Overview of the National Economy Dr. Todd M. Nesbit

1. Overview of the National Economy Dr. Todd M. Nesbit

2. 2 Overview Current Status of National Economy Total Output or Production (Real GDP) Labor Markets Prices and Inflation Federal Reserve Bank Policy Federal Budget Deficit Forecasted Trends for the National Economy Forecasted Employment for Erie County

3. 3 Total Output and Production 2005 Average: 3.2% 2006 Average: 3.3% 2007 Q1: 1.9% but rebounded in Q2 to 3.4% (average for 2007 of 2.65%).2005 Average: 3.2% 2006 Average: 3.3% 2007 Q1: 1.9% but rebounded in Q2 to 3.4% (average for 2007 of 2.65%).

4. 4 Labor Market Average since 1990: 5.5%Average since 1990: 5.5%

5. 5 Prices and Inflation Average annual inflation rates since 1990: Excluding Food and Energy: 2.79% All Items: 2.9% As of June: Excluding Food and Energy: 2.2% All Items: 2.7% Apr,May,Jun Average: 2.3%Average annual inflation rates since 1990: Excluding Food and Energy: 2.79% All Items: 2.9% As of June: Excluding Food and Energy: 2.2% All Items: 2.7% Apr,May,Jun Average: 2.3%

6. 6 Fed Funds Rate Reduced the target rate 13 times from January 3, 2001 to June 25, 2003. (6.5% to 1%) Increased the target rate 17 times from June 30, 2004 to June 29, 2006. (1% to 5.25%) Upside risks to inflation remains Fed�s primary concern even in light of major risk (among others) in the housing market. 1.) Housing slump: it will continue to hold back the economy in the near future, but not as bad as many investors fear. Increased frequency of mortgage delinquencies have been contained to the adjustable subprime mortgages (higher risk loans to people with not as good credit). Necessary correction to the market that must take its course; housing activity just now has returned to the levels of the late 1990s. The recent increase in housing construction in June should be short-lived based on the roughly 7% plunge in building permits. Primary reason for inflationary fears are the productivity losses. As worker productivity falls, firms must hire additional workers to produce the same level of output. As such, firms will increase their output prices. Productivity growth down to only 1% in Q1 of this year, down from 2% growth in 2005 and 2006 and even greater growth in the preceding years. Reduced the target rate 13 times from January 3, 2001 to June 25, 2003. (6.5% to 1%) Increased the target rate 17 times from June 30, 2004 to June 29, 2006. (1% to 5.25%) Upside risks to inflation remains Fed�s primary concern even in light of major risk (among others) in the housing market. 1.) Housing slump: it will continue to hold back the economy in the near future, but not as bad as many investors fear. Increased frequency of mortgage delinquencies have been contained to the adjustable subprime mortgages (higher risk loans to people with not as good credit). Necessary correction to the market that must take its course; housing activity just now has returned to the levels of the late 1990s. The recent increase in housing construction in June should be short-lived based on the roughly 7% plunge in building permits. Primary reason for inflationary fears are the productivity losses. As worker productivity falls, firms must hire additional workers to produce the same level of output. As such, firms will increase their output prices. Productivity growth down to only 1% in Q1 of this year, down from 2% growth in 2005 and 2006 and even greater growth in the preceding years.

7. 7 2007 National Forecast

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9. 9 Erie County Employment Forecast Ask the Magic 8-Ball

10. 10 Erie County Employment Forecast Erie Total Employment Service Sector Employment (78.1%) Wholesale trade and Retail trade (14.5%) Education and health care (19.2%) Leisure and hospitality (10.4%) Other Services (primarily finance, insurance, real estate and government) (33.9%) Goods Producing Sector Employment (21.9%) Includes manufacturing, construction, mining and natural resources Yellow percentages represent the preliminary numbers for June �07 Historical Percentages: Goods = 27.7% Services = 72.3% Whole & Retail Trade = 14.7% Ed and Health = 16.5% Leisure and Hospitality = 8.7% Other Services = 32.4%Yellow percentages represent the preliminary numbers for June �07 Historical Percentages: Goods = 27.7% Services = 72.3% Whole & Retail Trade = 14.7% Ed and Health = 16.5% Leisure and Hospitality = 8.7% Other Services = 32.4%

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