US Economics Analyst

Issue No: 10/52

December 31, 2010
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Goldman Sachs Global ECS Research

at https://360.gs.com

10 Questions for 2011

We wish all our readers a happy, healthy, and A Surge in Organic Growth
prosperous 2011. In the last US Economics Percent change, annual rate Percent change, annual rate

Analyst of the year, we tackle what we believe 6 6

are the 10 most important questions on the *

4 4
Jan Hatzius economic outlook for the next year.
jan.hatzius@gs.com 2 2
212 902 0394 For the first time in five years, our one-year-
ahead forecast for real GDP growth is well 0 0
Ed McKelvey above the published consensus. The main
-2 -2
ed.mckelvey@gs.com reason is a slowdown in the pace of private
212 902 3393 sector deleveraging, which has become evident -4 -4
in a sharp improvement in the economic data Dec Dec
Alec Phillips 2009 2010
alec.phillips@gs.com
despite the loss of growth support from fiscal -6 Real GDP -6

202 637 3746 policy and the inventory cycle. The enactment -8
Real GDP Ex. Fiscal & Inv Ef f ects
-8
of the fiscal compromise has also helped. 2007 2008 2009 2010 2011
* 2010 Q4 estimated based on partial GDP tracking data.
Sven Jari Stehn One sector that is unlikely to show much Source: Department of Commerce. Our calculations.
jari.stehn@gs.com
212 357 6224
improvement yet is housing. We expect prices
to fall further and building activity to pick up Rate Hikes are a Long Way Off
Andrew Tilton only gradually. We also expect little help, on Percentage points Percentage points

andrew.tilton@gs.com net, from foreign trade, though the main reason 6 6

212 357 2619 for this is stronger growth in US demand. 4 4

David Kelley
Contrary to consensus expectations, core
2 2
david.kelley@gs.com inflation is unlikely to accelerate from current 2013Q1
212 902 3053 levels, which are the lowest in at least half a 0 0
century. Indeed, our central forecast is for a 2014Q4
Maria Acosta-Cruz slight further slowdown in core inflation to just -2 -2
maria.acosta-cruz@gs.com ½%. Because of the huge amount of excess
212 902 6709 “slack” in the economy, tail risks remain tilted -4 -4

to deflation rather than inflation. -6

Federal Funds Rate:
Actual -6
GS Taylor Rule
We now think that Fed officials will stop GS Taylor Rule, adj. f or Fiscal Policy & QE
-8 -8
expanding their balance in June 2011, i.e. after 02 04 06 08 10 12 14
the first $600 billion of “QE2.” However, Source: Federal Reserve Board. Our calculations.

further purchases are possible if inflation falls

further and/or the economy grows more slowly
than we now expect. In any case, we do not
expect any funds rate hikes in 2011 (and for
that matter in 2012).
Longer-term interest rates are likely to drift up
modestly, but we do not share the widespread
concern about a federal debt crisis. The state
and local crisis will linger, but we do not think
it will be severe enough to derail the recovery.
Important disclosures appear at the back of this document.
GS Global ECS US Research US Economics Analyst

I. 10 Questions for 2011

In the last US Economics Analyst of the year, we
tackle what we view as the 10 most important
questions on the economic outlook for 2011:
1. Will we finally see a “real” economic recovery?
Yes. For the first time in at least five years, our one-
year-ahead GDP growth forecast is well above the
published consensus, as shown in Exhibit 1. It is also
well above our estimate of the economy’s potential
growth pace of 2¾%.
What has made us so much more optimistic? Most
importantly, a sharp improvement in the economic
data. As shown in Exhibit 2, “organic” GDP
growth—that is, the change in real GDP excluding the
effects of inventories and fiscal policy—is on track for
Exhibit 1: Well Above Consensus for the First
Time in Years
Percent change
4 4
about a 5% (annualized) pace in the fourth quarter of
2010. This is the fastest organic growth pace since at
least 2006. It contrasts with the picture of a year ago,
when real GDP grew sharply but essentially all of the
growth was due to transitory factors. We believe that
the main reason for the improvement is a slowdown in
the pace of private sector deleveraging, via a decline
in the private sector financial balance—the gap
between the total income and total spending of
households and businesses—from the exceptionally
high levels reached at the end of the recession.
2. Will the housing market recover meaningfully?
No. The housing market is the only major sector of
the economy where the news over the past few months
has failed to improve materially. Indeed, it has gotten
a bit worse, and we now expect house prices to fall
another 5% during 2011. The reason is the still-large
excess supply, as we have only unwound about one-
third of the pre-bubble increase in the homeowner
Percent change
vacancy rate so far (see Exhibit 3).

3 3
In contrast to prices, housing starts should rise in
2011, though not yet at a pace that we would label
2 2
“meaningful.” In the most overbuilt parts of the
country, activity is so close to zero that further
1 1
declines are almost mathematically impossible. In
markets without a large supply overhang, in contrast,
0 0 building activity is likely to recover gradually
alongside the labor market and the broader economy.
-1 4-Quarter Average -1
Projected Growth: 3. Will the trade deficit shrink substantially?
Average Consensus
-2 -2 No. In the next few months, the deficit is likely to
GS Forecast
narrow a bit further as inventory accumulation slows
-3 -3 and the apparent seasonal adjustment distortions in the
06 07 08 09 10 11
petroleum import data abate. But over the year as a
Source: Blue Chip Economics. Our calculations.

Exhibit 3: Vacancies Still Quite High

Exhibit 2: A Surge in Organic Growth Percent Percent
Percent change, annual rate Percent change, annual rate 3.0 3.0
6 6 Homeowner Vacancy Rate*:
* 2.5
Current
2.5
4 4 Projected

2 2
2.0 2.0

0 0
2013 Q4
1.5 1.5
-2 -2

-4 -4 1.0 1.0
Dec Dec
2009 2010
-6 Real GDP -6

Real GDP Ex. Fiscal & Inv Ef f ects 0.5 0.5

-8 -8 65 70 75 80 85 90 95 00 05 10 15
2007 2008 2009 2010 2011 *Vacant homes for sale in percent of housing stock for owner occupation.
* 2010 Q4 estimated based on partial GDP tracking data. Source: Department of Commerce. Our calculations.
Source: Department of Commerce. Our calculations.

Issue No: 10/52 2 December 31, 2010

GS Global ECS US Research US Economics Analyst

Exhibit 4: Strong US Demand Usually Widens close as it ever was. The chart suggests that growth in
the Trade Deficit line with our forecast would almost certainly bring
down the unemployment rate meaningfully, although
Percent change, year ago Percent
the level will remain high for years.
12 -3

Real Broad Dollar 5. Will inflation move back toward 2%?

Depreciation of ~30% -2
8 No. In contrast to both the Federal Reserve and the
consensus of forecasters, we expect core inflation to
-1
stay well below 1%, and indeed see a small further
4
drop to ½%. The main reason is the still-large amount
0 of slack in the economy. For at least five decades,
0 core inflation has never risen when the unemployment
1 rate was above 8%, as shown in Exhibit 6. That is
obviously not a law of nature but nevertheless a neat
-4
2
illustration of the basic idea that the demand/supply
Real Domestic Demand (lef t)
balance matters for prices. And it illustrates that the
Net Export Contrib. to Real GDP Growth* (right, inverted)
risks remain tilted toward deflation rather than higher
-8 3
inflation, although neither is our baseline forecast.
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
* 4-quarter moving average.
Source: Department of Commerce. Our calculations.

Exhibit 6: Inflation Falls When Unemployment

whole, a meaningful improvement is unlikely. Exhibit is High
4 shows that strong domestic demand growth almost
5
always widens the trade deficit. The only exception in
Change in Core PCE Inf lation Over Next 2 Years
recent memory was the late 1980s, when the Fed’s 4 Annual Data,
real broad trade-weighted dollar index fell by nearly 1960-2007 Unemployment >
8% has meant
30%. While our foreign exchange strategists expect 3
declining inflation
the dollar to depreciate against most major currencies, for at least the
(percentage points)

2 next 2 years.
their forecast implies a trade-weighted drop of only
about 5%, probably not enough to make a significant 1
dent in the deficit when demand is strengthening. 0

4. Will the unemployment rate fall? -1

Yes. We expect a decline to 9% by the end of 2011 -2

and a further drop to 8¼% by the end of 2012. As
shown in Exhibit 5, the relationship between changes -3

in real GDP and changes in the unemployment rate— -4

known by economists as “Okun’s law”—remains as 3 4 5 6 7 8 9 10 11
Unemployment Rate
Exhibit 5: A Strong Link Between Growth and Source: Department of Labor. Department of Commerce.

Unemployment—Okun’s Law Lives!

Percent change, year ago Dif f erence, year ago Exhibit 7: A Surge in Profit Margins
10.0 -4 Percent of GDP Percent of GDP
Real GDP (lef t) 8 8
Unemployment Rate (right, inverted) Economic Prof its*
7.5
7 7
-2

5.0
6 6

2.5 0 5 5

0.0 4 4

2
3 3
-2.5

2 2
-5.0 4 50 55 60 65 70 75 80 85 90 95 00 05 10
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
*Af ter-tax corporate prof its adjusted f or depreciation and inventory
Source: Department of Commerce. Department of Labor. valuation distortions.
Source: Department of Commerce.

Issue No: 10/52 3 December 31, 2010

GS Global ECS US Research
Exhibit 8: Modest Inflation vs. Falling Labor
Costs—A Recipe for Higher Margins
Percent change, year ago Percent change, year ago
6 6
4 4
2 2
0 0
-2 GDP Price Index
Unit Labor Costs*
-4
90 92 94 96 98 00 02 04 06 08
*Nonf arm business sector.
Source: Department of Commerce. Department of Labor.
6. Will profit margins rise further?
Yes. To be sure, margins are already quite high by
historical standards. Exhibit 7 shows that the ratio of
after-tax economic profits to nominal GDP currently
stands at 5.6%, somewhat above the historical
average. Eventually, a combination of higher labor
costs, higher taxes, and slower top-line growth may
well push margins back toward the historical norm.1
In 2011, however, we expect profits to grow about
15%, more than three times as fast as nominal GDP,
as top-line growth accelerates and the high level of
unemployment keeps labor costs at bay. The best
macroeconomic predictor of changes in profit margins
is the gap between price inflation and unit labor cost
inflation. As shown in Exhibit 8, this measure still
points to an exceptionally favorable outlook for
corporate profits. Although the gap is set to shrink,
we do not see it closing until well after 2011.
7. Will QE2 end on schedule, i.e., in June 2011
with total holdings of $600bn?
Yes. Although Fed officials have promised to review
the “QE2” purchase program regularly, an early end is
unlikely barring a huge upside surprise in growth or
inflation. But what will happen after June?
Not too long ago, we thought that QE2 could total as
much as $2 trillion. But we have beaten a hasty
retreat from this forecast. If real GDP grows at a
3½%-4% pace in the first half of 2011, it is hard to see
1
Note the word “may” in this sentence. Arguably, the
rise of the BRICs or, more broadly, the increase in the
world’s effective supply of low-cost labor has boosted
the “equilibrium” level of profit margins. So we
would not be too dogmatic about the idea that profit
margins have to mean-revert, even in the longer term.
Issue No: 10/52
US Economics Analyst
a sufficiently strong push from Chairman Bernanke
and other senior FOMC members to overcome the
opposition from several regional Fed bank presidents
who never liked QE2 much in the first place. Our
forecast for 2011 looks quite similar to the Fed’s—in
hindsight, overly optimistic—view in early 2010,
when the committee was nowhere close to considering
further monetary easing but instead discussed the
timing of the eventual “exit.”
This does not mean that further QE is now out of the
question. If core inflation falls moderately further
than we expect—say to 0% rather than ½%—
Chairman Bernanke and others may press to keep
-2 buying after June to provide extra insurance against
deflation. At a minimum, this means the FOMC is
unlikely to “close the door” to further QE next spring.
-4
10
8. Will Fed officials start to “exit” from their
current policy stance by raising the funds rate or
shrinking their balance sheet?
No. Once again, we are puzzled by the consensus
among economic forecasters that rate hikes are right
around the corner. The most recent Blue Chip
Financial Indicators survey provides a stark
illustration. Out of 40 institutions that supplied
forecasts for the first quarter of 2012, only 9 predicted
a federal funds rate of 0.2% or less, i.e. more than
three-quarters thought that the funds rate would rise
from the current level.2
In our view, rate hikes by early 2012 are possible but
quite unlikely. This is partly because standard models
suggest that the “warranted” funds rate will remain in
negative territory for a much longer period. As shown
Exhibit 9: Rate Hikes Are a Long Way Off
Percentage points Percentage points
6 6
4 4
2 2
2013Q1
0 0
2014Q4
-2 -2
-4 -4
Federal Funds Rate:
-6 Actual -6
GS Taylor Rule
GS Taylor Rule, adj. f or Fiscal Policy & QE
-8 -8
02 04 06 08 10 12 14
Source: Federal Reserve Board. Our calculations.
2
We were not among the 40 respondents because the
survey was taken before we had rolled out our forecast
for 2012.
4 December 31, 2010
GS Global ECS US Research
in Exhibit 9, our forward-looking version of the
“Taylor rule” currently suggests that the first rate hike
should not occur until the fourth quarter of 2014.
Admittedly, this is too extreme as a prediction because
it does not take into account the impact of
unconventional monetary policy measures and/or the
unusually loose stance of fiscal policy. If we include
these two factors (crudely) via our measure of the
“overall macroeconomic policy stance,” the first rate
hike is indicated in early 2013. We readily admit that
these types of calculations are far from precise, but the
conclusion that it is difficult to justify hikes by early
2012 is fairly robust.
In any case, there are also more practical reasons to
doubt that Fed officials will raise the funds rate (or
sell assets) quite so soon. There are several things that
likely need to happen before the first rate hike. First,
Fed officials need to stop expanding their balance
sheet. Second, they need to stop reinvesting MBS
paydowns in Treasury securities. Third, they need to
drop the “extended period” commitment from the
FOMC statement.3 Fourth, they may want to drain
some of the excess reserves out of the banking system
(although we do not believe that this is necessary).
Could all of these steps occur in time to allow for a
rate hike in 2011 or early 2012? Yes. If inflationary
pressure rose quickly, the financial markets would
clamor for tighter policy, and Fed officials would of
course move more quickly. But this would require
economic outcomes that we find quite unlikely.
9. Will the 10-year Treasury note yield end 2011
above the current level of 3.4%?
Yes. We expect a moderate increase to 3¾% by the
end of 2011 and 4¼% by the end of 2012. The
“Sudoku” model constructed by our rates strategy
team suggests that the turn to above-trend growth in
the United States coupled with continued strong
momentum in the emerging world will outweigh the
slight further decline in core inflation and translate
into a gradual updrift in bond yields. Partly based on
the message from Sudoku, our strategists argued back
in October that 10-year yields were bottoming.
But given the scale of the recent selloff we are not
particularly bearish on bonds. Although we forecast
rising yields, the rise falls short of the forwards and
therefore implies that investors would be a bit better
off ex post investing in bonds rather than cash.
Why so tame an increase in rates? Mainly because the
inflation and credit fundamentals are likely to remain
3
Indeed, if the commitment has any value at all, this
probably needs to happen several months before the
first rate hike although this is not an absolute
requirement if the data surprise sharply on the upside.
Issue No: 10/52
US Economics Analyst
Exhibit 10: State and Local Receipts are Now
Rising
Percent change, year ago Percent change, year ago
12 12
Real State and Local Tax Receipts*
(4-quarter moving average)
8 8
4 4
0 0
-4 -4
-8 -8
70 75 80 85 90 95 00 05 10
* Current tax receipts divided by state and local GDP def lator.
Source: Department of Commerce.
more benign than many market participants now think.
In particular, we do not expect a meaningful increase
in concerns about a federal debt crisis. The deficit is
very large, and a credible plan for longer-term
consolidation would be very beneficial for US
economic performance. But there is still a lot of room
to maneuver for a government with the power to tax a
$15 trillion economy whose debt service payments
currently total just 1½% of GDP.
10. Will the state and local budget crisis derail the
recovery?
No. To be sure, the situation is unlikely to get better
quickly. State governments still need to cut spending
and raise taxes to offset the loss of federal stimulus
funds, and cities are likely to see their property tax
base shrink in lagged response to the house price
collapse—with property tax rates and other local fees
likely to move up in many jurisdictions. All told, state
and local cutbacks are likely to shave around ½
percentage point from growth in the next year, a
similar amount as in calendar 2010.4
But there is also some good news. Exhibit 10 shows
that real state and local tax receipts are now rising at a
solid pace. If the economy recovers in 2011-2012 as
we expect, this increase is likely to gather pace. And
while we cannot rule out a recurrence of high-profile
budget crises in some cases, we do not expect them to
cause a large tightening of broader US financial
conditions or derail the economic recovery.
Jan Hatzius
4
For more detail, see Andrew Tilton, “Amid Stronger
Growth, State and Local Drag Persists,” US
Economics Analyst, 10/50, December 17, 2010.
5 December 31, 2010
GS Global ECS US Research
II. Forecast Highlights
1. Real GDP grows well above its potential rate—
between 3% and 4%—over the next two years.
We estimate that real GDP is growing at a 3%
annual rate in the current quarter, and we think it
will accelerate to a 4% rate by the second quarter
of 2011. In 2012 we expect a modest slowing, to
3½% during the final three quarters of the year, as
the payroll tax cut is allowed to expire. In
contrast, we assume that the extended/emergency
jobless insurance programs will be renewed yet
again. On an annual average basis, we look for
real GDP to rise 3.4% in 2011 and 3.8% in 2012.
2. A gradual drop in the jobless rate, to 9% by
year-end 2011 and 8¼% by year-end 2012.
The persistence of above-potential growth over
the next two years should help reduce the rate of
unemployment visibly during this period. Against
our forecasted decline, the risks lie modestly to
the high side, especially if prospects of improved
job availability lure marginally attached workers
back into the labor force.
3. Stabilization in core inflation, at ½% per year.
Although margins of unused productive capacity
should diminish over the next two years, they are
apt to remain ample by historical standards. In
this regard, most measures of resource availability
(the official jobless rate and its many cousins,
capacity utilization in the factory sector, and
residential and nonresidential vacancy rates, to
name a few) show an unusually large amount of
excess capacity in the US economy at the present
time. As long as the jobless rate exceeds 8%, we
see little, if any, prospect of a sustained pickup in
core inflation over the succeeding two years. At
the same time, well-anchored inflation
expectations should keep core inflation from
falling further.
4. No Fed rate hikes before 2013. This is a close
call for 2012. However, with the jobless rate far
above the Federal Open Market Committee’s
“mandate-consistent” 5%-6% range and core
inflation well below the comparable “2% or a bit
less” standard and showing no signs of rising, we
think most FOMC members will think it
premature to start raising interest rates.
5. But extension of the $600bn in large-scale asset
purchases (LSAPs) is also unlikely. With real
GDP rising consistently above its 2½%-3%
potential rate, we think the FOMC will complete
but not extend the current program, especially
given the backlash that has greeted it.
Issue No: 10/52
US Economics Analyst
6. Yields on 10-year Treasury notes reach 3¾%
by year-end 2011 and 4¼% by year-end 2012.
As strong growth in global economic activity
keeps commodity prices under upward pressure,
many participants in the financial markets will
anticipate an earlier pickup in US (core) inflation
that is consistent with either our outlook or that of
most Fed officials. This is especially likely if the
dollar also depreciates, as we expect it will, or if
bank loans start to grow. In turn, these inflation
fears will feed expectations that tightening in US
monetary policy is just around the corner. While
we disagree with that view, we expect market
rates to rise in response, with increases tilted
toward the short end of the curve, where changes
in market expectations of monetary policy matter
more.
Economic Data Strong, for the Most Part
Economic news this week was sparse but generally
strong. The highlights came Thursday morning, with
the release of the weekly jobless claims report and
Chicago purchasing managers’ index.
New jobless claims fell to 388,000 in the week of
Christmas, the lowest level since July 2008. The
Labor Department indicated there were no obvious
distortions in the data, though big moves in holiday
weeks are always suspect. Given the East Coast
blizzard and New Year holiday, it will be a couple of
weeks before we have a “clean” reading on new
claims.
Meanwhile, the Chicago purchasing managers’ index
posted an unexpected surge to a 22-year high. With
other regional factory surveys sending a generally
upbeat message, we expect the Institute for Supply
Management’s monthly manufacturing index to rise to
57.5 in December. Pending sales of existing homes
posted a decent 3.5% gain after an increase of greater
than 10% in October.
Still, the week featured a couple of mild
disappointments. Consumer sentiment showed a
small setback in the Conference Board’s latest survey,
with perceptions of job availability still pessimistic.
And home prices fell even more than we’d expected,
with the Case-Shiller index now showing declines of
about 1% in both September and October.
The first week of 2011 features a busy schedule of
economic indicators, including the Institute for Supply
Management’s indexes, data on vehicle and same-
store retail sales, and the December employment
report.
6 December 31, 2010
GS Global ECS US Research US Economics Analyst

THE US ECONOMIC AND FINANCIAL OUTLOOK

(% change on previous period, annualized, except where noted)
2009 2010 2011 2010 2011 2012
(f) (f) Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
OUTPUT AND SPENDING
Real GDP -2.6 2.8 3.4 2.6 3.0 3.5 4.0 4.0 4.0 4.0 3.5
Consumer Expenditure -1.2 1.7 3.5 2.4 4.0 3.5 4.0 4.0 3.5 3.5 3.5
Residential Fixed Investment -22.9 -2.9 5.1 -27.3 5.0 7.5 12.5 15.0 15.0 15.0 15.0
Business Fixed Investment -17.1 5.3 6.4 10.0 1.5 5.0 5.0 7.5 12.5 7.5 10.0
Federal Government 5.7 5.0 3.7 8.8 2.5 2.5 2.5 2.5 2.5 2.5 2.5
State and Local Government -0.9 -1.2 0.4 0.7 0.0 0.0 0.5 1.0 1.5 1.5 1.5
Net Exports ($bn, '05) -363.0 -441.4 -471.5 -505.0 -473.4 -452.5 -458.1 -475.3 -500.2 -515.3 -536.4
Inventory Investment ($bn, '05) -113.1 79.1 81.5 121.4 82.0 67.0 77.0 86.0 96.0 112.0 108.0
Industrial Production, Mfg -11.1 5.9 4.6 4.1 2.5 4.0 5.5 5.5 5.5 5.5 4.5
INFLATION (% ch, yr/yr)
Consumer Price Index (CPI) -0.3 1.7 1.7 1.2 1.2 1.6 2.0 1.9 1.5 1.1 1.0
Core CPI 1.7 1.0 0.7 0.9 0.6 0.9 0.8 0.6 0.5 0.5 0.5
Core PCE* 1.5 1.3 0.6 1.2 0.8 0.7 0.6 0.5 0.6 0.5 0.5
Unit Labor Costs -1.6 -1.4 0.2 -1.1 0.5 1.5 0.1 -0.1 -0.7 -0.6 -0.2
LABOR MARKET
Unemployment Rate (%) 9.3 9.7 9.3 9.6 9.7 9.6 9.4 9.2 9.0 8.8 8.6
FINANCIAL SECTOR
Federal Funds** (%) 0.12 0.15 0.15 0.19 0.15 0.15 0.15 0.15 0.15 0.15 0.15
3-Month LIBOR (%) 0.25 0.30 0.45 0.29 0.30 0.30 0.35 0.35 0.45 0.45 0.50
Treasury Yield Curve** (%)
2-Year Note 0.87 0.65 1.00 0.48 0.65 0.60 0.60 0.75 1.00 1.25 1.50
5-Year Note 2.34 2.00 2.25 1.41 2.00 1.75 1.75 2.00 2.25 2.50 2.75
10-Year Note 3.59 3.40 3.75 2.65 3.40 3.25 3.50 3.75 3.75 4.00 4.00
30-Year Bond 4.49 4.50 4.70 3.77 4.50 4.40 4.50 4.60 4.70 4.80 4.90
Profits*** (% chg, yr/yr) 5.1 20.5 15.5 16.2 14.0 15.0 15.5 16.0 15.5 11.0 10.5
_ _ _ _ _ _ _ _
Federal Budget (FY, $ bn) -1,416 -1,294 -1,300
FOREIGN SECTOR
Current Account (% of GDP) -2.7 -3.3 -3.2 -3.5 -3.2 -3.0 -3.1 -3.2 -3.4 -3.6 -3.8
Euro ($/€)** 1.46 1.30 1.50 1.31 1.30 1.40 1.45 1.48 1.50 1.50 1.50
Yen (¥/$)** 90 84 90 84 84 84 84 87 90 90 90
* PCE = Personal consumption expenditures. ** Denotes end of period. *** Profits are after taxes as reported in the national income
and product accounts (NIPA), adjusted to remove inventory profits and depreciation distortions.
NOTE: Published figures are in bold

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

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Issue No: 10/52 7 December 31, 2010

 US Calendar

Focus for the Week Ahead

■ Generally strong regional factory surveys point to a further increase in the Institute for Supply Management’s
December manufacturing index (January 3). Its nonmanufacturing counterpart should remain consistent with
healthy expansion in the rest of the economy (January 5).
■ We expect nonfarm payrolls to post a moderate gain of 100,000 in December, rebounding from a weak
November figure that was likely suppressed by seasonal distortions. Most forecasters expect an even bigger
rebound (January 7).
■ In addition to the release of the minutes from the December Federal Open Market Committee meeting, several
Fed officials will speak this week, with Chairman Bernanke testifying before Congress (January 4, 5, 7, 8).

Economic Releases and Other Events

Time Estimate
Date (EST) Indicator GS Consensus Last Report
Mon Jan 3 10:00 Construction Spending (Nov) +0.7% +0.2% +0.7%
10:00 ISM Manufacturing Index (Dec) 57.5 57.0 56.6
Tue Jan 4 10:00 Factory Orders (Nov) -0.5% -0.2% -0.9%
14:00 Minutes of December 14 FOMC Meeting
Lightweight Motor Vehicles (Dec) 12.4M 12.3M 12.3M
Domestic Motor Vehicles (Dec) 9.0M 9.2M 9.3M
Wed Jan 5 8:15 ADP Employment Change (Dec) n.a. +100,000 +93,000
10:00 ISM Nonmanufacturing Index (Dec) 56.0 55.5 55.0
13:00 KC Fed Pres Hoenig spks at Central Exchange; KC
Thu Jan 6 8:30 Initial Jobless Claims n.a. 400,000 388,000
8:30 Continuing Claims n.a. 4,080,000 4,128,000
9:15 GS Retail Index (Dec) n.a. n.a. +6.6%
11:00 Treasury 3, 10, 30-year Note Announcements
Fri Jan 7 8:30 Unemployment Rate (Dec) 9.7% 9.7% 9.8%
8:30 Nonfarm Payrolls (Dec) +100,000 +135,000 +39,000
8:30 Average Hourly Earnings (Dec) +0.1% +0.2% Flat
9:30 Bernanke testifies before Senate Budget Panel; DC
15:00 Consumer Credit (Nov) n.a. Flat +$3.4bn
16:30 Chicago Fed Pres Evans spks at Policy Forum; Denver
Sat Jan 8 16:30 Vice Chairman Yellen spks at Policy Forum; Denver

Issue No: 10/52 8 December 31, 2010