Macroeconomic and Consumer Setting Presented by : Roger BrinnerPartner and Chief Economist Andres SaenzPartnerThe Parthenon Group February 2010 Prior Themes Remain Intact: Understanding the Macroeconomic Setting and Consumer Responses .This Recession is Worse Than Those in Recent History, But It is Not a Depression . .The Recovery Will Be Good, But at a Slower Pace than Prior Booms as Financial Structures Rebuild . .The Consumer Has Reacted Predictably to Harsh Conditions . .Going Forward, the Consumer Appears Willing to Re-Engage in Spending as Employment Recovers and Household Wealth is Rebuilt . Agenda •GDP & Unemployment: Macroeconomic Setting •Consumer Spending •Saving Behavior •Consumer Microeconomics •Inflation •Consumer Survey •Backup This recession will exceed by 2x the severity of the deep 1975 and 1981-82 recessions -5.0% -2.5% 0.0% 2.5% 5.0% 7.5% 10.0% -5.0% -2.5% 0.0% 2.5% 5.0% 7.5% 10.0% 2005Q32006Q12006Q32007Q12007Q32008Q12008Q32009Q12009Q32010Q12010Q32011Q12011Q32012Q12012Q3Real GDP Growth vs. Year AgoCurrent1990-19911981-19821974-1975 Real GDP Growth: Past 3 and Current Business Cycles GDP and Unemployment: Macroeconomic SettingGreater Recession Depth, But Typical Duration History Forecast Note: Cycles are aligned on the first quarters of near zero real GDP growth versus a year earlier: The 1990-91 cycle alignment implies 2008 Q3=1990 Q4; The 1980-81 cycle alignment implies 2008 Q3=1981 Q4; The 1974-75 cycle alignment implies 2008 Q3=1974 Q1 Source: Parthenon analysis; Bureau of Economic Analysis Source: Parthenon analysis; Bureau of Economic Analysis -10.0% -5.0% 0.0% 5.0% 10.0% 2007Q11.22007Q23.22007Q33.52007Q42.12008Q1-0.72008Q21.42008Q3-2.72008Q4-5.52009Q1-6.62009Q2-0.72009Q32.22009Q45.62010Q14.62010Q23.82010Q33.42010Q42.51.2%-0.7%2.2%5.6%4.6%3.8%3.4%2.5%3.2%3.5%2.1%-0.7%1.4%-2.7%-5.5%-6.6% versuspriorquarteratannualrate1.4%-3.8%-2.6%0.1%2.9%4.1%4.4%3.6%1.9%2.7%2.5%2.0%1.6%0.0%-1.9%-3.3%versusyearagoversusyearagoversuspriorquarteratannualrate Real GDP Growth GDP and Unemployment: Macroeconomic SettingYear-Ago GDP “Comps” Will be Positive by Q1, Two Quarters After Growth Has Resumed History Forecast GDP and Unemployment: Macroeconomic SettingInventories Were Abnormally Slashed in 2007-09 -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 2007Q12007Q22007Q32007Q42008Q12008Q22008Q32008Q42009Q12009Q22009Q32009Q42010Q12010Q22010Q32010Q42011Q12011Q22011Q32011Q4Current CycleAverage CycleFull-Cycle Norm Note: Average includes ‘74-’75, ‘81-’82, ‘90-’91, ‘00-’01 recessions Source: Parthenon analysis; Bureau of Economic Analysis Inventory Accumulation Relative to GDP Inventory Accumulation as a Percentage of GDP Recession Onset History Forecast Inventory Reduction 1% of GDP Beyond Normal This Cycle Current Cycle: Employment Relative to GDP 94% 95% 96% 97% 98% 99% 100% 101% 102% 103% 104% 105% 106% 107% 108%108% 94% 95% 96% 97% 98% 99% 100% 101% 102% 103% 104% 105% 106% 107% 108%108% QuartersBeforeandAfterRecessionStart2007Q12007Q32008Q12008Q32009Q12009Q32010Q12010Q32011Q1PerformanceRelativetoBeginningofRecesionRealGDPPayrollEmploymentProductivity GDP and Unemployment: Macroeconomic Setting Employment Fell in Line with GDP and Should Begin Recovering Early in 2010 94% 95% 96% 97% 98% 99% 100% 101% 102% 103% 104% 105% 106% 107% 108%108% 94% 95% 96% 97% 98% 99% 100% 101% 102% 103% 104% 105% 106% 107% 108%108% QuartersBeforeandAfterRecessionStart1980Q21980Q41981Q21981Q41982Q21982Q41983Q21983Q41984Q2PerformanceRelativetoBeginningofRecesionRealGDPPayrollEmploymentProductivity 1981-82 Cycle: Employment Relative to GDP Note: Average includes ‘74-’75, ‘81-’82, ‘90-’91, ‘00-’01 recessions Source: Parthenon analysis, Bureau of Economic Analysis history forecast GDP and Unemployment: Macroeconomic SettingLast Year, Parthenon Anticipated a Much Deeper Recession than the Consensus, Foreseeing the Export and Capex Collapse CalendarYear Forecast: Calendar Year 2009 CY 2010 Date Forecast Was Made: November 2008 July2009 Actual 2009 Nov2009 Feb 2010 Concepts / ForecastSource Blue Chip Consensus Parthenon Blue Chip Consensus Parthenon Gov’tas of Feb 2010 Blue Chip Parthenon BlueChip Parthenon US Real GDP -0.4% -2.1% -2.6% -2.8% -2.4% 2.7% 3.2% 3.0% 3.8% Consumer Spending -0.6% -0.3% -0.7% -0.7% -0.6% 1.8% 2.2% 2.0% 2.6% Business Equipment and Structures -5.2% -12.4% -18.5% -18.1% -17.9% 0.2% 1.3% 0.9% 2.5% InventoryGrowth(Contribution to GDP) -0.1% -0.5% -0.5% -0.7% -0.8% 0.8% 1.3% 0.0% 0.4% Residential Construction -7.0% -11.1% -22.9% -22.1% -20.4% 10.0% 3.1% 10.3% 6.6% Exports -1.0% -5.5% -12.1% -15.3% -9.9% 5.5% 12.8% 12.2% 14.0% Major Trading Partners Growth 0.7% -0.6% -3.6% -3.5% -3.3% 2.5% 2.8% 2.3%x 1.9% Today, compared to the consensus, Parthenon expects a ½ to 1% better US recovery across many sectors Source: Parthenon analysis, Blue Chip Economic Indicators GDP and Unemployment: Macroeconomic Setting The Range of Outlook Opinion at Yearend: Parthenon and the Blue Chip Consensus, November 2008 & 2009, February 2010 Official 2007 2.0% 2.1% 2.1% Official 2008 1.4% (est.) 0.4% 0.4% Blue Chip Top 10 0.3% -2.4% Blue Chip Average (52 Surveyed) -0.4% -2.4% Blue Chip Bottom 10 -1.1% -2.5% Parthenon -2.1% -2.5% Blue Chip Top 10 3.4% 3.6% Blue Chip Average 2.7% 3.0% Blue Chip Bottom 10 2.0% 2.5% Parthenon 3.2% 3.8% Source: Blue Chip Economic Indicators .In November 2008, the consensus was significantly more optimistic than Parthenon for 2009 .Now, it is less optimistic than Parthenon for 2010 .Reviewing the 1980-2008 Blue Chip accuracy, it is typical for the consensus to be too optimistic going into a recession and too pessimistic coming out, both erring by about 1% Nov. 2009 Nov. 2008 2009 2010 Calendar Year GDP Growth Forecast, By Date of Forecast Feb. 2010 The US “Blue Chip” Consensus Tends to Be Conservative on Both Sides of Each Recession -4% -2% 0% 2% 4% 6% 8% -4% -2% 0% 2% 4% 6% 8% 19801982198419861988199019921994199619982000200220042006200820092010ForecastActual YOY Percent Increase The historical comparison of GDP actual data to forecasted data indicates both macro-economic series can be forecasted with a useful degree of accuracy, and also that shocks have intensified recessions beyond expectations followed by recoveries more robust than expected Source: Blue chip forecast survey in November from prior year; Bureau of Economic Analysis Volcker’s 2ndshock Invasion of Kuwait 9/11 Attack Mortgage Crisis US GDP Forecasts: 1980-2009(December forecasts for following year) Agenda •GDP & Unemployment: Macroeconomic Setting •Consumer Spending •Saving Behavior •Consumer Microeconomics •Inflation •Consumer Survey •Backup Consumer SpendingIncome, Consumer Finances, and Psychology Drive Spending in Systematic Patterns That Are Still Valid Income Consumer Finances Consumer Psychology -2% 0% 2% 4% 6% 2005Q12005Q32006Q12006Q32007Q12007Q32008Q12008Q32009Q12009Q32010Q12010Q3ActualFit through 2005Fit through 2009 History Forecast Consumer Spending Growth 2005-2010F Year-Over-Year Growth in Consumer Spending Source: Parthenon analysis; Bureau of Economic Analysis Consumer Spending Income, Consumer Finances, and Psychology Drive Spending in Systematic Patterns That Are Still Valid Income Net Worth Psychology Source: Parthenon analysis; Bureau of Economic Analysis Elasticity Estimate 1978-2009 Elasticity Estimate 1978-2005 Income 0.8 NetWorth 0.2 Sentiment 0.1 Income 0.8 NetWorth 0.2 Sentiment 0.1 Impacts for key drivers are nearlyidentical, whether estimated through1978-2005 or 1978-2009 -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% -40% -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 1990Q11991Q11992Q11993Q11994Q11995Q11996Q11997Q11998Q11999Q12000Q12001Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q1211Q12012Q12013Q12014Q12015Q1ConsumerSpendingConsumerSentiment(rightscale:5x) HouseholdNetWorth(rightscale:5x) DisposableIncome Growth in Real Consumer Spending and Key Drivers, 1990-2015 History Forecast -2% 0% 2% 4% 6% 8% 1978Q11979Q11980Q11981Q11982Q11983Q11984Q11985Q11986Q11987Q11988Q11989Q11990Q11991Q11992Q11993Q11994Q11995Q11996Q11997Q11998Q1199Q12000Q12001Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q1GrowthofRealConsumerSpendingActualModelGap Consumer Spending The Model, Accurate for Three Decades, Projects a Good Recovery But Below Past Recovery Cycles Source: Parthenon analysis; Bureau of Economic Analysis Growth of Real Consumer Spending, Actual vs. Fitted, 1978-2012F Consumer Spending Consumer Sentiment Has Surprisingly Rebounded to Typical Values 506070809010050607080901002005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q1Michigan Consumer Sentiment IndexCurrentAverageof3MajorCycles1990-911980-811974-75 Consumer Sentiment: Past 3 and Current Business Cycles Note: The cycles are aligned on the first quarters of near zero real GDP growth versus a year earlier: the 1990-91 cycle alignment implies 2008 Q3=1990 Q4; the 1980-81 cycle alignment implies 2008 Q3=1980 Q2; the 1974-75 cycle alignment implies 2008 Q3=1974 Q1 Source: Parthenon Analysis; Bureau of Economic Analysis •Americans are resilient: every major recession had a sharp spike down for a quarter, then recovered •However, compared with previous cycles, sentiment remained exceptionally low until mid-2009 History Forecast Percent Change in Net Worth 1984-2014F -20% -15% -10% -5% 0% 5% 10% 15% 20% 1986Q11988Q11990Q11992Q11994Q11996Q11998Q12000Q12002Q12004Q12006Q12008Q12010Q12012Q12014Q1Percent Change vs Year AgoNet WorthTime Weighted Net WorthPriorNetWorthPriorTimeWeightedNetWorth .Consumers respond to persistent changes in net worth, not just immediate or short-run –The estimated average lag is over 5 quarters for net worth, vs. only 2 quarters for income –Recognizing these lags, consumer spending rises 0.8% for each 1% gain in time-weighted income, and 0.2% for each 1% gain in time-weighted net worth Consumer Spending As Previously Forecast, Consumers Have Temporarily Saved More to Rebuild Wealth Source: Parthenon analysis; Bureau of Economic Analysis History Forecast Saving will be increased until 2011 History Forecast $50K$100K$200K$500K1973Q11974Q11975Q11976Q11977Q11978Q11979Q11980Q11981Q11982Q11983Q11984Q11985Q11986Q11987Q11988Q11989Q11990Q11991Q11992Q1199Q11994Q11995Q11996Q11997Q11998Q11999Q12000Q12001Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q1Inflation-Adjusted Net Worth per Household(Thousands of $US) Consumer Spending The Decline in Net Worth Captures a Bubble Pop, But Still Reflects Long-Term Growth Note: Axes on logarithmic scale Source: Parthenon analysis; Bureau of Economic Analysis 2% Real Growth at Major Recession Troughs History Forecast $50K$100K$200K$500K2002Q12002Q32003Q12003Q32004Q12004Q32005Q12005Q32006Q12006Q32007Q12007Q32008Q12008Q32009Q12009Q32010Q12010Q32011Q12011Q3201Q12012Q32013Q12013Q32014Q12014Q32015Q12015Q3Inflation-Adjusted Net Worth per Household(Thousands of $US) Net Worth per HouseholdTrendthrough'75and'82recessiontroughs Consumer Spending Almost Half of the Maximum Peak-to-Trough Wealth Destruction Has Been Reversed Already Note: Axes on logarithmic scale Source: Parthenon analysis; Bureau of Economic Analysis •The peak-to-trough loss was 34% (’07 Q1 to ’09 Q1) •As of 2010 Q1,the loss is 19%, returning us to the ‘03 Q4 wealth •In 2 years, the past peak should be re-established Agenda •GDP & Unemployment: Macroeconomic Setting •Consumer Spending •Questions on Saving Behavior •Consumer Microeconomics •Inflation •Consumer Survey •Backup Negative GDPGrowth -20% -10% 0% 10% 20% 30% -20% -10% 0% 10% 20% 30% 1929193019321934193619381940194219441946194819501952195419561958196019621964196619681970197219741976197819801982198419861988199 199219941996199820002002200420062008SavingsRateandAnnualGrowthinRealGDP2009SavingsRateRealGDPGrowth The Personal Saving Rate Fell Early in the Depression (Necessities Had to Be Bought), Then Recovered; Rationing Propelled Saving in WW II, Followed by a Gradual Savings Rise Until 1982 Personal Saving Rate and Periods of Recession, 1929-2009 The current recession does not display the same pattern of desperate consumerspending as the recessions in the first half of the century Source: Bureau of Economic Analysis Saving Behavior Since WWII, Movements in Net Worth Have Materially Influenced Personal Saving 80848892961001042345678195219561960196419681972197619801984198819921996200020042008Spending/IncomeNetWorth/IncomeNetWorth/IncomeConsumerSpending/Income Note: Income Shown Here Is Official After-tax Personal Income For Americans, it’s pretty simple: if wealth is high, there is less need for savings to build “nest eggs” or for other purposes Source: Bureau of Economic Analysis This chart demonstrates a clear consumption-to-wealth elasticity or proportional response of 0.2 : 1 (The Net Worth / Income ratio is graphed against the larger right axis compared to the Consumption / Income ratio on the left. For example as wealth/income increased 25% from 4 to 5, consumption to income. increased 5% from .91 to 96) History Forecast 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 2005Q12005Q32006Q12006Q32007Q12007Q32008Q12008Q32009Q12009Q32010Q12010Q32011Q12011Q32012Q12012Q3CurrentCyclePriorCyclesCurrentAerageof3MajorCycles1990-911980-811974-75 Saving Behavior Therefore, in Recent Cycles, Saving Rates Have Been High During the Recession and Drifted Lower When Growth Resumed Personal Savings Rate: Past 3 and Current Business Cycles Note: The cycles are aligned on the first quarters of near zero real GDP growth versus a year earlier: the 1990-91 cycle alignment implies 2008 Q3=1990 Q4; the 1980-81 cycle alignment implies 2008 Q3=1980 Q2; the 1974-75 cycle alignment implies 2008 Q3=1974 Q1 Source: Parthenon Analysis; Bureau of Economic Analysis The savings rate rose approximately 3 percentage points in this cycle versus a more typical 1% rise Real GDP Below Prior year Saving BehaviorNet Worth Relative to Disposable Income Has Been Much More Volatile in The Current Cycle than in Past Cycles Real GDP Below Prior year 300% 400% 500% 600% 700% 300% 400% 500% 600% 700% 2005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q1RatioofNetWorthtoDisposableIncomeCurrentAverageof3MajorCycles1990-911980-811974-75 Ratio of Net Worth to Disposable Income: Past 3 and Current Business Cycles Note: The cycles are aligned on the first quarters of near zero real GDP growth versus a year earlier: the 1990-91 cycle alignment implies 2008 Q3=1990 Q4; the 1980-81 cycle alignment implies 2008 Q3=1980 Q2; the 1974-75 cycle alignment implies 2008 Q3=1974 Q1 Source: Parthenon Analysis; Bureau of Economic Analysis Current cycle volatility is many times as great as in recent cycles, but recovery began in 2009Q1 History Forecast History Forecast 0% 10% 20% 30% 40% 50% 60% 70% 80% 0% 10% 20% 30% 40% 50% 60% 70% 80% 1972Q11974Q11976Q11978Q11980Q11982Q11984Q11986Q11988Q11990Q11992Q11994Q11996Q11998Q12000Q12002Q12004Q12006Q12008Q12010Q12012Q1214Q1ConsumerSpendingas%ofIncomeorWealthConsumer Spending/ (GDP+Capital Appreciation) Consumer Spending/ Household Net WorthConsumer Spending/ GDP Saving BehaviorMoreover, The “Unaffordable,” Headline- Grabbing Rise of Consumer Spending/GDP Shrinks if Asset Income is Properly Recognized Consumer Spending Relative to GDP and Wealth 1972-2015F Source: Parthenon Analysis; Bureau of Economic Analysis Saving Behavior Appreciation of Equities and Real Estate Assets Should Be Recognized as Income When Computing Saving, But Is Not 024619591963196719711975197919831987199119951999200320072011AppreciatingAssets/IncomeRealEstate+Equity/Income,5yr.smoothingRealEstate+Equity/IncomeRealEstate(smoothed) Equities(smoothed) 01020304019591963196719711975197919831987199119951999200320072011AdAdjustedSavingRatetoReflectIgnoredIncomeOfficialSavingRateLog-runCapitalGain/OfficalIncomeAdjustedSaving/AdjustedIncome Asset AppreciationS&P 500Real Estate/HomeConsumer InflationS&P-InflationReal Estate- Inflation1959-20106.2%5.7%3.6%2.6%2.1% 1959-19844.2%6.8%4.7%-0.5%2.1% 1984-20108.2%4.5%2.5%5.7%2.0% Source: xxx If the Assets = 4 x Official Income, and Yield 6% , then Capital Gains = 24% of Official Income, and the Saving Rate is Dramatically Higher History Forecast History Forecast Saving Behavior Data and Conventional Wisdom Support Capital Gain Measurement for Equities and the Assumed Gain on Real Estate 0% 2% 4% 6% 8% 10% 12% 14% 16% 1959196319671971197519791983198719911995199920032007 Net Gains / IncomeNetCapitalGainsReportedtoIRS/Income •IRS net gains capture almost no home appreciation due to large exemptions, ignore gainsnever realized, and allow massive defferaluntil realization •Conventional wisdom and data regarding home prices = 2.5 x income supports the assumption of unrecognized gains on real estate equal to approximately 15% of income Net Capital Gains Relative to Income, 1969-2007 Source: IRS; Bureau of Economic Analysis Saving Behavior Debt Is Now Rising and Assets Are Appreciating 2009 2010 2011 2012 2013 2014 2015 08-15 59.6 64.5 64.5 51.4 54.8 62.6 68.0 73.7 Quintile 4 6.7 4.9 0.0 -13.1 3.4 7.8 5.5 5.6 Quintile 3 12.2 13.4 14.3 14.2 14.0 14.5 15.3 16.4 Quintile 2 1.1 1.3 0.9 -0.1 -0.2 0.5 0.9 1.1 Quintile 1 35.0 39.4 42.0 34.4 39.0 44.4 47.3 50.4 2.5 4.3 2.6 -7.6 4.7 5.4 2.9 3.1 36.7 38.6 36.8 31.2 29.7 32.6 36.0 39.7 5.4 1.8 -1.7 -5.6 -1.5 2.9 3.4 3.6 58.8 62.5 60.3 47.2 49.7 55.9 59.6 63.4 4.9 3.6 -2.2 -13.1 2.5 6.2 3.7 3.8 18.4 18.5 18.8 18.6 17.9 17.5 17.6 17.5 Q1 2010 Q1 2011 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2012 Household Net Worth Annual Change Household Liabilities Annual Change Household FinancialAssets Annual Change Household TangibleAssets Annual Change HH NetWorth ($2005) Annual Change Household ObligationsRatio Household obligations relative to net worth willcontinue to decline through 2012 Source: Global Insight Trillions of Dollars Agenda •GDP & Unemployment: Macroeconomic Setting •Consumer Spending •Saving Behavior •Consumer Microeconomics •Inflation •Consumer Survey •Backup 2.1% 2.53% 3.54% 4.55% 5.56% 6.57% 7.58% 8.59% 9.510.010.513% 13.5% 14% 14.5% 15% 15.5% 16% 16.5% 17% 17.5% 18% 18.5% 19.0% 19.5% 1999Q11999Q32000Q12000Q32001Q12001Q32002Q12002Q32003Q12003Q32004Q12004Q32005Q12005Q32006Q12006Q32007Q12007Q32008Q12008Q32009Q1209Q3DisountshareUnemploymentRateTrendat4%Unemployment Unemployment Rate vs. “Value Shopping” as a Percent of Core Retail In comparison to the last recession, the current shift to value shopping is proportional to the relative rise in unemployment: both are more than twice as great as during the 2000-2003 recession Unemployment Rate Wholesale Club and Discount DepartmentStore Share of Core Retail (excl. gasoline, motor vehicles, restaurants) Consumer MicroeconomicsThe Shift to Value Shopping Is a Normal Cyclical Response Source: Parthenon analysis; Bureau of Economic Analysis 1.6% 0.7% 6.1% Consumer MicroeconomicsIncome, Consumer Finances, and Psychology Drive Spending in Key Categories Such Food and Furniture Income Consumer Finances Consumer Psychology Source: Parthenon analysis; Bureau of Economic Analysis Sociology and Demographics Are An Added Key at the Micro Level Consumer MicroeconomicsFemale Labor Force Participation Has Importantand Opposite Effects on Restaurant vs. GroceryCategory Spending 20% 30% 40% 50% 40% 50% 60% 70% 80% 90% 100% 1960Q11962Q11964Q11966Q11968Q11970Q11972Q11974Q11976Q11978Q11980Q11982Q11984Q11986Q11988Q11990Q11992Q11994Q11996Q11998Q12000Q1202Q12004Q12006Q12008Q1FemaleWorkforceParticipationRateTotalRestaurantSpendasaPercentofTotalFoodSpendRestaurantSpendtoTotalFoodSendFemaleWorkforceParticipationRate Note: Total restaurant spend includes limited and full service restaurants; Female workforce participation rate includes all women ages 20 to 64 that are employed or actively seeking employment (unemployed) out of the total population of women ages 20 to 64 Source: U.S. Government Data The female participation rate flattened out in the 1990’s, leading to bettergrocery demand and more tempered growth in restaurant spending Restaurant vs. Total Food Spend andFemale Labor Force Participation, 2060-2008 Consumer MicroeconomicsNow, Both Grocery and Restaurant Spending Track Income, But Prices Are Also Important -5% 0% 5% 10% 15% 1988Q11989Q11990Q11991Q11992Q11993Q11994Q11995Q11996Q11997Q11998Q11999Q12000Q12001Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q1209Q1GrowthinIncomeandSpendingvs4QtrsAgoNominalIncomeRestaurantSpending(Nominal) GrocerySpending Source: U.S. Government Data Growth in Food Spending and Income, 1888-2009 Consumer MicroeconomicsKey Drivers of Grocery Expenditures Female Workforce Participation Rate Logged four-quarter average of percent of women ages 20 to 64 employed or actively searching (unemployed) A 1% increase cuts real full service grocery spending up by 0.6% Real Disposable Income Lagged disposable income relative to CPI A 1% increase in income drives real full service grocery spending up by 0.3% Household Assets-Debt Relative to Income Average of previous eight-quarters’ household net worth relative to income A 1% increase in assets drives real full service grocery spending up 0.2% Consumer Sentiment Lagged four-quarter average of the consumer sentiment index from the University of Michigan A 1% increase in consumer sentiment cuts real full service grocery spending up by 0.04% Grocery Price Relative to CPI Lagged grocery price index relative to CPI A 1% increase in grocery prices (relative to CPI) is associated with a decrease of 0.3% in real spending Grocery Price Relative to Restaurant Price Grocery price index relative to CPI A 1% increase in grocery prices relative to restaurant prices is associated with a decrease of 0.6% in real spending R-Squared 0.99 - - + + - - Driver Short-Term Drivers Unit of Measure Coeff. Sign Implication/Rationale Long- TermDrivers Price Source: Parthenon Grocery Model Consumer MicroeconomicsKey Drivers of Real Full Service RestaurantExpenditures Note: Impact represents extent to which the variable contributes to the annual change in real full service restaurant spending from 2009 to 2010 Source: Parthenon full service restaurant spend regression model Female Workforce Participation Rate Logged four-quarter average of percent of women ages 20 to 64 employed or actively searching (unemployed) A 1% increase drives real full service restaurant spending up by 1.2% Real Disposable Income Lagged disposable income relative to CPI A 1% increase in income drives real full service restaurant spending up by 0.6% Household Home Value Assets Relative to Income Average of previous eight-quarters’ logged household holdings of real estate and other nonfinancial assets relative to income (consists primarily of real estate holdings) A 1% increase in assets drives real full service restaurant spending up 0.2% Consumer Sentiment Logged three-quarter average of the consumer sentiment index from the University of Michigan A 1% increase in consumer sentiment drives real full service restaurant spending up by 0.02% Restaurant Price Inflation Relative to CPI Logged restaurant price index relative to CPI A 1% increase in restaurant prices (relative to CPI) is associated with a decrease of 0.2% in real spending R-Squared 0.99 + - + + + Short-Term Drivers Long- TermDrivers Price Driver Unit of Measure Coeff. Sign Implication/Rationale Consumer MicroeconomicsKey Drivers of Real Furniture and Accessory Spending Note: Impact represents extent to which the variable contributes to the annual change in real full service restaurant spending from 2009 to 2010 Source: Parthenon Furniture Model Real Disposable Income Current disposable income relative to CPI A 1% increase in income drives real full service restaurant spending up by 1% without much delay Real Household Net Worth Average of previous eight-quarters A 1% increase in assets drives real spending up 0.3% Home Sales Existing and New Over Prior 8 Quarters A 1% increase in sales drives real spending up 0.1% Consumer Sentiment Increase Change over 2 quarters A 1% increase in consumer sentiment drives real full service restaurant spending up by 0.04% Furniture Price Current furniture price index relative to CPI A 1% increase in restaurant prices (relative to CPI) is associated with a decrease of 1% in real spending R-Squared 0.99 + - + + + Short-Term Drivers Price Driver Unit of Measure Coeff. Sign Implication/Rationale Consumer MicroeconomicsGrocery Spending Is Expected to RecoverAs Prices Stabilize and Income Rises -2% 0% 2% 4% 6% 8% 200420052006200720082009201020112012201320142015Growth in Spending and Price GrocerySpendingGroceryPricingRealGrocerySpendingIncome History Forecast Source: Parthenon full service restaurant regression model Grocery Market Growth, 2004-2015F Consumer MicroeconomicsRestaurant Spending Is Expected to Recoverin 2011 As Prices Stabilize -4% -2% 0% 2% 4% 6% 8% 200420052006200720082009201020112012201320142015GrowthinSpendingandPricevs4QtrsAgoRestaurantSpendingRestaurantPricingRealRestauantSpend History Forecast Source: Parthenon full service restaurant regression model Restaurant Spending Growth, 1971-2015F History Forecast -10% -5% 0% 5% 10% -60% -40% -20% 0% 20% 40% 60% 200420052006200720082009201020112012201320142015 Growth in Furnitire Sales (Excluding Inflation) Growth in Housing Starts and SalesFurnitureSalesExistingHomesSoldNewHomesSoldHousingStarts Consumer Microeconomics As Housing Recovers, With a Lag So Will Furniture Markets Source: U.S. Government Data Housing Market and Furniture Market Growth, 2004-2015F Agenda •GDP & Unemployment: Macroeconomic Setting •Consumer Spending •Saving Behavior •Consumer Microeconomics •Inflation •Consumer Survey •Backup Unit Labor Costs -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 1995Q11996Q11997Q11998Q11999Q12000Q12001Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q1InflationRatesvsYeaAgoProductivityGrowthSalary,Benefits, andPayrollTaxesTotalComp. Incl.Bonuses InflationWith Labor Costs Falling, Large Government Deficits Will Not Create Problematic Inflation History Forecast Source: U.S. Government Data Inflation Rates and Compensation Growth, 1995 –2012F Inflation Rates and Pay Costs, 1995-2012F -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 1995Q11996Q11997Q11998Q11999Q12000Q12001Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q1InflationRatesvsYeaAgoGDPPriceIndexCoreCPI InflationCore Inflation Rates Will Recover to 2% Per Year Source: U.S. Government Data History Forecast Pay costs growth fell especially hard relative to theGDP deflator in 2009 and will continue to decline through 2010 Unit Labor Costs 0.00.51.01.52.02.5$0$2$4$6$81975Q11976Q11977Q11978Q11979Q11980Q11981Q11982Q11983Q11984Q11985Q11986Q11987Q11988Q11989Q11990Q11991Q11992Q11993Q11994Q11995Q1996Q11997Q11998Q11999Q12000Q12001Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q1PPIFarmProductsChemicalsanAlliedProductsAveragePriceofCrudeReceivedinRefineriesGDPPriceDeflatorExchangeRatePPIMetalsandMetalProducts Indexed to 1993=1 Weighted Average Price of Oil ($/Barrel) InflationCommodity Prices Surged and Declinedin the Last Four Years, Consistent withHistorical Patterns Source: Global Insight, BLS, IMF •All commodities are driven by three shared fundamentals: –Global economic activity –Exchange rate of dollar vs. other currencies –Trends in global GDP price inflation •As a consequence, there are often pronounced similarities in commodity price surges and corrections Exchange Rate and Prices of Key Commodities, 1975-2012 History Forecast Agenda •GDP & Unemployment: Macroeconomic Setting •Consumer Spending •Saving Behavior •Consumer Microeconomics •Inflation •Consumer Survey •Backup Consumer SurveyThe Number of Consumers Spending Less and Intending To Spend Less In The Future Increased Over The Past 6 Months 0% 20% 40% 60% 80% 100% Spending LessNo Impact – Spending theSameSpending Moren=1,500Spending LessNo Impact – Spending theSameSpending Moren=1,500Percentage of Respondents Impact on Current Spending Source: Consumer Survey (n=1,500) June 2009 January 2010 June 2009 January 2010 Spending Post-Recovery 0% 20% 40% 60% 80% 100% Will spend lessthan I did prior tothe recessionWill spend as Idid prior to therecessionWill spend morethan I did prior tothe recessionn=1,500Will spend lessthan I did prior tothe recessionWill spend as Idid prior to therecessionWill spend morethan I did prior tothe recessionn=1,500Percentage of Respondents Consumer Survey The Number of Consumers Indicating A Desire To Save More And Incur Less Debt Has Not Changed Over The Past 6 Months Source: Consumer Survey (n=1,500) 0% 20% 40% 60% 80% 100% Would Like ToSave More ThanI Used To PriorTo RecessionWould Like ToContinue SavingThe Same That IUsed To Prior ToRecessionWouldLikeToSaveLessThanIUsedToPriorToRecessionn=1,500Would Like ToSave More ThanI Used To PriorTo RecessionWould Like ToContinue SavingThe Same That IUsed To Prior ToRecessionWouldLikeToSaveLessThanIUsedToPriorToRecessionn=1,500Percentage of Respondents Desire to SavePost-Recovery Desire to Incur Debt Post-Recovery June 2009 January 2010 0% 20% 40% 60% 80% 100% Would Like ToIncur Less DebtThan I Used ToPrior ToRecessionWould Like ToContinue IncurThe SameAmount Of DebtAs Prior ToRecessionWouldLikeToIncurMoreDebtThanIUsedToPriorToTheRecession1,500Would Like ToIncur Less DebtThan I Used ToPrior ToRecessionWould Like ToContinue IncurThe SameAmount Of DebtAs Prior ToRecessionWouldLikeToIncurMoreDebtThanIUsedToPriorToTheRecessionn=1,500Percentage of Respondents June 2009 January 2010 Consumer SurveyConsumer Segments Show Meaningful Variation in Their Expectation of Future Behavior 0% 20% 40% 60% Unemployed45% Retired37% Empty Nesters54% Low Income39% Families44% Young w/oKids41% HigherIncome38% Top Earners33% Percentage of RespondentsJanuary 2010June 2009 Source: Consumer Survey (n=1,500) Percentage Of Consumers Expecting To Spend Less Post-Recovery, By Segment Consumer SurveyOverall, Expected Retirement Age Changes Have Not Shifted; Those Expecting Moderate Postponement (1- 4 years) Have Decreased In Favor Of No Change Source: Consumer Survey (n=1,500) 0% 20% 40% 60% 80% 100% Change in Expected Retirement AgeAdvanced10+YearsAdvanced 5-9 YearsAdvanced 1-4 YearsNo ChangePushed Back 1-4YearsPushed Back 5-9YearsPushed Back 10+ Yearsn=417Percentage of Total Change in Expected Retirement Age Due To The Recession, Only Respondents Over 55 Years Old 0% 20% 40% 60% 80% 100% Change in Expected Retirement AgeAdvanced10+YearsAdvanced 5-9 YearsAdvanced 1-4 YearsNo ChangePushed Back 1-4YearsPushed Back 5-9YearsPushed Back 10+ Yearsn=477Percentage of Total June 2009 January 2010 Consumer Survey Consumers Have Cut Back Most On Discretionary Categories, But Some Should See Strong Recovery Post-Recession 0% 10% 20% 30% 40% 50% 60% 70% 80% Eatingoutatsit- downrestaurants77% Jewelryandwatches72% Out-of-townvacations71% Eatingoutatfast- foodrestaurants70% Clothing/apparel70% Admissiontospectatoramusements70% Consumerelectronics66% Toys,dolls, andgames66% Cosmeticsandperfumes64% Shoes64% Furniture64% Beautyshops(salons,spas)64% Lotteriesandgambling61% Kitchenandotherhouseholdappliances60% Candy59% Sportingandfitnessequipment59% MagazinesandNewspapers58% Beer,Wine,AndDistilledSpirits54% Charitableandreligiousgiving52% Groceries50% Healthclubs45% Babyfood&apparel44% Personalhygiene,care, andbeautyproducts43% Householdcleaningproducts43% Non-prescriptiondrugs40% CellPhones(Devices)37% Petproducts&services29% HouseholdutilitiesPrescriptiondrugsPercentage of Respondents29% 19% Percent of Respondents Spending Less, January 2010 Percent of Respondents Continuing To Spend Less Post-Recovery, January 2010 Percent of Respondents Spending Less, June 2009 Note: Percentage spending less for each category does not include respondents who did not or are not currently buying these products Source: Consumer Survey (n=1,500) Consumer SurveyConsumers Have Cut Back Most On Discretionary, Non-Essential Categories; Some Should See Strong Recovery Post-Recession 0% 20% 40% 60% 80% 100% 51015202530Rank of Categories Where Consumers Expect To Increase Spending Most Quickly0Percentage of Respondents Currently Spending LessHealthclubsNon-prescriptiondrugsMagazinesandnewspapersCandySportingandfitnessequipmentBabyfood,apparelandotherproductsToys,dolls,andgamesHouseholdcleaningproductsCellPhonesPetproductsandservicesCosmeticsandperfumesLotteriesandgamblingJewelryandwatchesShoesrescriptiondrugsBeer,wine,anddistilledspiritsPersonalhygiene,care,andbeautyproductsBeautyshopsHouseholdutilitiesKitchen/householdappliancesFurnitureEatingoutatfast- foodrestaurantsConsumerelectronicsCharitableandreligiousgivingAdmissiontospectatoramusementsClothing/apparelGroceriesOut-of-townvacationsEatingoutatsit- downrestaurants Note: Percentage spending less for each category does not include respondents who did not or are not currently buying these products Source: Consumer Survey (n=1,500) Consumer SurveyConsumers Have Cut Back Most On Discretionary, Non-Essential Categories; Some Should See Strong Recovery Post-Recession 0% 10% 20% 30% 40% 50% 60% 70% 80% Eatingoutatsit- downrestaurants77% Out-of-townvacations71% Groceries50% Clothing/apparel70% Admissiontospectatoramusements70% Charitableandreligiousgiving52% Consumerelectronics66% Eatingoutatfast- foodrestaurants70% Furniture64% Kitchenandotherhouseholdappliances60% Householdutilities29% Beautyshops64% Personalhygiene,care, andbeautyproducts43% Beer,wine,anddistilledspirits54% Prescriptiondrugs19% Shoes64% Jewelryandwatches72% Lotteriesandgambling61% Cosmeticsandperfumes64% Petproductsandservices29% CellPhones37% Householdcleaningproducts43% Toys,dolls, andgames66% Babyfood,apparelandotherproducts44% Sportingandfitnessequipment59% Candy59% Magazinesandnewspapers58% Non-prescriptiondrugs40% Healthclubs45% Percentage of Respondents Currently Spending LessNote: Percentage spending less for each category does not include respondents who did not or are not currently buying these products Source: Consumer Survey (n=1,500) Rank of Categories Where Respondents Expect to Increase Spending Most Quickly Permanently Continuing To Try to Do This, January 2010 0% 10% 20% 30% 40% 50% 60% 70% Delaying purchasesof higherpriceditemsStayingat homemore toavoidspendingoutsideLooking for/ waiting forsalesUsingcouponsDoingthingsmyselfinstead ofpayingsomeoneCloselymonitoringandstickingto a budgetShiftingspendingto privatelabelproductsShiftingspendingto cheaperbrand nameproductsDoingresearchon whichproductto buyShiftingspendingto cheaperstoresUsing lowerquantities/ frequencyof productsPercentage of RespondentsCurrently Doing More as a Result of the Recession, June 2009Currently Doing More as a Result of the Recession, January 2010 Q: How are current economic conditions impacting how much you are doing the following things to save money? Consumer SurveyThe Prevalence Of Most Thrift Shopping Behaviors Has Decreased Over The Past 6 Months Note: Does not include respondents who do not engage in the respective thrift shopping behaviorSource: Consumer Survey (n=1,500) Permanently Continuing To Try to Do This, June 2009 Consumer Survey ~60% of Consumers Now Do More Product Research; Generally, Most Consumers Research Products That Cost More Than $50-$100 0% 20% 40% 60% 80% 100% AvoidbuyingsomethingIdonotneedFindthebestpriceFindoptionthatisbestsuitedtomyneedsOtherImproveunderstandingofproductfeaturesPercntageofTotal Most Important Reasons For Researching More Than Prior To The Recession Note: Percentage of Total does not include respondents who did not or are not currently researching products and services Source: Consumer Survey (n=1,500) 0% 20% 40% 60% 80% 100% $50$100$10$25$150$250$500PercentageofTotalPrice Thresholds For Additional Research n= 937 n= 1027 Consumer Survey Consumers Spend More Time Researching High-Ticket Items As well As Essential Categories Such As Groceries And Clothing 0% 10% 20% 30% 40% 50% Consumerelectronics41% Out-of-townvacations40% Groceries36% Clothing/apparel33% CellPhones(Devices)32% Kitchenandotherhouseholdappliances32% Shoes27% Eatingoutatsit- downrestaurants27% Personalhygiene,care, andbeautyproducts26% Furniture26% Admissiontospectatoramusements25% Householdutilities24% Cosmeticsandperfumes21% Eatingoutatfast- foodrestaurants21% Non-prescriptiondrugs21% Householdcleaningproducts21% Prescriptiondrugs20% Petproducts&services19% Charitableandreligiousgiving19% Toys,dolls,andgames19% Jewelryandwatches16% Sportingandfitnessequipment16% Beautyshops(salons,spas)16% MagazinesandNewspapers14% Beer,Wine,AndDistilledSpirits14% Healthclubs11% Candy11% Babyfood&apparel10% Lotteriesandgambling8% Percentage Spending More Time Researching Q:How are current economic conditions impacting the time you spend researching the following categories before you make a purchase, relative to a year ago? Note: Percentage researching more for each category does not include respondents who do not spend time researching products Source: Consumer Survey (n=1,500) Consumer SurveyWhen Researching Online, Consumers Mostly Use Reviews/General Information And Use Company, News, Or Review Websites For Decision Support 0% 20% 40% 60% 80% 100% Professional MediaReviewsOnline AdsUser-GeneratedReviewsGeneral Articles andInformationBrand-SponsoredGamesorEntertainmentOtherUser DiscussionForumsQ&A with BrandRepresentativePercentage of Total0% 20% 40% 60% 80% 100% CompanyWebsitesOnlineNewsReviewWebsitesSocialNetworkingSitesOnlineVideosMessageBoardsBlogsWikisProfessionalNetworkingSitesTwittrPodcastsPercentage of Respondents Who Have Used Online Media Q: To what extent have you used the following Social and Online Media to help you make purchase decisions? Note: Percentage of respondents researching does not include respondents who do not use online or social media for research purposesSource: Consumer Survey (n=1,500) 32% 29% 23% 25% 24% Q: How do you use Social and Online Media to support your purchase process? Consumer SurveyMost Consumers Will Continue Purchasing Private Label Products Post-Recession; PL Purchasing Is Prevalent For Groceries & Non-Prescription Drugs 0% 20% 40% 60% 80% 100% Current Purchasesof Private LabelYesNoFuture Purchasesof Private LabelWillpurchaselessprivatelabelproductsthanIdidpriortotherecessionWill not change myspending on privatelabel productsWill purchase more privatelabel products than I didprior to the recessionWillnotpurchaseprivatelabelproductsPercentage of All Respondents Private Label Purchasing Source: Consumer Survey (n=1,500) 0% 20% 40% 60% 80% 100% CategoriesHousehold cleaningproductsNon-prescriptiondrugsGroceriesOtherClothing/ apparelPersonal hygiene, care, and beauty productsPercentage of Total Mentions Prevalence of Private Label Purchasing By Category Permanently Continuing To Try to Do This, June 2009 0% 10% 20% 30% 40% 50% 60% 70% PersonalIndulgenceor RewardPremium BrandsNatural / OrganicSave meTime (fromhaving to doit myself) Green/ Good for theEnvironmentHealth & WellnessSafety and ControlPercentage of RespondentsCurrently Less Willing to Pay More For…, June 2009Currently Are Less Willing to Pay More For…, January 2010 Consumer SurveyConsumers’ Unwillingness To Pay For Certain Product Benefits Has Decreased –Most Notably for Natural/Organic Products Q: How are current economic conditions impacting your spending on products and services that provide the following benefits and/or have the following characteristics? Note: Percentage spending less for each category does not include respondents who have been and remain unwilling to pay moreSource: Consumer Survey (n=1,500) Permanently Continuing To Try to Do This, January 2010 Agenda •GDP & Unemployment: Macroeconomic Setting •Consumer Spending •Saving Behavior •Consumer Microeconomics •Inflation •Consumer Survey •Backup Supply of New Homes vs. Demands of Population Growth -1.0MM-0.5MM0.0MM0.5MM1.0MM1.5MM2.0MM2.5MM196119631965196719691971197319751977197919811983198519871989199119931995199719992001200320050072009201120132015HousingandPopulationGrowthinMillionsNetChangeinHousingStockHousingStartsPopulationAge22-84(dividedby1.8) BackupCurrent Housing Production is Far Below Demographic Needs, and When it Comes the Recovery Will Be Outsized Source: U.S. Government Data Housing Starts Need to Return to 1.7 million per Yearto Meet Population Growth and Normal Demolition of 0.3 Million History Forecast BackupAmerican Families and Our Middle Class: Doing Better than “Advertised” by Pundits and Politicians Source: Parthenon analysis; Bureau of Labor Statistics 0.70.80.91.01.11.21.31.41.51.61.71.81.92.019671971197519791983198719911995199920032007RealIncomesIndexedto1976=1.00Quintile1Quintile2Quintile3Quintile4Quintile50.80.91.01.11.220082009201020112012201320142015Real Incomes Indexed to 2008=1.00Quintile1Quintile2Quintile3Quintile4Quintile5 Real Consumer Incomes by Quintile, 1967-2015F Contrary to much public commentary: •Real income growth has been positive for all population segments in recent years (prior to recession) •Peak-to-peak, the real growth for the nation has been better than in the past BackupIncome Growth Acceleration Has Been the Greatest for the Lowest-Income Quintiles 2009 2010 2011 2012 2013 2014 2015 08-15 Quintile 5 -4.8% 1.2% 2.6% 2.5% 3.1% 3.2% 3.0% 1.6% Quintile 4 -3.7% 1.0% 2.0% 2.3% 2.7% 3.0% 2.9% 1.5% Quintile 3 -4.9% 0.3% 1.8% 2.1% 2.6% 2.9% 2.8% 1.1% Quintile 2 -5.7% 0.0% 1.6% 1.9% 2.6% 2.7% 2.6% 0.8% Quintile 1 -6.4% -1.4% 1.9% 3.1% 3.0% 3.3% 3.4% 1.0% Source: Parthenon analysis; Bureau of Labor Statistics 2014 2015 2009 2010 2011 2012 2013 Quintile 1 Quintile 5 Quintile 4 Quintile 3 Quintile 2 ‘08-‘15 Real Consumer Income Forecasted Growth Rates, 2009-15F Growthin Inflation-AdjustedHourly Compensation H F $1,000$2,000$5,000$10,000$20,000$50,000$100,000$200,0001967197019731976197919821985198819911994199720002003200620092012Quintile1ActualFittedModelQuintile2ActualQuintile3Actualuintile4ActualQuintile5Actual Backup Mean HH Income Models Source: Parthenon analysis; Bureau of Labor Statistics Actual vsModeled Mean HH Income by Quintile, 1967-2015F Mean HH Income BackupThe Foreign Exchange Value of the Dollar Erodes When the US Has High Inflation or Low Interest Rates Relative to Our Global Peers -5% 0% 5% 10% 15% 1980Q11982Q11984Q11986Q11988Q11990Q11992Q11994Q11996Q11998Q12000Q12002Q12004Q12006Q12008Q1PercentPeer Bond RateUS Bond RateInflation Excess: US - PeerReal Bond Differential US and Global Inflation and Interest Rates -6.0-4.0-2.00.02.04.06.00.40.60.81.01.21.41.61980Q11982Q11984Q11986Q11988Q11990Q11992Q11994Q11996Q11998Q12000Q12002Q12004Q12006Q12008Q1Freign Exchange Strength of $USReal Bond Differential$US Foreign Exchange ValueReal Bond Differential US Dollar Value Abroad vs Relative Interest Rates BackupThe Foreign Exchange Value of the Dollar Erodes When the US Has High Inflation or Low Interest Rates Relative to Our Global Peers -5% 0% 5% 10% 15% 1980Q11981Q11982Q11983Q11984Q11985Q11986Q11987Q11988Q11989Q11990Q11991Q11992Q11993Q11994Q11995Q11996Q11997Q11998Q11999Q12000Q1201Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q1PercentPeer Bond RateUS Bond RateInflation Excess: US - PeerReal Bond Differential US and Global Inflation and Interest Rates -6.0-4.0-2.00.02.04.06.00.40.60.81.01.21.41.61980Q11982Q11984Q11986Q11988Q11990Q11992Q11994Q11996Q11998Q12000Q12002Q12004Q12006Q12008Q1210Q12012Q1Foreign Exchange Strength of $USReal Bond Differential$US Foreign Exchange ValueReal Bond Differential US Dollar Value Abroad vs Relative Interest Rates Backup Deficits Need Not Create Inflation But It Will Eventually Mean Expensive Credit for Private Sector and Lower Living Standards -2% 0% 2% 4% 6% 8% 10% 196519681971197419771980198319861989199219951998200120042007DeficitInflation Inflation versus the Deficit as a Share of GDP: 5-Year Rolling Averages Monetary Policy Regimes Old Before 1980, there was a clear correlation between government deficits and subsequent national inflation; this has thoroughly disappeared since then .Economists have always known that liquidity finances spending, which tightens labor and product markets, and then creates inflation .However deficits don’t need to create excess liquidity: a deficit forces the central bank either to borrow through bonds or to print money. Borrowing soaks up liquidity, crowding out private spending; printing money creates inflation-generating liquidity -In the early 1980s, Paul Volcker refused to play the game (of printing money to finance deficits) and global central bankers followed. Neither President Reagan’s large deficits nor the Iranian Revolution oil price spike were accommodated by printing money -Similarly, the late 1990’s budget balancing didn’t create a liquidity shortage and deflation because government borrowing was reduced to make room for private borrowing New (Volcker + Post-Volcker) Percentage of GDP Source: Parthenon analysis; Federal Reserve Board; Bureau of Economic Analysis BackupThe Bureau of Economic Analysis TracksFood Spending Reliably, Offering aComprehensive View of the Market Note: Average quarterly growth calculated by taking the weighted average by annual revenue of quarterly comp sales and annualunit growth of top public FSR chainsSource: Nation’s Restaurant News; Company 10Ks; BEA -6% -4% -2% 0% 2% 4% 6% 8% 10% Q32007Q42007Q12008Q22008Q32008Q42008Q12009Q22009Q32009Q42009Growthvs.4QuartersPriorWinnDixieFSRComp+UnitGrowthGovt:FullServceRest.Spending(FSR) Govt:Grocery Winn Dixie Comp vs. Food Spending Growth 2007-2009 •Government Data Includes Growth in Stores, ‘Comps” Do Not •Focus on publicly traded dining chains overlooks the independent restaurants