US Economics Analyst

Issue No: 11/52 December 30, 2011

FOR THOSE PERMISSIONED: Goldman Sachs Global ECS Research at https://360.gs.com

5 Questions for 2012

We wish all of our readers a happy, healthy, and prosperous 2012. Todays focus article discusses what we see as the 5 most important questions facing the US economy in the coming year.
Jan Hatzius jan.hatzius@gs.com 212 902 0394 Zach Pandl zach.pandl@gs.com 212 902 3393 Alec Phillips alec.phillips@gs.com 202 637 3746 Sven Jari Stehn jari.stehn@gs.com 212 357 6224 Andrew Tilton andrew.tilton@gs.com 212 357 2619 Shuyan Wu shuyan.wu@gs.com 212 902 3053 Maria Acosta-Cruz maria.acosta-cruz@gs.com 212 902 6709

Alternative Measures Suggest Q4 GDP Tracking May Overstate Growth

Percent change, annual rate 10 Current Activity Indicator* 8 Quarterly GDP Growth Quarterly GDI Growth 6 4 2 0 -2 -4 -6 -8 -10 2006 2007 2008 2009 2010 2011 2012 * First principal component of 25 weekly and monthly US activity indicators. Shaded area denotes recession. Source: Department of Commerce. GS Global ECS Research. Percent change, annual rate 10 11Q4 Tracking = 3.3% 8 6 4 2 0 -2 -4 -6 -8 -10

First, will US growth pick up to an abovetrend pace? We think not. Underlying growth is probably considerably weaker than implied by our 3.3% tracking estimate for Q4 GDP growth; tight oil supplies act as a speed limit for global growth; fiscal policy remains a drag on growth; and the spillovers from the European recession are likely to increase. Second, how much will the European crisis the biggest downside risksubtract from US growth? Our baseline estimate is 1 percentage point, but the uncertainty is large. On the one hand, we have not seen much impact yet. On the other hand, a failure of peripheral European economies to stabilize due to a paradox of thrift situation in both the public and private sectors poses a downside risk for Europe and ultimately also the United States. Third, will the US housing market bottom in 2012? We think yes. With excess supply diminishing gradually and valuations back to equilibrium, we expect the house price decline to end in 2012H2, although the recovery is likely to look very U-shaped. Fourth, will inflation be too high or too low by late 2012, relative to the Feds target? Too low, in our view. The commodity price impulse is waning and there is still plenty of excess capacity. We expect core inflation to fall back to 1% by yearend, clearly below the Feds implicit target. Fifth, will Fed officials ease further? We think yes, probably via purchases of agency MBS (and perhaps Treasuries) announced in the first half of the year. We also expect Fed officials to provide a forecast path for the funds rate and adopt an official inflation target at the January 24-25 FOMC meeting.

Core Inflation Likely to Ease

Percent change, year ago 4 Contributions to Core CPI Inf lation: Goods Shelter Services Ex-Shelter Core CPI 3 Fcast 3 Percent change, year ago 4

-1 2000

-1 2002 2004 2006 2008 2010 2012

Source: Department of Labor. GS Global ECS Research.

Important disclosures appear at the back of this document.

GS Global ECS US Research

US Economics Analyst

I. 5 Questions for 2012

In the last US Economics Analyst of the year, we tackle what we view as the five most important questions on the economic outlook for 2012. 1. Will US growth in 2012 pick up to an abovetrend pace? No. We expect growth in 2012 to look broadly similar to 2011. The healing from the imbalances built up in the bubble economy of the pre-2007 period continues, but real GDP is likely to increase at a slightly below-trend pace of 2% or so on a Q4/Q4 basis. However, growth in early 2012 is likely to be well below our current tracking estimate of 3.3% in the fourth quarter of 2011. First, expenditure-side GDP is a noisy signal of the economys growth trend, and we suspect the truth is considerably less positive. As shown in Exhibit 1, both our current activity indicator and income-side real GDP have been weaker than expenditure-side real GDP recently. Second, tight oil supplies are likely to act as a speed limit on global growth. The utilization of global oil production capacity is already well above normal levels, as shown in Exhibit 2. Our commodity strategists believe that utilization will rise further in 2012 as our global GDP growth forecast of 3% implies that oil demand will continue to grow a bit faster than oil production capacity. They believe that this tightening will push up crude oil prices further; perhaps more importantly, they see a significant risk of price spikes in response to news of weaker-thanexpected supply or stronger-than-expected demand. Exhibit 1: Alternative Measures Suggest Q4 GDP Tracking May Overstate Growth
Percent change, annual rate 10 Current Activity Indicator* 8 Quarterly GDP Growth Quarterly GDI Growth 6 4 2 0 -2 -4 -6 -8 -10 2006 2007 2008 2009 2010 2011 2012 * First principal component of 25 weekly and monthly US activity indicators. Shaded area denotes recession. Source: Department of Commerce. GS Global ECS Research. Percent change, annual rate 10 11Q4 Tracking = 3.3% 8 6 4 2 0 -2 -4 -6 -8 -10

Third, fiscal policy continues to be a drag on growth. Following the agreement to extend the payroll tax cut and emergency unemployment benefits for two monthsand assuming that most of these provisions will ultimately be extended for the full yearthe fiscal impulse is likely to be around -, not far from that seen in 2011. A more substantial fiscal tightening looms in 2013. And fourth, we expect more spillovers from the European crisis, as discussed next. 2. How much will the European crisis subtract from US growth? About 1 percentage point, but uncertainty is large. As shown in Exhibit 3, our baseline estimate is that Exhibit 2: Oil Capacity Runs Short
Million barrels per day 100 Ef f ective Global Oil Capacity 90 80 70 60 50 40 30 20 65 70 75 80 85 90 95 00 05 10 15 Note: Dashed lines represent f orecasts. Source: IEA. GS Global ECS Research. By 2013 the market is likely back to capacity constraints Global Oil Production 90 80 70 60 50 40 30 20 Million barrels per day 100

Exhibit 3: European Spillovers Likely to Grow

Percentage points 0.0 Cumulative Impact on Level of US Real GDP f rom Eurozone Financial Stress* Percentage points 0.0

-0.4

-0.4

-0.8

-0.8

-1.2

Average Impact**

-1.2

-1.6

-1.6

-2.0

-2.0 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2011 2012 2013 *From bank equity shock in Q2 and/or short-term f unding shock in Q3. ** Shaded area represents range of estimates f rom alternative models. Source: GS Global ECS Research.

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GS Global ECS US Research

US Economics Analyst

the European crisis will subtract around 1 percentage point from growth over the next year, on top of the point impact that we have probably already seen over the past few months. This consists of three effectsa direct trade effect worth percentage point or less, a tightening of financial market conditions worth - point, and a tightening of bank lending worth around point.1 However, the uncertainty around this baseline estimate is large. This is partly due to US-specific factors; the links between European economic developments, US financial conditions, and US economic activity are difficult to estimate with precision. But it is partly also because the outlook for the European economy itself is highly uncertain. Our European economists have argued that a resolution of the crisis will need to involve an implicit bargain between a mutualization of excessive debt stocks and commitment to future fiscal responsibility in the periphery. Our baseline forecast is that such a bargain will emerge in the course of 2012, albeit in more halting fashion than would be desirable for a forceful resolution of the crisis. However, even with such a bargain, the risk of economic and financial instability is unlikely to disappear quickly. Ultimately, fiscal sustainability requires a recovery in economic growth; otherwise, the primary budget and trade surpluses necessary to stabilize government and external debt/GDP ratios will be difficult to achieve. And there is a risk that the simultaneous pressure toward retrenchment in the public and private sector in the periphery will prevent such a recovery. In any given economy, there are three possible sources of demand: private domestic spending, government spending, and foreign spending. As a matter of accounting, or on an ex post basis, the financial balances between income and spending across these three sectors must add up to zero. But as a matter of economics, or on an ex ante basis, the financial balances need not add up to zero. And if all three taken together are trying to spend less than they earnthat is, if the ex ante balances add up to a number greater than zerothen the result will be a shortfall of demand relative to production. This means that production plans need to be revised downward, the labor market weakens, and income disappoints. The result is ongoing cyclical weakness in the economy.
1

Exhibit 4: A Simultaneous Public and Private Retrenchment in the Euro Area

Percent of GDP 10 European Periphery*: 8 6 4 2 0 -2 -4 -6 -8 -10 90 92 94 96 98 00 02 04 06 08 10 11E 14 12 * Greece, Ireland, Italy, Portugal, and Spain. Source: OECD. GS Global ECS Research.
Fiscal Cutbacks

Percent of GDP 10 Government Balance Private Sector Balance Current Account Tight FCI 8 6 4 2 0 -2 -4 -6 -8 -10

Exhibit 4 shows how the three financial balances have evolved over the past 15 years. The European periphery currently runs a general government deficit of about 5% of GDP, a private sector surplus of 1% of GDP, and an external deficit of 4% of GDP. Our concern is that both the government sector and the private domestic sector are likely to be a source of ex ante restraint for the foreseeable future, and the external sector is unlikely to provide enough of an ex ante boost to offset it. The prospect of upward pressure on the government balance (light gray bars in Exhibit 4) is obvious. Our European economists currently estimate that the peripheryGreece, Ireland, Italy, Portugal, and Spainis on track for an ex ante fiscal cutbacks of a little over 2% of GDP in 2012. We also expect upward pressure on the private sector balance (dark shaded bars in Exhibit 4). It is still quite low across the periphery, both relative to its own history and relative to other post-crisis economies such as the US, the UK, and Japan. This means that households and businesses are still not paying down debt and/or accumulating financial assets at a particularly rapid pace. Given the tightening of financial conditions in the European periphery, households and businesses may decide to retrench further. Meanwhile, a corresponding improvement in external demand (solid line in Exhibit 4) is unlikely. Real exchange rates across the European periphery remain overvalued as countries still struggle with the sharp increase in unit labor costs prior to the crisis, and external demand is neither growing quickly nor likely

See Andrew Tilton, Will the European Storm Cross the Atlantic, US Economics Analyst, 11/37, September 16, 2011, and Jan Hatzius, European BanksA Drag on US Growth? US Daily, December 13, 2011.

Issue No: 11/52

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GS Global ECS US Research

US Economics Analyst

to pick up significantly anytime soon. The fact that a drop-off in external demand was not part of the problem in triggering the downturn in peripheral economies in 2011i.e., that external demand is not particularly depressedmakes it less likely that a normalization in external demand will be part of the solution. The implication is that the euro area could suffer from a shortage of aggregate demand for a long time to come. As shown in Exhibit 5, our European economists forecasts imply a further decline in nominal GDP relative to its pre-crisis trend through 2013. The slump in nominal GDP is also likely to weigh on countries ability to reach their fiscal goals and retain their electorates support for unpopular fiscal measures. Although we believe that the European authorities in general, and the ECB in particular, will continue to support banks and government bond markets, the risk of renewed bouts of instability in the euro areaand larger spillovers to the rest of the worldtherefore remains quite high. 3. Will the housing market bottom in 2012? Yes. We believe that housing starts have probably bottomed already, while nominal house prices are likely to bottom in the course of 2012. This forecast mainly reflects the fact that there has already been a very large amount of adjustment. Housing starts are running at an annual rate of 600,000-700,000. As shown in Exhibit 6, we estimate that this is only about half the underlying demographic rate, which we calculate as the sum of the 10-year average rate of household formation and an assumed 300,000 demolition rate for existing homes. This estimate is likely to be conservative because household formation in recent years has been depressed by weakness in the labor market. If these cyclical factors diminish or reverse, we should see a significant pickup in household formation.2 Moreover, we estimate that home prices are now back in line with the underlying fundamentals such as income, population, the user cost of capital, and construction costs (see Exhibit 7). That said, there are substantial differences between metropolitan areas, with some (such as Detroit and Las Vegas) now well below equilibrium but others (such as Los Angeles and New York) still well above. Overall, we project a 2%-3% decline in nominal house prices through mid2012, followed by stabilization in 2013 and gradual recovery thereafter.

Exhibit 5: Nominal GDP in the Euro Area Far Below the Pre-Crisis Trend
Trillions of euros 12 Euro Area Nominal GDP: 11 10 9 8 7 6 5 1995 Actual Trend* GS f orecast 13% 10 9 8 7 6 5 2000 2005 2010 2015 11 Trillions of euros 12

*Estimated as level of nom GDP in 2005Q4 extrapolated backward at historical trend rate of 4% and extrapolated f orward at assumed 3.8%. Source: Eurostat. GS Global ECS Research.

Exhibit 6: Housing Starts Still Far Below the Demographic Demand for Homes
Millions 2.8 2.4 2.0 1.6 1.2 0.8 0.4 0.0 70 75 80 85 90 95 00 05 10 Housing Starts Demographic Demand f or Homes* Household Formation** Millions 2.8 2.4 2.0 1.6 1.2 0.8 0.4 0.0

* Household f ormation plus an assumed demolition rate of 300K per year. **10-year average change in number of households, break adjusted. Source: Department of Commerce.

Exhibit 7: Home Prices Back at Fair Value

Index 200 Case-Shiller Home Price Index: Actual 150 Estimated Equilibrium 150 Index 200

100 Forecast 50 2011Q2

100

50

See Zach Pandl, The Longer-Term Outlook for US Homebuilding, US Economics Analyst, 11/17, April 29, 2011.

0 0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: Moody's Analytics. GS Global ECS Research.

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GS Global ECS US Research

US Economics Analyst

Exhibit 8: Core Inflation Likely to Ease

Percent change, year ago 4 Contributions to Core CPI Inf lation: Goods Shelter Services Ex-Shelter Core CPI 3 Fcast 3 Percent change, year ago 4

5. Will the Fed ease further? Yes. We expect Fed officials to ease anew in the first half of 2012 via purchases of agency mortgage-backed securities, either on their own or combined with Treasuries. This forecast is based on our expectation that real GDP growth will slow to a below-trend pace and inflation will fall to a below-target rate in the course of 2012. With the level of output still far below potential, we believe that this would be a sufficient signal for Fed officials to decide to ease further. At a minimum, we believe Fed officials would be loath to end their securities purchases at the conclusion of operation twist in mid-2012, and additional purchases essentially require a balance sheet expansion. In addition, we also expect the FOMC to provide forecasts for the federal funds rate in the Summary of Economic Projections (SEP) published four times per year, starting at the January 24-25 meeting. More likely than not, the FOMC will also move from its current all-but-official inflation target of 2% or a bit less to an outright inflation target of 2%. These moves are somewhat independent of the shift to renewed QE. We view the funds rate forecasts as a sensible step, because they are likely to enhance the communication of the Feds reaction function to incoming information.4 We are less sure about the inflation target because it might be misinterpreted as a shift away from the employment part of the dual mandate. To counteract this impression, Fed officials are likely to emphasize that the inflation target is flexible and applies to the medium term, and also that unemployment remains far above their estimate of the structural rate. Although they are unlikely to go as far as to complement the official inflation target with an outright target for the unemployment rate, they might decide to state even more clearly that they aim for an unemployment rate in line with their estimate of the structural rate over the medium term. Our own view remains that a move to a nominal GDP level target, complemented with potentially large amounts of QE, would provide a greater chance to achieve the Feds dual mandate over time. But while we would not rule out such a move if the economy performs significantly worse than our forecast, we do not expect Fed officials to embrace such a seemingly radical option anytime soon.

-1 2000

-1 2002 2004 2006 2008 2010 2012

Source: Department of Labor. GS Global ECS Research.

4. Is US inflation likely to look too high or too low? Too low. Our baseline forecast is that core CPI and PCE inflation will fall back from around 2% year-onyear now to around 1% by the end of 2012. This would be below the Feds implicitand probably soon explicitinflation target of about 2%. Both a top-down and a bottom-up view point to lower inflation ahead. From a top-down perspective, the US economy remains far from full employment, and this is showing up in measures of overall labor costs such as average hourly earnings, the employment cost index, and unit labor costs. We believe that this weakness will also reassert itself in lower core price inflation over time. From a bottom-up perspective, our models suggest that the slowdown in commodity price inflation since the spring, the reversal of the auto price surge following the Japanese earthquake, continued high unemployment, and an end to the pickup in rent inflation are all likely to push down inflation over the next year (see Exhibit 8).3 The biggest risk to this view is probably another sharp increase in energy prices. Our commodity strategists point estimate that Brent oil prices will climb to $130/barrel would still be consistent with declining inflation pressure because it would imply a slower rate of price increase than over the past year). However, the decline in spare capacity not only pushes up the central forecast but also raises the risk of a significant price spike. Such a spike would primarily lift headline rather than core inflation. But one of the lessons of 2011 has been that the standard core inflation indexes can also be quite sensitive to changes in commodity prices, at least in the short term.
3

Jan Hatzius

See Andrew Tilton, Inflation: From Hill to Valley, US Economics Analyst, 11/49, December 9, 2011.

See Jan Hatzius, Why the Fed Should Forecast Its Own Policy, US Daily, October 24, 2011. December 30, 2011

Issue No: 11/52

GS Global ECS US Research

US Economics Analyst

II. Forecast Highlights

1. We estimate that real GDP increased by 3.3% (annualized) in Q4, up from 1.8% in Q3. Despite this momentum in the recent data, we still expect growth to slow in the first half of 2012. This deceleration is due to two factors. First, expenditure-side GDP is a noisy signal of the economys growth trend, and we suspect the truth is considerably less positive. In particular, both our Current Activity Indicator and income-side real GDP have been weaker than expenditure-side real GDP recently. Second, we expect the Euroarea crisis to weigh somewhat more heavily on growth than it has done so far, mainly via the financial channels. 2. We expect the unemployment rate to stay move sideways to higher, ending 2012 around 9%. Since our forecast entails growth that is slightly below the US economys potential, we expect the unemployment rate to drift back up to 9.0% by Q4 2012, and to remain there throughout 2013. 3. Core inflation near its peak. Upward pressure on prices earlier this year caused by pass-through from high commodity prices and other temporary factors looks to be receding. The last few core inflation readings have been more moderate, and business surveys point to diminishing input cost pressure. We believe that core PCE inflation is near its peak on a year-over-year basis, and that it will begin to decline early next year. Based on our forecast for activity, core PCE inflation should fall to 1.3% by the end of 2012 and 1.1% by the end of 2013. 4. A continued easing bias from the Fed. The FOMC is implementing the twist, and plans to continue sales of shorter-maturity Treasuries and purchases of longer-maturity Treasuries through mid-2012. We expect that the Fed will ultimately announce a return to balance sheet expansion sometime in the first half of 2012, likely including purchases of mortgage-backed securities (MBS). We also expect Fed officials to begin publishing their forecasts for the federal funds rate in the quarterly Summary of Economic Projections (SEP) at the January 24-25 meeting. Like the current forward guidance in the post-meeting statement, this would emphasize that rates are likely to stay low, but would be more clearly conditional on outcomes for economic activity and inflation. This change will probably be accompanied by more guidance of the Feds longrun objectives, including a formal inflation target. 5. Long-term interest rates to rise gradually. The US 10-year yield is below our strategists fair value estimate of about 2.7%, likely reflecting Fed asset purchases (and expectations of more to come) and a flight to quality resulting from the European financial crisis. We expect a modest drift up in rates throughout the forecast horizon.

A Week of Light Data

The (light) dataflow this week was mostly positive. First, consumer confidence reported for December by the Conference Board increased more than expected. Although both major surveys of consumer confidenceConference Board and the University of Michiganremain low in an absolute sense, each of them has shown a significant improvement since September/October levels. Second, the Chicago purchasing managers' index held steady in December despite expectations for a notable decline. Moreover, the index of pending home salesa leading indicator for existing home salesrose by 7.3% (month-overmonth) in November, a larger increase than expected. Initial claims, however, increased a bit more than expected (up 15,000 to 381,000 in the week ended December 24). Nonetheless, the four-week moving average dropped to 375,000the lowest level since mid-2008. Moreover, the Case-Shiller index of home prices in 20 metro areas fell more than expected in Octoberdown 0.6% (month-on-month) on a seasonally adjusted basis, resulting in a 3.4% year-onyear decline.

Issue No: 11/52

December 30, 2011

GS Global ECS US Research

US Economics Analyst

THE US ECONOMIC AND FINANCIAL OUTLOOK

(% change on previous period, annualized, except where noted) 2010 OUTPUT AND SPENDING
Real GDP Year-to-year change Consumer Expenditure Residential Fixed Investment Business Fixed Investment Federal Government State and Local Government Net Exports ($bn, '05) Inventory Investment ($bn, '05) Industrial Production, Mfg 3.0 2.0 -4.3 4.4 4.5 -1.8 -422 59 5.4 1.6 1.0 1.4 -2.0 9.6 0.18 0.30 1.8 2.2 -1.7 8.9 -1.6 -2.2 -407 27 4.4 3.2 1.7 1.5 1.2 8.9 0.10 0.55 1.7 1.5 4.5 5.6 -0.9 -1.0 -397 55 2.2 2.2 1.7 1.5 1.2 8.9 0.10 0.25 2.2 1.9 10.3 6.9 -2.1 0.1 -421 93 3.6 1.6 1.3 1.2 0.8 9.0 0.10 0.25 0.4 2.2 2.1 -2.4 2.1 -9.4 -3.4 -424 49 7.1 2.2 1.1 1.1 1.4 8.9 0.14 0.31 0.70 2.11 3.41 4.51 10.6
_

2011 (f)

2012 (f)

2013 (f)

Q1

2011 Q2 Q3
1.3 1.6 0.7 4.2 10.3 1.9 -2.8 -416 39 0.1 3.3 1.5 1.3 1.0 9.1 0.09 0.25 0.41 1.58 3.00 4.23 9.4
_

Q4
3.3 1.7 2.4 6.2 5.8 -1.5 -1.3 -386 21 3.0 3.6 2.2 1.8 2.1 8.7 0.10 0.55 0.25 0.95 2.00 2.90 10.0
_

Q1
0.5 1.7 0.5 2.5 2.5 -1.5 -1.0 -393 34 0.0 2.8 2.1 1.7 1.3 8.7 0.10 0.50 0.30 0.90 2.00 2.75 7.5
_

2012 Q2 Q3
1.5 1.8 1.5 5.0 2.5 -1.5 -1.0 -393 47 2.0 2.3 1.8 1.5 1.0 8.8 0.10 0.40 0.35 1.00 2.25 3.10 4.5
_

Q4
2.5 1.6 2.0 7.5 5.0 -1.5 0.0 -403 81 4.0 1.9 1.4 1.3 1.0 9.0 0.10 0.25 0.50 1.25 2.50 3.25 10.0
_

Q1
2.0 2.0 1.5 10.0 7.5 -2.5 0.0 -414 98 3.0 1.8 1.4 1.3 0.7 9.0 0.10 0.25 0.50 1.35 2.50 3.25 8.0
_

2013 Q2 Q3
2.0 2.1 2.0 12.5 7.5 -2.5 0.0 -418 95 4.0 1.6 1.3 1.2 0.7 9.0 0.10 0.25 0.60 1.50 2.75 3.50 8.0
_

Q4
2.5 2.2 2.3 15.0 10.0 -2.5 1.0 -427 84 4.5 1.4 1.2 1.1 0.9 9.0 0.10 0.25 1.00 2.25 3.25 4.00 10.0
_

1.8 1.5 1.7 1.3 15.7 2.1 -1.6 -403 -2 4.8 3.8 1.9 1.6 0.4 9.1 0.08 0.35 0.21 0.90 1.98 3.18 11.1
_

2.0 1.8 2.0 7.5 5.0 -1.5 0.0 -398 57 3.0 1.9 1.5 1.3 1.3 8.9 0.10 0.30 0.40 1.10 2.25 3.15 8.0
_

2.5 2.2 2.0 15.0 10.0 -2.5 1.0 -423 93 4.5 1.5 1.3 1.2 0.8 9.0 0.10 0.25 0.75 1.75 3.00 3.75 10.0
_

INFLATION (% ch, yr/yr)

Consumer Price Index (CPI) Core CPI Core PCE* Unit Labor Costs

LABOR MARKET
Unemployment Rate (%)

FINANCIAL SECTOR
Federal Funds** (%) 3-Month LIBOR (%) Treasury Yield Curve** (%) 2-Year Note 5-Year Note 10-Year Note 30-Year Bond Profits*** (% chg, yr/yr) Federal Budget (FY, $ bn)

0.62 0.25 0.50 1.00 1.93 0.95 1.25 2.25 3.29 2.00 2.50 3.25 4.42 2.90 3.25 4.00 27.5 10.3 7.5 9.0 -1,294 -1,299 -1,250 -1,100 -3.2 1.32 83 -3.1 1.33 77 -3.1 1.45 74 -3.6 1.45 74

FOREIGN SECTOR
Current Account (% of GDP) Euro ($/)** Yen (/$)** -3.2 1.40 82 -3.3 1.44 80 -2.9 1.38 77 -2.9 1.33 77 -3.0 1.33 77 -3.1 1.38 76 -3.2 1.42 75 -3.3 1.45 74 -3.4 1.45 74 -3.5 1.45 74 -3.6 1.45 74 -3.7 1.45 74

* 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, Zach Pandl, 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 firms business or client relationships. Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Banco Mltiplo S.A.; in Canada by Goldman Sachs & Co. regarding Canadian equities and by Goldman Sachs & Co. 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Issue No: 11/52

December 30, 2011

US Calendar
Focus for the Week Ahead

We forecast that nonfarm payroll employment rose by 175,000 in December (January 6). The pickup from a gain of 120,000 in November reflects mainly the continued decline in initial unemployment claims and an improvement in consumers assessment of current conditions in the labor market. Regional surveys sent mixed signals on the state of manufacturing activity in December. We expect the ISM manufacturing index to remain broadly unchanged (January 3). We anticipate a slight improvement in the non-manufacturing ISM index in December (January 5).
Time (EST) 10:00 10:00 14:00 10:00 17:00 17:00 8:15 8:30 8:30 10:00 11:00 8:30 8:30 8:30 10:20 18:00 Indicator Construction Spending (Nov) ISM Manufacturing Index (Dec) Minutes of December 13 FOMC Meeting Factory Orders (Nov) Lightweight Motor Vehicle Sales (Dec) Domestic Motor Vehicle Sales (Dec) ADP Employment Change (Dec) Initial Jobless Claims Continuing Claims ISM Nonmanufacturing Index (Dec) GS Retail Index (Dec) Unemployment Rate (Dec) Nonfarm Payrolls (Dec) Average Hourly Earnings (Dec) Boston Fed Pres Rosengren spks at econ summit; CT St Louis Fed Pres Bullard spks at Korean American Assoc Estimate GS Consensus Last Report +0.7 +0.5% +0.8% 53.0 53.2 52.7 +2.3% 13.4M 10.3M n.a. n.a. n.a. 53.0 n.a. 8.7% +175,000 +0.1% +1.9% 13.5M 10.4M +168,000 375,000 3,573,000 53.0 n.a. 8.7% +150,000 +0.2% -0.4% 13.6M 10.5M +206,000 381,000 3,601,000 52.0 +2.9% 8.6% +120,000 -0.1%

Date Tue Jan 3

Wed Jan 4

Thu

Jan 5

Fri

Jan 6

Sat

Jan 7

Issue No: 11/52

December 30, 2011