ECONOMIC OUTLOOK UPDATE

Transcription

1 ECONOMIC OUTLOOK UPDATE QUARTERLY 3Q 2015 ECONOMIC UPDATE AT A GLANCE The pace of U.S. economic growth slowed in the third quarter of GDP expanded at a rate of 1.5% in the third quarter, less than half of the previous quarter s rate of 3.9%, but in line with economists expectations. A reduction in companies inventory investments caused the sharp deceleration, with the inventory component of GDP experiencing its largest slowdown since the third quarter of With private inventory investment factored out of GDP, final sales grew at a rate of 3.0% in the third quarter after rising 3.9% in the second, a less dramatic deceleration. While consumer spending pulled back a little in the third quarter, it continued to be the main driver moving the economy forward. Residential investment, a proxy for the housing market, was also healthy. Business activity presented a mixed picture: Investment in equipment and intellectual property rose, but spending on structures fell. Government spending eased a bit but remained positive for the second consecutive month. There was little change in America s trade deficit, and net exports were only a slight drag on GDP. After remaining unchanged in July and August, the Leading Economic Index fell in September, dropping to its lowest reading of the past seven months. A weaker stock market and manufacturing sector, along with declining housing permits, caused the drop. Despite the lower September reading, the Conference Board found that the data continue to indicate that the U.S. economy will expand at a moderate level during the next several quarters. Measures of consumer confidence were mixed at the end of the third quarter. The Consumer Confidence Index rose for the second consecutive month in September as consumers assessed their present situations more positively. The improvement sent the Consumer Confidence Index to its second highest reading in eight years. The rise was Subscribers are permitted to quote all or parts of the Economic Outlook Update. Please see the Disclaimer and Copyright Permission Statement at the end of the report for the terms and conditions of this grant of permission. 3Q 2015 CONTENTS REVIEW OF AND OUTLOOK FOR THE U.S. ECONOMY ECONOMIC UPDATE AT A GLANCE ABOUT THE ANALYSIS IN THIS REPORT EXHIBIT 1A: Real Gross Domestic Product 1Q Q EXHIBIT 1B: GDP Components Contribution to GDP Rate EXHIBIT 2A: Historical Economic Data and Forecasts EXHIBIT 2B: Historical Energy Data and Forecasts EXHIBIT 2C: Global Real GDP Data and Forecasts GROSS DOMESTIC PRODUCT CONSUMER SPENDING EXHIBIT 3: Key Economic Variables Actual and Forecast EXHIBIT 4: Economic Indicators Historical Data GOVERNMENT SPENDING FIXED INVESTMENT BUSINESS INVENTORIES EXHIBIT 5: U.S. Retail and Food Service Sales EXPORTS AND IMPORTS CONSUMER PRICES AND INFLATION RATES ENERGY PRICES EXHIBIT 6: Consumer Price Index and Producer Price Index INTEREST RATES UNEMPLOYMENT AND PERSONAL INCOME INDEX OF LEADING INDICATORS EXHIBIT 7: U.S. Employment CONSUMER CONFIDENCE BUSINESS OPTIMISM EXHIBIT 8: Consumer Confidence and Small Business Optimism STOCK MARKETS AND VOLATILITY EXHIBIT 9: Stock Market Historical Data BOND MARKETS CONSTRUCTION EXHIBIT 10: Bond Market Historical Data EXHIBIT 11: Treasury Historical Data EXHIBIT 12: Prime Lending and Federal Funds Historical Data MANUFACTURING SERVICES REAL ESTATE EXHIBIT 13: Manufacturing, Services, and Housing Indicators.. 29 EXHIBIT 14: National Association of Realtors Market Forecast.. 32 EXHIBIT 15: Mortgage Bankers Association Market Forecast ECONOMIC OUTLOOK EXHIBIT 16: REIT Returns Historical Data EXHIBIT 17: Property Index Returns Historical Data Economic Outlook Update Data Sources DISCLAIMER AND PERMISSION STATEMENT Business Valuation Resources, LLC, (503) All Rights Reserved. 1

2 unexpected, as economists had forecasted the index to decline. On the other hand, the Consumer Sentiment Index fell in September for the third consecutive month. A declining stock market and worsened finances brought the Consumer Sentiment Index to an 11-month low. Business owner optimism was little changed in the third quarter, according to the Small Business Optimism Index, and confidence remained down from the levels seen at the end of 2014 and the beginning of The biggest mover in September was the component of the Small Business Optimism Index that measures whether business owners expect sales to be higher, which fell 6.0 points. The Wells Fargo/Gallup Small Business Index reading for the third quarter of 2015 lost ground, with the metric that measures how business owners regard their current revenue accounting for the majority of the downturn. Job growth continued in the third quarter, though the pace continued to be slow. The combined job growth of September and August together were the worst two consecutive months for job growth since December 2013 and January The unemployment rate was unchanged at its lowest level since April 2008, though the labor-force participation rate dropped to its lowest figure since October Both wages and the workweek for private employees retreated slightly in September. Both the manufacturing sector and services sector continued to expand in the third quarter, as measured by the Institute of Supply Management s respective indexes, though the pace of expansion in both sectors slowed. Regardless, both indexes remained at readings indicating that the U.S. economy continues to expand. Industrial production fell in September and August after rising in July. July marked the only month thus far in 2015 that industrial production has risen. Regardless, industrial production was up from one year ago. The output of utilities rose, but it was not enough to offset a decline in manufacturing and mining. The Federal Reserve maintained its decision to leave the target for the federal funds rate unchanged in the third quarter. It did, however, state that it would continue to assess labor market conditions and inflation expectations to determine whether raising the rate would be appropriate in the future. The Federal Reserve also continued its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities. The third quarter was a turbulent time for the stock market, and the major indexes all declined. VIX surpassed a reading of 40.0 in the third quarter, an indication that there was a large amount of volatility as a result of ABOUT THE ANALYSIS IN THIS REPORT A well-prepared business valuation contains a thorough and relevant economic section. Revenue Ruling requires consideration of the economic outlook in general and the condition and outlook of the specific industry in particular. An understanding of the economic outlook is fundamental to developing reasonable expectations about a subject company s future prospects. In any business valuation, the general economic outlook as of the appraisal date should be considered, since the national economic outlook is often the basis of how investors perceive alternative investment opportunities at any given time. Appraisers and analysts should integrate the information presented in the Economic Outlook Update with their valuation assignment and discuss how the economic information impacts their valuation assumptions and conclusions. In this analysis, we examine the general economic climate that existed at the end of the third quarter of This summary provides an overview of some selected economic factors that prevailed at that time as well as a discussion of the factors that are crucial over an extended time period. Topics addressed include general economic conditions, gross domestic product, consumer prices and inflation rates, energy prices, interest rates, unemployment, consumer spending, the stock and bond markets, construction, manufacturing, real estate markets, and the future economic outlook. Adam Manson Managing Editor Doug Twitchell Publisher David Foster CEO Lucretia Lyons President Retta Dodge Customer Service The Economic Outlook Update (ISSN ) is published monthly and quarterly by Business Valuation Resources, LLC, 1000 SW Broadway, Ste. 1200, Portland, OR, The annual subscription price for the Economic Outlook Update (EOU) is $339. Site licenses are available for those who wish to distribute EOU throughout their firms. Contact sales@bvresources.com or ext. 2 for details. Please also visit Although the information in this publication has been obtained from sources that BVR believes to be reliable, we do not guarantee its accuracy, and such information may be condensed or incomplete. This publication is intended for information purposes only, and it is not intended as financial, investment, legal, or consulting advice. No portion of this document can be republished without the express written consent of Business Valuation Resources, LLC. 2

3 EXHIBIT 1A: Real Gross Domestic Product 1Q Q % 5.0% 3.0% 1.0% Annual Growth Rate -1.0% -3.0% -5.0% GDP Growth Rate Moving Average (Four Quarters) Moving Average (Two Quarters) -7.0% -9.0% 1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009 4Q2009 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Source of data: U.S. Department of Commerce. Note: Figures are seasonally adjusted at annual rates. As the U.S. Department of Commerce issues revised data, some historically reported figures may change. EXHIBIT 1B: GDP Components Contribution to GDP Rate 6.0% Government Spending Net Exports 5.0% 4.0% Private Investment Consumer Spending GDP (% rate) 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% 4Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Business Valuation Resources, LLC, (503) All Rights Reserved. 3

4 investor uncertainty. The S&P 500 experienced its largest quarterly decline in four years as investors worried about a China-led global slowdown and a potential U.S. rate hike. The typically more volatile smaller-cap indexes fared even worse than mid- and large-cap benchmarks. The defensive utilities sector was the only S&P 500 sector to register a gain in the third quarter. Consumer prices fell in September and August, while producer prices dropped sharply in September after remaining unchanged in August. Declining gas prices dragged down both the Consumer Price Index and Producer Price Index in September. At the end of the third quarter, both the three-month and 12-month averages for the Consumer Price Index and Producer Price Index were negative. Housing starts rose in September, while building permits declined, though both remained well over their levels from a year ago. Builder confidence remained strong in the third quarter, with the Housing Market Index reaching its highest level since October Existing-home sales rebounded strongly in September after cooling off in August and have now increased year-over-year for 12 consecutive months. Pending home sales, on the other hand, slowed in both August and September, with the September reading being the second lowest in The national median existing-home price continued to rise in the third quarter, reaching year-over-year levels for the 43rd consecutive month. The Realtors Confidence Index report for current conditions showed that the market slowed for all three property types, but the report noted that this was seasonal and is normal for this time of year. EXHIBIT 2A: Historical Economic Data and Forecasts HISTORICAL DATA CONSENSUS FORECASTS** Real GDP* Industrial production* Personal consumption* Real disposable personal income* Nonresidential fixed investment* Nominal pretax corp. profits* Total government spending* NA NA NA NA Consumer price inflation* Month Treasury Bill rate Year Treasury Bond yield Unemployment rate NA NA NA NA Housing starts (millions) NA NA NA NA Source of historical data: U.S. Department of Commerce, U.S. Department of Labor, U.S. Census Bureau, and The Federal Reserve Board. Source of forecasts: Consensus Forecasts USA, September Notes: *Numbers are based on percent change from preceding period. Historic consumer price inflation, unemployment rate, 3-month Treasury rate, and 10-year Treasury yield are the annual averages. **Forecast numbers are based on percent change from preceding period (excludes unemployment rate, housing starts, 3-month Treasury rate, and 10-year Treasury yield). Consumer price inflation information is annual averages. The 2015 through 2019 forecasts for the 3-month Treasury rate and 10-year Treasury yield are for the end of each period. Forecasts for signify the average for that period. Personal consumption includes spending on services, durable, and nondurable goods. Nonresidential fixed investment is also known as business spending. Total government spending includes federal, state, and local government spending. Every month, Consensus Economics surveys a panel of 30 prominent United States economic and financial forecasters for their predictions on a range of variables including future growth, inflation, current account and budget balances, and interest rates. 4

5 EXHIBIT 2B: Historical Energy Data and Forecasts HISTORICAL DATA EIA FORECASTS % CHANGE Brent crude oil spot price* West Texas intermediate crude oil price* % 8.5% % 8.2% Heating oil retail price** % -2.8% Gasoline regular grade retail price** Electricity residential retail price*** Electricity commercial retail price*** Electricity industrial retail price*** Natural gas Henry Hub spot price**** % -1.7% % 1.1% % 2.3% % 1.7% % 8.5% Airline Ticket Price Index % 4.6% Producer Price Index: % 4.0% Petroleum Producer Price Index: all % 1.0% commodities Source of historical and forecast data: U.S. Energy Information Administration. Notes: *Dollars per barrel **Cents per gallon, U.S. average ***Cents per kilowatthour, U.S. average ****Dollars per million Btu EXHIBIT 2C: Global Real GDP Data and Forecasts HISTORICAL DATA WORLD BANK FORECASTS World High income United States Euro Area Japan United Kingdom Russia East Asia and Pacific Europe and Central Asia Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Source of historical and forecast data: The World Bank, June 2015 Forecast. Notes: Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights Business Valuation Resources, LLC, (503) All Rights Reserved. 5

6 1. GROSS DOMESTIC PRODUCT The Bureau of Economic Analysis reported that the nation s economy as indicated by GDP grew at an annual rate of 1.5% in the third quarter of This was consistent with forecasts, as a survey conducted by Bloomberg found that the median forecast of economists was a 1.6% rate. This was a sizable deceleration from the 3.9% growth in the second quarter. Companies decreasing their inventories dragged down the third-quarter GDP, with the inventory investment component of GDP seeing its largest slowdown since GDP is the total market value of goods and services produced in the U.S. economy and is generally considered the most comprehensive measure of economic growth. Final sales of domestic product rose in the third quarter, increasing at a rate of 3.0%. This came after a rate of 3.9% in the second quarter. Final sales are GDP minus the influence of private inventory investment, which tends to be volatile from quarter to quarter. The Economic Policy Institute has stated that final sales are arguably a better indicator of underlying economic strength than GDP. The increase in GDP in the third quarter was the result of positive contributions from consumer spending, state and local government spending, nonresidential fixed investment, exports, and residential fixed investment. The third-quarter GDP increase was partly offset by negative contributions from private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased. (See Exhibits 1A, 1B, 2A, and 4 for historic and forecasted GDP figures.) 1.1 CONSUMER SPENDING Consumer spending grew at a rate of 3.2% during the third quarter of 2015, a slight deceleration from the second quarter s pace of 3.6%. Consumer spending, also referred to as personal consumption, accounts for approximately 70% of the U.S. GDP. The third quarter s growth in consumer spending contributed 2.19 percentage points to the third-quarter GDP, somewhat less than its 2.42-percentage-point contribution in the second quarter. (See Exhibits 2A and 4 for historic and forecasted consumer spending figures.) EXHIBIT 3: Key Economic Variables Actual and Forecast Percent change per year Real GDP* Industrial production* Consumer spending* Consumer price inflation* Business investment* Source of historical data: U.S. Department of Commerce, U.S. Department of Labor, and The Federal Reserve Board. Source of forecasts: Consensus Forecasts. *Numbers are based on percent change from preceding period. Consumer price inflation information is annual averages

7 EXHIBIT 4: Economic Indicators Historical Data MONTHLY DATA 10/14 11/14 12/14 1/15 2/15 3/15 4/15 5/15 6/15 7/15 8/15 9/15 Real GDP Personal consumption Nonresidential fixed investment Total government spending Exports Imports CPI (1-month % change) Unemployment rate PMI NMI HMI Housing starts (millions) Building permits (millions) Notes: Real GDP and subcomponents data only available on a quarterly basis and therefore, are quarterly figures. GDP and its subcomponents, along with housing starts and building permits, are seasonally adjusted at annual rates. PMI is the Institute of Supply Management s Manufacturing Index any reading above 50.0% suggests growth in the manufacturing economy, whereas a reading below 50.0% indicates contraction. NMI is the Institute of Supply Management s Non-Manufacturing Index, which measures the strength of the services sector any reading above 50.0% suggests growth, whereas a reading below 50.0% indicates contraction. HMI is the National Association of Home Builders/Wells Fargo Housing Market Index any reading over 50 indicates that more builders view sales conditions as good than poor. QUARTERLY DATA 4Q 11 1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 3Q 13 4Q 13 1Q 14 2Q 14 3Q 14 Real GDP Personal consumption Nonresidential fixed investment Total government spending Exports Imports CPI (3-month % change) Unemployment rate PMI NMI HMI Housing starts (millions) Building permits (millions) Notes: Unemployment rate is the rate for the last month of the quarter. Housing starts and building permits are seasonally adjusted annual rates for the last month of the quarter. PMI, NMI, and HMI are readings from the last month of the quarter. GDP and its subcomponents, along with housing starts and building permits, are seasonally adjusted at annual rates. YEARLY DATA Real GDP Personal consumption Nonresidential fixed investment Total government spending Exports Imports Consumer Price Index Unemployment rate Housing starts (millions) Building permits (millions) Notes: Yearly Consumer Price Index rates and yearly unemployment rates are the annual average rates. Personal consumption includes spending on services and durable and nondurable goods. Government spending includes federal, state, and local government spending. As the government issues revised data, some historical reported figures may have changed. Source of data: U.S. Department of Commerce, U.S. Department of Labor, U.S. Census Bureau, The Federal Reserve Board, the Institute of Supply Management, and the National Association of Home Builders Business Valuation Resources, LLC, (503) All Rights Reserved. 7

8 Consumer spending on durable goods items meant to last three years or more, such as computers, cars, and machinery rose in the third quarter at a rate of 6.7%. This was a deceleration from the 8.0% rate in the second quarter. Consumer spending on nondurable goods items such as food and gasoline increased at a rate of 3.5% in the third quarter, compared with a rate of 4.3% in the second quarter. Service expenditures grew at a rate of 2.6% in the third quarter of 2015, nearly matching its rate of 2.7% in the prior quarter. Retail sales rose in September, after remaining unchanged in August. U.S. retail sales increased 0.1% in September, slightly below the median forecast of 0.2% in a Bloomberg survey of economists. Retail sales were up 2.4% from one year ago. Seven of the 13 major retail categories saw sales declines in September. Gas stations saw the largest decline, with sales plunging 3.2%, followed by miscellaneous stores, which fell 1.3%. The largest sales increase came from motor vehicle and parts dealers, where sales climbed 1.7%. Data from Ward s Automotive Group showed sales of cars and light trucks rose at an 18.1 million annualized rate in September, the best pace in a decade, after rising at a 17.7 million pace the prior month. Retail sales excluding autos fell 0.3% in September, the largest decline since January. Core retail sales fell 0.1% in September but were up 2.9% from one year ago. The core retail sales figure excludes sales of automobiles, gasoline, building materials, and food services and corresponds most closely with the consumer-spending component of gross domestic product. (See Exhibit 5 for total retail and food service sales figures.) 1.2 GOVERNMENT SPENDING Total government spending rose at a rate of 1.7% in the third quarter of 2015, slower than the rate of 2.6% in the prior quarter. The third-quarter increase in government spending added 0.30 percentage point to the third-quarter GDP rate. (See Exhibits 2A and 4 for historic and forecasted government spending figures.) Federal government spending rose at a rate of 0.2% in the third quarter, the fourth rise in the past 12 quarters. Federal government spending contributed 0.02 percentage point to the third-quarter GDP rate. National defense spending retreated 1.4% in the third quarter of This was in contrast to an increasing rate of 0.3% in the prior quarter. Defense spending has fallen in nine of the past 12 quarters. Federal nondefense spending grew at a rate of 2.8% in the third quarter, after declining at a rate of 0.5% in the second quarter. State and local government spending increased at a rate of 2.6% in the third quarter of 2015, its fifth advance in the last six quarters. The advance in state and local government spending made a 0.29-percentage-point contribution to the third-quarter GDP rate. 1.3 FIXED INVESTMENT Business investment, also referred to as nonresidential fixed investment, rose at a rate of 2.1% in the third quarter of This was a deceleration from the prior quarter when business investment grew at a rate of 4.1%. The growth in business investment added 0.27 percentage point to the third-quarter GDP. (See Exhibits 2A and 4 for historic and forecasted business spending figures.) Business spending on structures (nonresidential structures) fell at an annual rate of 4.0% in the third quarter of 2015, its fourth decline in the past six quarters. Business spending on equipment rose at a rate of 5.3% in the third quarter, after rising at a rate of 0.3% in the previous quarter. Business spending on intellectual property products rose for the ninth consecutive quarter, increasing at a rate of 1.8% in the third quarter. Spending on research and development accounted for the majority of the gain. Residential fixed investment, often considered a proxy for the housing market, grew at an annual rate of 6.1% during the third quarter of This was slower than the prior quarter s rate of 9.3%. The third quarter s growth in residential fixed investment added 0.27 percentage point to the third-quarter GDP. 1.4 BUSINESS INVENTORIES Businesses inventory investments decreased at a rate of $58.9 billion in the third quarter of This was the 8

9 EXHIBIT 5: U.S. Retail and Food Service Sales Total Retail Sales Past 24 Months $450 $440 Monthly Change Monthly Sales (billions) 2.0% 1.5% Total Monthly Sales (in billions) $430 $420 $410 $ % 0.5% 0.0% -0.5% Monthly Change $ % $ % Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Total Retail Sales Change From One Year Prior Past 24 Months With Averages 7.0% 6.0% Change From One Year Prior Change from Prior Year - 3 Month Average Change from Prior Year - 12 Month Average 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Source of data: U.S. Department of Commerce. Notes: Monthly retail and food services sale are seasonally adjusted. Continued on next page 2015 Business Valuation Resources, LLC, (503) All Rights Reserved. 9

10 EXHIBIT 5: U.S. Retail and Food Service Sales, Continued Total Retail Sales Monthly Change Since 2008 $ % $ % Total Monthly Sales (in billions) $420 $400 $380 $360 $ % 1.0% 0.0% -1.0% -2.0% Monthly Change $320 Monthly Change Monthly Sales (billions) -3.0% $300 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul % Total Retail Sales Percent Change From One Year Prior Since 2008 $ % $ % Total Monthly Sales (in billions) $420 $400 $380 $360 $340 Change From One Year Prior Monthly Sales (billions) 6.0% 3.0% 0.0% -3.0% -6.0% Change From One Year Prior $ % $ % Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Source of data: U.S. Department of Commerce. Notes: Monthly retail and food services sale are seasonally adjusted. 10

11 largest slowdown in inventory investment since the third quarter of The decline in inventory investments subtracted 1.4 percentage points from the third-quarter GDP, the biggest drag since the fourth quarter of EXPORTS AND IMPORTS The GDP report showed there was little change in America s trade deficit. Exports rose at a rate of 1.9% in the third quarter of 2015, after rising at a rate of 5.1% in the prior quarter. Exported goods grew at a rate of 0.7% in the third quarter, while exported services increased at a rate of 4.4%. Imports, which are a subtraction in the calculation of GDP, rose at a 1.8% rate in the third quarter after growing at a rate of 3.0% in the previous quarter. Imported goods moved up at a rate of 0.7% in the third quarter, while imported services increased at a rate of 6.6%. Net exports (the value of exports minus the value of imports) subtracted 0.03 percentage point from the thirdquarter GDP, after adding 0.18 points in the prior quarter. (See Exhibit 4 for historic export and import figures.) 2. CONSUMER PRICES AND INFLATION RATES According to the Bureau of Economic Analysis, the price index for gross domestic purchases rose 1.5% in the third quarter of 2015, comparable to the 1.4% increase in the previous quarter. The price index for gross domestic purchases measures prices paid by U.S. residents. Excluding food and energy prices, the price index for gross domestic purchases rose 1.6% in the third quarter, compared with an increase of 1.5% in the previous quarter. Consumer prices declined in September and August, both times mainly due to falling gas prices. The Consumer Price Index (CPI) moved lower by 0.2% in September, on a seasonally adjusted basis, its third decline so far this year. Over the last 12 months, CPI has remained unchanged. CPI is a measure of a basket of products and services including housing, electricity, food, and transportation and is used as a measure of inflation. CPI is comprised of three main indexes: the food index, the energy index, and the all items less food and energy index (also known as Core CPI ). Core CPI is a measure of inflation that excludes volatile food and energy costs. The energy index fell 4.7% in September, with all the major components declining. The gasoline index continued to fall sharply, dropping 9.0%. The energy index is down 18.4% from one year ago. The food index rose 0.4% in September and 1.6% over the past year. The food index has risen for four consecutive months. The index for food at home rose 0.3% in September, with the major grocery store food group indexes mixed. The food away from home index increased 0.5% in September, which was its largest increase since October Core CPI increased 0.2% in September, after rising 0.1% in both July and August. Core CPI has risen 1.9% over the past 12 months. (See Exhibits 2A, 4, and 6 for historic and forecasted CPI figures.) The Producer Price Index (PPI) fell 0.5% in September, on a seasonally adjusted basis, after remaining unchanged in August. PPI is down 1.1% over the past 12 months. PPI is a gauge of inflation in the manufacturing process that can be a precursor to inflation in consumer prices. PPI for final demand is comprised of two main indexes: final demand services and final demand goods. The index for final demand goods fell 1.2% in September, the index s largest decline since January. Over 80.0% of the decline was attributed to a decline in prices for final demand energy, which fell 5.9%. A 16.6% drop in the gasoline index was responsible for two-thirds of the decline in the energy index. The index for final demand services decreased 0.4% in September, breaking three months of gains. Approximately half of the increase in final demand services was traced to a 0.3% decline in prices for final demand services less trade, transportation, and warehousing. The index for final demand goods less volatile food and energy prices was unchanged in September, after falling 0.2% in August and remaining unchanged in July. The index for final demand goods less food and energy remained up 0.2% from one year ago. (See Exhibit 6 for historic PPI figures.) 3. ENERGY PRICES The Energy Information Administration (EIA) reported that the spot price for a barrel of West Texas Intermediate (WTI) crude oil was $45.06 at the end of the third quarter 2015 Business Valuation Resources, LLC, (503) All Rights Reserved. 11

12 EXHIBIT 6: Consumer Price Index and Producer Price Index 0.6% U.S. Consumer Price Index Past 24 Months 0.4% 0.2% 0.0% -0.2% -0.4% -0.6% Core CPI CPI -0.8% Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 U.S. Consumer Price Index Past 24 Months With Averages 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% -0.6% CPI CPI 3-Month Average CPI 12-Month Average -0.8% Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Source of data: U.S. Department of Labor. Note: Data are seasonally adjusted change from the prior month. Core CPI is the All Items Less Food and Energy Index. Core PPI is the Final Demand Goods Less Foods and Energy Index. Continued on next page 12

13 EXHIBIT 6: Consumer Price Index and Producer Price Index, Continued 0.6% U.S. Producer Price Index Past 24 Months 0.4% 0.2% 0.0% -0.2% -0.4% -0.6% -0.8% Core PPI PPI -1.0% Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep % U.S. Producer Price Index Past 24 Months With Averages 0.4% 0.2% 0.0% -0.2% -0.4% -0.6% -0.8% PPI PPI 3-Month Average PPI 12-Month Average -1.0% Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Source of data: U.S. Department of Labor. Note: Data are seasonally adjusted change from the prior month. Core CPI is the All Items Less Food and Energy Index. Core PPI is the Final Demand Goods Less Foods and Energy Index Business Valuation Resources, LLC, (503) All Rights Reserved. 13

14 of This was down from $59.48 per barrel at the end of the second quarter and much lower from one year ago, when the price was $91.17 per barrel. The regular retail gas price (conventional areas) was $2.25 per gallon at the end of the third quarter, below the price of $2.71 per gallon at the end of the previous quarter and down significantly from one year ago, when the price was $3.30 per gallon. The Henry Hub natural gas spot price was $2.47 per million Btu (MMBtu) at the end of the third quarter, up from $2.80 per MMBtu at the end of the previous quarter but well below the price of $4.14 per MMBtu from one year ago. (See Exhibit 2B for historic and forecasted energy price figures.) 4. INTEREST RATES The Federal Open Market Committee (FOMC) met twice during the third quarter of 2015, issuing a statement from each meeting. At both meetings, the FOMC reaffirmed its desire to keep its target for the federal funds rate near zero. The FOMC s goal with these decisions is to support its continued progress toward maximum employment and price stability. The federal funds rate is the interest rate at which a commercial bank lends immediately available funds in balances at the Federal Reserve to another commercial bank. The FOMC establishes a target rate and expands or contracts the money supply with the aim that the federal funds rate, a market rate, will approximate the target rate. The FOMC stated that it would continue to assess a wide range of information in maintaining its current target for the federal funds rate, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The FOMC said it would be appropriate to raise the rate when the labor market improves further and it appears evident that inflation will move closer to 2.0% over the medium term. The statements read that the economy expanded moderately during the quarter. It noted that both household spending and business spending increased, and the housing sector improved further. The FOMC did find that net exports continue to remain soft. Further, the labor market experienced solid job gains and declining unemployment. Inflation also continued to run below the FOMC s object, partly reflecting earlier declines in energy prices and decreasing prices of import. To maintain accommodative financial conditions, the FOMC maintained its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities. During the third quarter of 2015, the Board of Governors of the Federal Reserve left the discount rate unchanged, at 0.75%. The discount rate is the interest rate a commercial bank is charged to borrow funds, typically for a short period, directly from a Federal Reserve Bank. The board of directors of each Reserve Bank establishes the discount rate every 14 days, subject to the approval of the Board of Governors. 5. UNEMPLOYMENT AND PERSONAL INCOME Job creation continued in September, though gains were sluggish and weaker than forecast. The U.S. economy added 142,000 jobs in September, and the number of jobs created in the prior two months were both revised lower. August and September were the worst two consecutive months for job growth since December 2013 and January Despite the recent slowdown, the private sector has added 13.2 million jobs over 67 straight months of job growth, extending the longest streak on record. Employment rose in healthcare (+34,000), professional and business services (+31,000), retail trade (+24,000), food services and drinking places (+21,000), and information (+12,000). Employment continued to fall in mining, declining 10,000 in September. Mining is now down 102,000 jobs since December Employment in other major industries, including construction, manufacturing, wholesale trade, transportation and warehousing, financial activities, and government, showed little or no change over the month. The unemployment rate (also known as the U3 unemployment rate) was unchanged at 5.1% in September, the lowest since April The total number of unemployed persons was virtually unchanged in September at 7.9 million. The U3 unemployment rate is the official unemployment rate per the International Labour Organization definition and occurs when people who have actively looked for work within the past four weeks are still without jobs. The labor-force participation rate slipped 0.2 percentage point in September to 62.4%, the lowest rate since 14

15 October The employment-population ratio the share of the working-age population with a job edged down 0.1 point to 59.2%, after showing little movement in the first eight months of the year. The number of long-term unemployed (those jobless for 27 weeks or more) comprised 26.6%, or 2.1 million persons, of the total unemployed in September. On average, the unemployed were out of work in September 2015 for 26.6 weeks, compared with 32.1 weeks in September If the economy added 190,000 jobs a month, which is the average monthly rate of growth since the jobs recovery began in March 2010, then the Hamilton Project calculates that it will take until September 2017 to close the jobs gap left by the recession. As of September 2015, the U.S. had a jobs gap of 3.2 million jobs. The jobs gap is the number of jobs that the U.S. economy needs to create to return to prerecession employment levels while also absorbing the people who enter the labor force each month. At a pace of 229,000 jobs per month, which is the average growth rate over the last 12 months, the Hamilton Project calculates that it would take until April 2017 to fill the U.S. jobs gap. The Hamilton Project was launched in 2006 as an economic policy initiative at the Brookings Institution. The Hamilton Project is guided by an advisory council of academics, business leaders, and former public policymakers. The rate of another category of unemployment, U6, shed 0.3 percentage point in September to 10.0% and is down from the 11.3% rate from one year ago. U6 unemployment is broader than U3 and includes marginally attached workers and people who are looking for and want full-time work but have settled for part-time employment. Marginally attached workers are people who are not actively looking for work but who have indicated that they want a job and have looked for work (without success) sometime in the past 12 months. This class also includes discouraged workers, those who have completely given up on finding a job because they feel that they would be unable to find one. (See Exhibits 2A, 4, and 7 for historic and forecasted unemployment figures.) Both wages and the workweek for private employees retreated in September. Average hourly earnings for all private-sector employees declined one cent in September to $ Over the last year, average hourly earnings for all private-sector employees have increased 54 cents, or 2.2%. Average hourly earnings for private-sector production and nonsupervisory employees was unchanged in September at $ Over the last 12 months, average hourly earnings for private-sector production and nonsupervisory employees have increased 40 cents, or 1.9%. The average workweek for all private workers in September edged down 0.1 hour to The average workweek for production and nonsupervisory employees on private payrolls fell 0.1 hour to 33.6 hours. The manufacturing workweek decreased by 0.2 hours to 40.6 hours, while factory overtime retreated 0.2 hour to 3.1 hours. The Bureau of Economic Analysis reported that currentdollar personal income increased $171.6 billion in the third quarter of 2015, after increasing by $139.5 billion in the second. The BEA found that the acceleration in personal income primarily reflected an acceleration in wages and salaries and an upturn in farm proprietors income that were partly offset by a deceleration in personal interest income. Personal current taxes increased $15.8 billion in the third quarter, compared with an increase of $27.3 billion in the second. Disposable personal income increased $155.9 billion (+4.8%) in the third quarter, compared with an increase of $112.2 billion (+3.4%) in the second. Real disposable personal income rose 3.5% in the third quarter, compared with an increase of 1.2% in the second. Personal outlays increased $136.6 billion in the third quarter, a deceleration from an increase of $182.3 billion in the second. Personal saving disposable personal income less personal outlays was $636.7 billion in the third quarter, up from $617.5 billion in the second. The personal saving rate saving as a percentage of disposable personal income was 4.7% in the third quarter, up slightly from 4.6% in the previous quarter. 6. INDEX OF LEADING INDICATORS The Conference Board s Leading Economic Index (LEI) moved down 0.2 point in September, the largest decline for LEI in the past seven months. LEI had remained unchanged in August and July. The decline wasn t unexpected, but it was more than economists had predicted. While the financial indicators rose, it was not enough to offset the weakness in the stock market, the manufacturing sector, and housing permits. Still, the Conference 2015 Business Valuation Resources, LLC, (503) All Rights Reserved. 15

16 EXHIBIT 7: U.S. Employment U.S. Employment Past 24 Months 450 Nonfarm Payrolls Added 7.5% Nonfarm Payrolls (monthly increase, in thousands) Unemployment Rate (U3) 7.0% 6.5% 6.0% 5.5% Unemployment (percentage of labor force) 0 5.0% Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Nonfarm Payrolls (monthly increase, in thousands) Jun-15 Jul-15 Aug-15 Sep-15 U.S. Employment Past 24 Months With Averages Nonfarm Payrolls Added 3-Month Payrolls Average 12-Month Payrolls Average 0 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Source of data: U.S. Department of Labor. Notes: U3 is the official unemployment rate per the International Labour Organization definition and occurs when people are without jobs and they have actively looked for work within the past four weeks. U6 unemployment is broader than U3 to include marginally attached workers and people who are looking for and want full-time work but have to settle on part-time employment. Marginally attached workers are people who are not actively looking for work, but who have indicated that they want a job and have looked for work (without success) sometime in the past 12 months. This class also includes discouraged workers who have completely given up on finding a job because they feel that they just won t find one. Continued on next page 16

17 EXHIBIT 7: U.S. Employment, Continued U.S. Employment Since Nonfarm Payrolls Added 11.0% Nonfarm Payrolls (monthly increase, in thousands) Unemployment Rate (U3) 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% % Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Unemployment (percentage of labor force) Jul-15 U3 Unemployment Compared With U6 Unemployment Since % 16.0% Unemployment Rate (U6) Unemployment Rate (U3) (U6) Average (U3) Average 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Source of data: U.S. Department of Labor. Notes: U3 is the official unemployment rate per the International Labour Organization definition and occurs when people are without jobs and they have actively looked for work within the past four weeks. U6 unemployment is broader than U3 to include marginally attached workers and people who are looking for and want full-time work but have to settle on part-time employment. Marginally attached workers are people who are not actively looking for work, but who have indicated that they want a job and have looked for work (without success) sometime in the past 12 months. This class also includes discouraged workers who have completely given up on finding a job because they feel that they just won t find one Business Valuation Resources, LLC, (503) All Rights Reserved. 17