<#>

© 2011 Morningstar, Inc. All rights reserved.

From Slow Straggle to Steady Stride: A Hesitant Recovery Assumes New Cadence

Robert Johnson, CFADirector of Economic AnalysisFebruary 22, 2011robert.johnson@morningstar.com(312) 696-6103

2

Executive Summary

×Worst recession since the Great Depression, ended June 2009

×Growth during 2010 may have approached 3%, 3.5% to 4.0% for 2011

×Manufacturing slowed somewhat during the summer of 2010

×Services, consumer sectors need to take the stage

3

Executive Summary

×Below-average recovery so far

×Worry zones: European debt crisis, banks, real wages, geopolitical issues, emerging economies stall as in inflation accelerates

×Bullishness based on consumer, high productivity, limited declines in construction, exports to developing markets

×Market valuations no longer dirt cheap, but not outrageously priced

4

Hidden Potential for the Economy to Perform Better than Expectations

2010 (a) 2.9% growth, because:

×End of inventory draw-down

×Renewed auto production

×Bottom in residential construction

×Exports

My GDP View

Source: Morningstar

My Inflation Outlook

Inflation 2010 (a)1.4%

Inflation 2011 (e)2.0%

My Unemployment Outlook×Unemployment peaked

about 10.1%

×Current rate 9.0%

×Potentially under 9% by mid-2011

2011(e) 3.75% growth

5

Where Are We Now?

6

The Harder GDP Falls, the Higher It Bounces--Usually

Year After Bottom, 18 Month GDP

Growth Rate

Prior GDP Contractio

n

1981 11.7% -2.6%

1957 9.8% -3.7%

1953 9.5% -2.6%

1960 9.4% -1.0%

1969 8.8% -1.1%

1973 7.5% -3.2%

1990 4.8% -1.4%

2001 2.6% -0.3%

1980 1.4% -2.2%

Average 7.0% -2.0%

2007 4.5% -4.1%Source: BEA, Morningstar calculations.

7

Retail Spending the Most Typical of Past Recoveries

Source: St. Louis Federal Reserve, updated January 31, 2010

8

Consumer, Exports Drive GDP Overall% Contribution to GDP Growth by Category

Source: Bureau of Economic Analysis, Morningstar, updated January 28, 2011

RecoveryBegins Whole

Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Recovery

Consumer Goods 0.6 -0.7 1.6 0.4 1.3 0.8 0.9 2.3 2.0

Consumer Services -0.1 0.1 -0.2 0.3 0.0 0.8 0.7 0.8 0.6

Business Structures -2.3 -0.7 -0.4 -1.0 -0.5 0.0 -0.1 0.0 -0.5Equipment & Software -3.0 -0.3 0.3 0.9 1.2 1.5 1.0 0.4 1.5Residential Construction -1.3 -0.7 0.3 0.0 -0.3 0.6 -0.8 0.1 -0.1Inventory -2.4 -1.4 1.1 2.8 2.6 0.8 1.6 -3.7 1.3

Exports -4.0 -0.5 1.3 2.6 1.3 1.1 0.8 1.0 2.1Imports 6.6 2.1 -2.7 -0.7 -1.6 -4.6 -2.5 2.4 -2.5

Government -0.5 1.3 0.3 -0.3 -0.3 0.8 0.8 -0.1 0.3

Other -0.3

Total GDP Growth(annualized) -6.4 -0.8 1.6 5.0 3.7 1.7 2.6 3.2

Total Recovery GDP growth 4.5

Boxes are two best categories for the period

9

Double Dip Not Likely

×Consumers are the key driver, and they keep spending

×Average recovery lasts longer than four years

×Manufacturing always pauses at this stage of the recovery

10

The Consumer Drives the Economy

Source: Morningstar

Employment Expands

Consumer Spending Accelerates

Industrial Production Grows

Capital Spending Increases

11

Average Recovery Lasts About Five YearsRecovery Duration

Trough Peak Months Comment

Oct-49 Jul-53 45May-54 Aug-57 39Apr-58 Apr-60 24Feb-61 Dec-69 106Nov-70 Nov-73 36Mar-75 Jan-80 58Jul-80 Jul-81 12 Shortest

Nov-82 Jul-90 92Mar-91 Mar-01 120 LongestNov-01 Dec-07 73

Average 61 Average

Jun-09 Dec-10 18 Current

Source: National Bureau of Economic Analysis, Morningstar

12

Manufacturing: PMI Predicts More Recessions than Occur

Source: ISM, NBER, updated February 1, 2011

PMI Composite versus Recessions(Three Month Moving Average)

Stripes Equal Recessions

30

35

40

45

50

55

60

65

Jan 1990 Jan 1995 Jan 2000 Jan 2005 Jan 2010

13

Employment Poised for Improvement?

14

Source: Bureau of Labor Statistics, Morningstar, Jobs Lost Between 12/2007 and 6/2009

Employment Very Bad, Goods Producing Very Hard Hit

Jobs Lost During 2007 Recession (in 1,000s)

Employment DataService

ProducingGoods

Producing Government Total

Employment December 2007 93,618 21,956 22,377

137,951

Jobs Lost -3,916 -3,962 +346 -7.532

Percentage Decline -4.2% -18.1% +1.6% -5.5%

15

Initial Unemployment Claims: Breaking-Out?

Source: Bureau of Labor Statistics, updated February 10, 2011

Claims % of Covered Employment

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

16

Employment Growth Would Have Been Almost 1.6 Million Higher if Hours Worked Had

Remained Constant

Source: Bureau of Labor Statistics, Updated February 4, 2011

32.5

33.0

33.5

34.0

34.5

35.0

35.5

36.0

36.5

37.0

37.5

Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10

Hours

per W

eek

17

ISM Employment Data Points to Employment Recovery

Source: St. Louis Federal Reserve, Morningstar Industrials Team. Updated February 1, 2011

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

70.0

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010% Change Private Employment

PM

I E

mp

loy

me

nt

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

% C

ha

ng

e P

riv

ate

Em

plo

ym

en

t

PMI Employment Level Change Private Employment

18

Demand Deferred, Not Lost: The Rubber Band Effect

19

Starts Far Below Natural Demand, Improvement Stalled

Source: Census Bureau, Morningstar, updated February 17, 2011

Monthly Total Housing Starts (SAAR, thousands)

0

500

1,000

1,500

2,000

2,500

3,000

1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009

Red bar represents average natural demand, Morningstar estimate

20

Housing Affordability at Record High

Source: National Association of Realtors, updated February 1, 2011

Composite Housing Affordability Index(Median Income = Qualifying Income = 100)

80

100

120

140

160

180

200

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Ind

ex

Va

lue

21

Consumer Takes The Stage

Source: topnews.net.nz

22

Consumption Establishes Uptrend

Source: Bureau of Economic Analysis, updated January 31, 2010

Real Personal Consumption

9,1009,1259,1509,1759,2009,2259,2509,2759,3009,3259,3509,3759,4009,4259,4509,4759,500

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Millions

of $

ConsumptionBottom

23

Savings Rate Peaked for this Cycle?

0

2

4

6

8

10

12

14

% Sav

ings

Rat

e

Source: U.S. Bureau of Economic Analysis, updated January 31, 2011Red bars denote recession

24

Consumer Fixed Payments Improved Sharply

Financial Obligations Ratio

15.00

15.50

16.00

16.50

17.00

17.50

18.00

18.50

19.00

19.50

20.00

Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08

Average =17.2

Source: U.S. Federal Reserve, Morningstar, Updated December 21, 2010

25

Real Hourly Wages Looking Up Again

Source: Morningstar, Bureau of Labor Statistics, Bureau of Economic Analysis, updated January 31, 2011

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

1967 1972 1977 1982 1987 1992 1997 2002 2007

Real Hourly Wage Real Personal Consumption