By: Anirban BasuSage Policy Group, Inc.

December 4, 2007

It was the Best of Times, Now What?

On Behalf of

FEI

University of Michigan Consumer Sentiment SurveySeptember 2001 through November 2007

65

75

85

95

105

Ind

ex: 1966Q

1=100

Source: University of Michigan; Dismal.com

Between Aug. 2005 and Sept. 2005, the consumer sentiment index dropped 12.2 points, the largest one-month decline sinceDecember 1980.

Retail & Food Services SalesJanuary 2001 through October 2007

Source: Dismal.com

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Year

to Y

ear

% c

han

ge

15-Year Fixed Mortgage Rates, January 1995 through October 2007

4%

5%

6%

7%

8%

9%

10%

Rate

Source: Freddie Mac

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

Jan-99

Sep-99

May-00

Jan-01

Sep-01

May-02

Jan-03

Sep-03

May-04

Jan-05

Sep-05

May-06

Jan-07

Sep-07

Th

ou

san

ds, S

AA

R

U.S. New Home SalesJanuary 1999 through September 2007

Source: Economy.com, Census Bureau

1,000

1,100

1,2001,300

1,400

1,500

1,6001,700

1,800

1,900

2,0002,100

2,200

2,300

Jan-99

Aug-99

Mar-00

Oct-00

May-01

Dec-01

Jul-02

Feb-03

Sep-03

Apr-04

Nov-04

Jun-05

Jan-06

Aug-06

Mar-07

Oct-07

New

Ho

usin

g S

tart

s (th

ou

san

ds)

U.S. New Residential Construction January 1999 through October 2007

Source: Economy.com

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Mill

ion

sU.S. Existing Home Sales

September 2001 through September 2007

Source: Economy.com

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

12-m

on

th n

et ch

an

ge

Change in Maryland Housing Units Sold January 2002 through October 2007

Source: Maryland Association of Realtors

2006 Residential Building Permits per 100 Households (2006 estimates) by select Regions

Region Permits per 100 Households

Las Vegas, Nevada 5.15

Raleigh-Durham, North Carolina 4.70

Loudoun County, Virginia 3.41

Phoenix-Mesa, Arizona 3.03

Richmond, Virginia 1.72

Northern Virginia 1.71

Washington, D.C.-MD-VA 1.39

Washington, D.C. without Loudoun County, VA 1.29

BW Corridor 0.96

Wilmington, Delaware 0.95

Baltimore, MD 0.80

Philadelphia, Pennsylvania 0.70

Pittsburgh, Pennsylvania 0.58

BW Corridor includes: Anne Arundel, Howard, Montgomery and Prince George’s counties

Source: U.S. Census Bureau

Current Hot Metro Housing Markets (154) Annual Existing Single-Family Home Price Appreciation

2007Q3 vs. 2006Q3

6% 10% 14%

Bismark, ND

Salt Lake City, UT

Yakime, WA

Binghamton, NY

Charlotte, NC

Beaumont, TX

San Jose, CA

San Francisco, CA

Spokane, WA

Farmington, NM

Median Sales Price Appreciation (% chng, yr ago)

Source: National Association of Realtors

Baltimore: 1.7% New York: -0.6%

Philadelphia: 2.9%

Boston: 0.6%

Washington, D.C.: 1.3%

U.S.: -2.0% in 2007Q3

Active Housing Inventory by Baltimore MSA Jurisdiction, October 2006 vs. October 2007

4,1894,484 4,627

5,977

3,701

4,632

1,197 1,298

1,8662,036

1,7732,037

621 671

70

1,070

2,070

3,070

4,070

5,070

6,070

Active In

ven

tory

AnneArundel

Balt. City Balt.County

Carroll Harford Howard QueenAnne's

Oct-06

Oct-07

Source: Maryland Association of Realtors

Maryland = October 2006: 40,083; October 2007: 49,136

Active Housing Inventory by Suburban MD Jurisdiction, October 2006 vs. October 2007

926 1,0211,308

1,6611,989

2,297

5,332

6,151

4,349

6,928

50

1,050

2,050

3,050

4,050

5,050

6,050

7,050

Active In

ven

tory

Calvert Charles Frederick Montgomery Prince George's

Oct-06

Oct-07

Source: Maryland Association of Realtors

Maryland = October 2006: 40,083; October 2007: 49,136

Mortgage Banker’s Association Delinquency Rates, Prime Mortgage Loans, 2005Q1 – 2007Q2

1.7%

2.2%

2.7%

3.2%

3.7%

4.2%

4.7%

Delin

qu

en

cy R

ate

Fixed Rate Mortgages

Adjustable Rate Mortgages

Source: Economy.com

Mortgage Banker’s Association Delinquency Rates, Subprime Mortgage Loans, 2005Q1 – 2007Q2

7.6%

9.6%

11.6%

13.6%

15.6%

17.6%

Delin

qu

en

cy R

ate

Fixed Rate Mortgages

Adjustable Rate Mortgages

Source: Economy.com

NYMEX Crude Oil Future Prices in U.S. DollarsJanuary 1995 through November 20, 2007

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Do

llars

per

Barr

el

Source: Energy Information Administration

U.S. Personal Savings Rate vs. NYMEX Crude Oil Prices, 2002 through 2006

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Pers

on

al S

avin

gs a

s %

of In

co

me

0

10

20

30

40

50

60

70

80

$ p

er b

arre

l

Savings Rate Crude Oil Prices

Source: Bureau of Economic Analysis; Energy Information Administration

0% 5% 10% 15%

Energy

Transportation

Medical Care

Food & Beverages

Other Goods & Services

All Items

Housing

Education & Communication

Recreation

CPI for all Urban Consumers, 12-Month % Change

CPIOctober 2007

Source: Bureau of Labor Statistics

CPI : +3.5%

Core CPI*: +2.1%

*Core CPI: All items less food and energy

U.S. Trade Deficit, January 2001 through September 2007

-$80

-$70

-$60

-$50

-$40

-$30

-$20

-$10

$0

Valu

e ($b

illio

ns)

Source: Dismal.com

Value of the Dollar (Broad Dollar Index) January 1999 through October 2007

95

100

105

110

115

120

125

130

Bro

ad

Do

llar

Ind

ex (Jan

. 1997=100)

Broad Dollar Index: a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.

Source: Federal Reserve Board

U.S. Federal Budget Deficit, 1995-2010*

-$500

-$400

-$300

-$200

-$100

$0

$100

$200

$300

Valu

e ($b

illio

ns)

1995 1997 1999 2001 2003 2005 2007 2009

*2007-2010 data are projections

Source: Congressional Budget Office

Mr. Greenspan says….

• “When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign, for example in the U.S., profit margins…have begun to stabilize, which is an early sign we are in the later stages of a cycle”;

• “While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008…with some slowdown”.

Speech made February 26, 2007 at the VeryGC Global Business Insight Conference via satellite.

Source: The Wall Street Journal

Dow Jones Industrial Average January 2003 through November 23, 2007

$7,000

$8,000

$9,000

$10,000

$11,000

$12,000

$13,000

$14,000Jan

-03

Ap

r-03

Ju

l-03

Oct-

03

Jan

-04

Ap

r-04

Ju

l-04

Oct-

04

Jan

-05

Ap

r-05

Ju

l-05

Oct-

05

Jan

-06

Ap

r-06

Ju

l-06

Oct-

06

Jan

-07

Ap

r-07

Ju

l-07

Oct-

07

Do

w J

on

es In

dex V

alu

e

Source: Dow Jones

Gross Domestic Product1990Q1 through 2007Q3

-4%

-2%

0%

2%

4%

6%

8%

10%

1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1

An

nu

aliz

ed

% C

ha

ng

e f

rom

P

rec

ed

ing

Pe

rio

d

Source: Bureau of Economic Analysis

2007Q3: 4.92%

Contributions to GDP Growth by Component, 2007Q3

1.9%

1.4%

0.9%0.8%

0.0%

0.5%

1.0%

1.5%

2.0%

% c

ha

ng

e a

t a

nn

ua

l ra

tes

PersonalConsumption

Net Exports Gross Investment GovernmentSpending

Source: Bureau of Economic Analysis

Contributions to Gross Investment Growth by Component, 2007Q3

0.98%

-1.03%

0.51%

0.46%

0.97%

-0.06%

-1.4% -0.9% -0.4% 0.1% 0.6% 1.1%

Inventories

Residential

Equipment/software

Structures

Nonresidential

Fixed investment

% change at annual rates

Source: Bureau of Economic Analysis

Growth in Value of Private, Nonresidential Construction Put in Place, September 1994 through September 2007

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

yr-

over-

yr

% c

han

ge, S

AA

R

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: U.S. Census Bureau

Corporate Profits* (SAAR)2001Q1 through 2007Q3

$500

$700

$900

$1,100

$1,300

$1,500

$1,700

Co

rpo

rate

Pro

fits

($

bill

ion

s)

2001Q1 2001Q4 2002Q3 2003Q2 2004Q1 2004Q4 2005Q3 2006Q2 2007Q1

*With inventory valuation and capital consumption adjustments

Source: BEA

-400

-300

-200

-100

0

100

200

300

400

500Ja

n-0

0A

pr-

00

Jul-0

0O

ct-0

0Ja

n-0

1A

pr-

01

Jul-0

1O

ct-0

1Ja

n-0

2A

pr-

02

Jul-0

2O

ct-0

2Ja

n-0

3A

pr-

03

Jul-0

3O

ct-0

3Ja

n-0

4A

pr-

04

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-

05

Jul-0

5O

ct-0

5Ja

n-0

6A

pr-

06

Jul-0

6O

ct-0

6Ja

n-0

7A

pr-

07

Jul-0

7O

ct-0

7

Th

ou

san

ds, S

A

Between March 2001 and July 2002, the nation lost nearly 2.4

million jobs.

Source: Economy.com, Bureau of Labor Statistics

Net Change in U.S. JobsJanuary 2000 through October 2007

10/07: 166,000

Over the last 12 months(Oct. to Oct.) the U.S. added 1.676 million jobs

National Nonfarm Employmentby Industry Sector Groups

October 2007 v. October 2006Absolute Change

-203

-106

25

30

37

38

232

237

368

438

580

-300 -100 100 300 500 700

Manufacturing

Construction

Other Services

Natural Resources & Mining

Financial Activities

Information

Government

Trade, Transportation & Utilities

Professional & Business Services

Leisure & Hospitality

Education & Health Services

Thousands, SASource: Economy.com, Bureau of Labor Statistics

+1,676k All Told

Bush ScorecardPrivate Sector: +4,453,000 Public Sector: +1,497,000Total: +5,950,000

Maryland Nonfarm Employmentby Industry Sector Groups

October 2007 v. October 2006Absolute Change

-2,000

-400

800

800

1,100

3,000

3,700

5,900

6,900

9,200

-4,000 0 4,000 8,000 12,000

Manufacturing

Government

Information

Financial Activities

Other Services

Trade, Transportation & Utilities

Construction

Leisure & Hospitality

Educational & Health Services

Professional & Business Services

MD Total: +29.0K; +1.1%

US Total: +1,676K; +1.2%

Source: Bureau of Labor Statistics

Baltimore MSA Nonfarm Employmentby Industry Sector Groups (NSA)

October 2007 v. October 2006Absolute Change

-1,900

-100

300

400

1,100

1,200

2,600

2,900

3,100

3,300

-3,000 -1,000 1,000 3,000 5,000 7,000

Manufacturing

Information

Trade, Transportation & Utilities

Other Services

Construction

Financial Activities

Leisure & Hospitality

Professional & Business Services

Government

Educational & Health Services

Source: Bureau of Labor Statistics

Baltimore MSA Total:

+12.9K; +1.0%

MD Total: +29.0K; +1.1%

US Total: +1,676K; +1.2%

Washington, D.C. MSA Nonfarm Employmentby Industry Sector Groups (NSA)

October 2007 v. October 2006Absolute Change

-500

-200

1,500

2,300

2,300

2,800

3,500

4,600

5,400

20,200

-4,000 2,000 8,000 14,000 20,000 26,000

Information

Manufacturing

Educational & Health Services

Construction

Financial Activities

Government

Other Services

Leisure & Hospitality

Trade, Transportation & Utilities

Professional & Business Services

Source: Bureau of Labor Statistics

DC MSA Total: +41.9K; +1.4%

US Total: +1,676K; +1.2%

Office Space Under Construction in the Baltimore MSA, 2007Q3

648.6

554.0

515.3

505.9

354.6

30.4

0 100 200 300 400 500 600 700

Columbia

Baltimore City

BWI

Reisterstown Rd

Hunt Valley

Annapolis

Square Feet (thousands)

Total square feet under construction in the Baltimore MSA: 2,608,759

Source: CB Richard Ellis

Office Space Under Construction in the Washington, DC Metropolitan Area, 2007Q3

4,632.1

3,869.5

2,543.6

2,080.8

1,012.3

646.7

475.5

343.2

230.8

126.8

114.0

27.6

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000

Other Areas in District

Fairfax

DC Central Business District

Capitol Hill

Arlington

Loudoun

Alexandria

I-270 Corridor

Prince William

Frederick

Prince George's

Silver Spring

Square Feet (thousands)Source: CB Richard Ellis

Total square feet under construction in the Washington, DC MSA: 16,102,847

Unemployment Rates, U.S. States (SA) October 2007

Source: Bureau of Labor Statistics

Rank State Rate Rank State Rate Rank State Rate

1 Idaho 2.5 18 Iowa 3.9 33 Washington 4.8

2 Hawaii 2.7 19 Maryland 4.0 36 Rhode Island 4.9

3 Utah 2.8 20 New Jersey 4.1 37 West Virginia 5.0

4 South Dakota 2.9 20 Texas 4.1 38 Nevada 5.2

4 Wyoming 2.9 22 Florida 4.2 38 Wisconsin 5.2

6 Alabama 3.1 23 Massachusetts 4.3 40 Illinois 5.3

6 Montana 3.1 23 Vermont 4.3 41 Oregon 5.5

6 New Mexico 3.1 25 Oklahoma 4.4 42 California 5.6

6 Virginia 3.1 26 Pennsylvania 4.5 42 Kentucky 5.6

10 Nebraska 3.2 27 Indiana 4.6 42 Missouri 5.6

10 New Hampshire 3.2 27 New York 4.6 45 Arkansas 5.7

12 Louisiana 3.3 27 Tennessee 4.6 46 District of Columbia 5.8

13 Delaware 3.4 30 Connecticut 4.7 46 South Carolina 5.8

13 North Dakota 3.4 30 Georgia 4.7 48 Ohio 5.9

15 Arizona 3.5 30 Minnesota 4.7 49 Alaska 6.1

16 Colorado 3.7 33 Maine 4.8 49 Mississippi 6.1

17 Kansas 3.8 33 North Carolina 4.8 51 Michigan 7.7

* U.S. unemployment rate: October = 4.7%

Unemployment Rates (NSA), Maryland CountiesSeptember 2007

Rank County Rate

1 Howard 2.7

1 Montgomery 2.7

3 Calvert 2.8

4 Carroll 2.9

4 Frederick 2.9

6 Charles 3.0

6 St. Mary’s 3.0

6 Queen Anne’s 3.0

9 Anne Arundel 3.1

10 Talbot 3.2

11 Harford 3.5

12 Kent 3.6

Rank County Rate

12 Wicomico 3.6

Maryland 3.6

14 Baltimore 3.7

14 Worcester 3.7

16 Garrett 3.8

17 Prince George’s 3.9

18 Caroline 4.0

19 Cecil 4.2

20 Washington 4.4

21 Allegany 4.9

22 Somerset 5.2

23 Dorchester 5.8

24 Baltimore City 6.0

Source: Bureau of Labor Statistics

Conclusions

• Chance of recession in U.S. in 2008 approaching 20-40%;

• Various risks remain (oil/energy, the dollar, interest rates/subprime, and the flu);

• U.S. macroeconomic imbalances are huge and widening;

• The Federal Reserve Chairman will continue to face enormous pressure; and

• 2010 and 2011 will be huge years . . .

Thank You

• You can always reach me at abasu@sagepolicy.com

• You’ll be hearing a lot from us the balance of the year.

• Also, if you need us in a hurry, we are at 410.522.7243 (410.522.SAGE)

• Please contact us when you require economic research & policy analysis.