                     30-Year Fixed Rate
we expect prices to average around $75 per
barrel.
                                                                                                                                                                                                           18%
                                                                                                                                                                Annual Average Mortgage Rate




                                                                                                                                                                                                           16%

Stock Market                                                                                                                                                                                               14%

                                                                                                                                                                                                           12%

The stock market is not the economy. But many                                                                                                                                                              10%

believe it is a leading indicator – a predictor of                                                                                                                                                          8%

economic conditions in 12 months or so. The                                                                                                                                                                 6%

Dow Jones peaked in late 2007 and bottomed                                                                                                                                                                  4%
                                                                                                                                                                                                                 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
out in March 2009, with the Dow at 6,547.
                                                                                                                                                                Source: Freddie Mac; March 2010.                                                                                                  * At March 2010


Since hitting bottom, the Dow has increased
approximately 60%, as investors are starting to
regain confidence and stocks were at bargain                                                                                                                   New Housing Construction and Sales
rates, allowing buyers to reap the rewards of
                                                                                                                                                               New homes sold at an annualized rate of
the next economic expansion. To sustain this
                                                                                                                                                               309,000 units during January 2010, down 6.1%
bull market, profits need to follow.
                                                                                                                                                               from one year earlier. Regardless, sales prices
                                                                                                                                                               on new homes increased to an average of
                                                                                                                                                               $254,500 per unit in January 2010, up 3.8%
                                                                                                                                                               from one year earlier.



Delta Associates                                                                                                                                           7                                                                                                                 First Quarter 2010
                                                   U.S. New Home Sales vs. Sales Price                                                                                                                                               Annual Change in
                                                                                                                                                                                                                                 Existing Home Sale Prices
                                         1,400                                                                                       $320,000                                                                      20%
                                                                                                 Number of New Home Sales
                                                                                                 Average New Home Sales Price
  Number of Sales - Thousands of Units




                                                                                                                                     $310,000




                                                                                                                                                                             Percent Change for Median Price of
                                         1,200                                                                                                                                                                     10%




                                                                                                                                                Average Sales Prices
                                                                                                                                     $300,000




                                                                                                                                                                                   Single-Family Homes
                                         1,000                                                                                                                                                                      0%

                                                                                                                                     $290,000
                                                                                                                                                                                                                  -10%
                                          800
                                                                                                                                     $280,000
                                                                                                                                                                                                                  -20%
                                          600
                                                                                                                                     $270,000
                                                                                                                                                                                                                  -30%
                                          400
                                                                                                                                     $260,000
                                                                                                                                                                                                                                                      2007     2008     2009
                                                                                                                                                                                                                  -40%
                                          200                                                                                        $250,000                                                                              Las   Mia   Chi   Phx   U.S.   NY   Atl    Bos   LA/OC   DFW    Was     Hou   SF/Oak
                                                                                                                                                                                                                           Veg
                                                    2005      2006          2007          2008             2009          2010*



 Source: U.S. Census; March 2010.                                                                            *Annualized sales rate at January 2010.                        Source: National Association of Realtors; March 2010.




Existing Home Sales                                                                                                                                                        We believe housing sales volume will continue
                                                                                                                                                                           to rise during the balance of 2010, given low
Existing homes sold at an annualized rate of                                                                                                                               interest rates and home buyer tax credit – now
5.1 million units during January 2010, up 12%                                                                                                                              extended through Spring 2010. With the
from one year ago. The current inventory is at a                                                                                                                           inventory declining, prices should continue to
7.8 months supply, down from 9.6 months one                                                                                                                                stabilize by and even gain traction into 2011 in
year ago.                                                                                                                                                                  many metro markets.

                                                                                                                                                                           Federal Budget Deficit
                                           U.S. Existing Home Sales vs. Sales Price
                                                                                                                                                                           The Federal budget deficit climbed to                                                                                          $1.4
                                           6,500                                                                                    $280,000
                                                                                                                                                                           trillion during 2009. The 2009 deficit                                                                                         was
                                                                                             Number of Existing Home Sales                                                 boosted by government funded TARP, the                                                                                         auto
  Number of Sales - Thousands of Units




                                                                                             Average Existing Home Sales Price      $270,000
                                           6,000                                                                                                                           bailout, and the American Recovery                                                                                              and
                                                                                                                                                Average Sales Prices




                                                                                                                                    $260,000


                                           5,500
                                                                                                                                                                           Reinvestment Act, among other programs.
                                                                                                                                    $250,000


                                                                                                                                    $240,000
                                           5,000


                                                                                                                                    $230,000

                                           4,500
                                                                                                                                    $220,000
                                                                                                                                                                                                                                  Federal Budget Deficit
                                           4,000                                                                                    $210,000
                                                       2006          2007          2008             2009               2010*
                                                                                                                                                                                                                  $400

                                                                                                                                                                                                                  $200
 Source: National Association of Realtors; March 2010.                                                       *Annualized sales rate at January 2010.
                                                                                                                                                                                                                    $0

                                                                                                                                                                                                                  -$200
                                                                                                                                                                             Billions of $




                                                                                                                                                                                                                  -$400


Sales prices on existing homes averaged                                                                                                                                                                           -$600

                                                                                                                                                                                                                  -$800
$212,000 per unit at January 2010, a slight rise                                                                                                                                                   -$1,000

of 2.6% from one year ago.                                                                                                                                                                         -$1,200

                                                                                                                                                                                                   -$1,400

                                                                                                                                                                                                   -$1,600
According to the National Association of                                                                                                                                                                                  91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10* 11* 12* 13* 14*


Realtors (NAR), price changes during 2009                                                                                                                                   Source: OMB, CBO; March 2010.                                                                     * Projected by CBO as of January 2010.
ranged from a low of -23.3% (Las Vegas) to a
high of +13.2% (San Francisco/Oakland).
                                                                                                                                                                           The Congressional Budget Office (CBO)
                                                                                                                                                                           anticipates, with the most recent projections,
                                                                                                                                                                           the U.S. budget deficit for 2010 will total $1.3
                                                                                                                                                                           trillion. The deficit will be comparable to 2009,
                                                                                                                                                                           as the government continues to pay for
                                                                                                                                                                           recovery programs.

Delta Associates                                                                                                                                                       8                                                                                                    First Quarter 2010
U.S. Trade Deficit                                                                                                            High worker productivity, coupled with low
                                                                                                                              consumer     confidence   and    restrained
The trade deficit retracted to $380 billion during                                                                            spending means few new jobs will be
2009, compared to $677 billion in 2008. Exports                                                                               created in the recovery period that will last
declined 15% during 2009, compared to imports                                                                                 through 2012. Until job growth resumes,
which declined 23%.                                                                                                           consumer spending cannot return to robust
                                                                                                                              levels, thereby creating a protracted
Exports declined during 2009, as our global                                                                                   recovery.
partners are experiencing a steeper and longer
recession compared to the U.S. Imports
declined as well, as American consumers                                                                                       National Payroll Job Growth Summary
demanded fewer goods.
                                                                                                                              The U.S. economy shed 3.3 million payroll jobs
                                                                                                                              over the 12 months ending February 2010.
                                                                                                                              This represents a decline of 2.5%. The pace of
                                           U.S. Trade Deficit                                                                 job change has been rapid, as 8.4 million jobs
                                                                                                                              have been cut since the start of the recession.
                     $0                                                                                                       However, job losses have moderated of late, as
                   -$100                                                                                                      the recession has ended and a slow recovery is
                   -$200                                                                                                      underway.
                   -$300
   Billions of $




                   -$400

                   -$500
                                                                                                                                            U.S. Payroll Job Growth
                   -$600
                                                                                                                                                   Job Change                 %Change
                   -$700                                                                                                          2010*                -3,297,000              -2.5%
                   -$800
                           91   92   93   94   95   96   97   98   99   00   01   02   03   04   05   06   07   08   09
                                                                                                                                  2009                 -5,874,000              -4.3%
                                                                                                                                  2008                   -558,000              -0.4%
 Source: U.S. Census Bureau, Bureau of Economic Analysis; March 2010.
                                                                                                                                  2007                  1,527,000               1.1%
                                                                                                                                  2006                  2,397,000               1.8%
Economic Outlook                                                                                                                  2005                  2,276,000               1.7%
                                                                                                                                  2004                  1,423,000               1.1%
We believe the national economy reached                                                                                           2003                   -344,000              -0.3%
the bottom during the middle of 2009 –
                                                                                                                                  2002                 -1,489,000              -1.1%
concluding      this     economic      downturn.
Although recovery is underway, we are not out                                                                                     2001                     36,000               0.0%
of the woods yet, as we predict unemployment,                                                                                 *Change for 12 months ending in February 2010; others are
                                                                                                                              comparisons of annual averages. Note that BLS has
a lagging indicator, will remain elevated through                                                                             rebenchmarked figures since their initial publication; the figures
mid-year 2010. In addition, we expect more                                                                                    presented above are the most recent estimates.
bankruptcies and foreclosures, as the financial
markets remain unsettled.

We expect GDP to rise 3.4% during the 1st
quarter of 2010. This rate should moderate
during the 2nd quarter of the year, as a handful
of stimulus programs end. For the year, we
expect the GDP to rise 3.0% during 2010.




Delta Associates                                                                                                          9                                             First Quarter 2010
                                   12-MONTH PAYROLL EMPLOYMENT       CHANGE THROUGH JANUARY 2010
                                                JOB CHANGE                                                            JOB CHANGE
METRO AREA                                        #      %           METRO AREA                                        #      %
New Orleans                                     (3,200) -0.6%        Boston (Metropolitan NECTA)                    (62,400)   -2.6%
Austin                                         (10,000) -1.3%        Minneapolis-St. Paul                           (63,200)   -3.7%
San Antonio                                    (16,400) -2.0%        Dallas/Ft. Worth                               (67,200)   -2.3%
Raleigh-Durham                                 (17,900) -2.3%        Seattle                                        (76,200)   -4.5%
Oklahoma City                                  (20,100) -3.5%        Detroit (Detroit/Warren/Livonia)               (82,000)   -4.7%
Jacksonville                                   (20,100) -3.4%        Houston                                        (84,900)   -3.3%
Pittsburgh                                     (20,300) -1.8%        Philadelphia                                   (86,000)   -3.2%
Salt Lake City                                 (24,100) -3.9%        South Florida
Nashville                                      (24,200) -3.3%           West Palm Beach/Boca Raton                  (28,100)    -5.4%
Memphis                                        (26,500) -4.4%           Miami/Miami Beach/Kendall                   (31,200)    -3.1%
Washington, DC                                 (29,200) -1.0%           Fort Lauderdale                             (33,000)    -4.5%
Charlotte                                      (31,200) -3.8%           Subtotal South Florida                      (92,300)    -4.1%
Columbus (OH)                                  (31,600) -3.5%        Atlanta                                        (93,200)    -4.0%
Cincinnati                                     (32,800) -3.3%        Phoenix                                        (97,400)    -5.5%
Kansas City                                    (33,500) -3.4%        San Francisco Bay Area
Indianapolis                                   (34,600) -4.0%           San Jose/Sunnyvale/Santa Clara              (43,900)    -5.0%
Baltimore                                      (35,000) -2.8%           San Francisco/San Mateo/Redwood City        (49,400)    -5.1%
Sacramento                                     (35,200) -4.1%           Oakland/Fremont/Hayward                     (53,700)    -5.4%
St. Louis                                      (37,100) -2.9%           Subtotal Bay Area                          (147,000)    -5.2%
Orlando                                        (41,700) -4.1%        Chicago                                       (174,700)    -4.0%
Tampa-St. Pete                                 (41,900) -3.6%        New York                                      (224,200)    -2.7%
Portland (OR)                                  (43,600) -4.4%        LA Basin
Cleveland                                      (47,300) -4.7%           Orange County (Santa Ana/Anaheim/Irvine)    (72,100)    -5.1%
San Diego                                      (50,300) -4.0%           Riverside/San Bernardino/Ontario            (73,500)    -6.3%
Denver-Boulder                                 (54,300) -4.0%           Los Angeles/Long Beach/Glendale            (176,500)    -4.5%
Las Vegas                                      (62,100) -7.3%           Subtotal LA Basin                          (322,100)    -5.0%
Source: Bureau of Labor Statistics, Delta Associates; March 2010.




Delta Associates                                                    10                                             First Quarter 2010