Economic Outlook - As of September 2008

Overview

Insolvencies

We expect to see insolvencies continue to rise into 2009. Business bankruptcies (including liquidations) have risen 40% in the past four quarters compared to the previous four. Business conditions have been difficult for several quarters, resulting in cumulative operating losses which are pushing an increasing number of firms toward bankruptcy. One leading indicator of future business bankruptcies is the Federal Reserve’s quarterly survey of bank lending officers. The most recent survey showed a record high percentage of bankers widening spreads and tightening lending conditions on C&I loans, a likely harbinger of increasing bankruptcies.

Economic Conditions

Current economic conditions are decidedly negative and we expect them to remain so into 2009. Both retail sales and wages are shrinking on a real, year-over-year basis, home foreclosures and delinquencies are at record highs, housing prices continue to plummet, and job losses and unemployment are on the rise. Unfortunately several of the forces which caused the U.S. to go into this slowdown are still in place: high energy prices, an imploding housing market, and tight credit conditions, so we expect the business environment to remain negative for several quarters. On the positive side, housing affordability is skyrocketing, and house prices may have reached a “fair value.” Also, the Fed’s aggressive loosening of monetary policy in 2007 and 2008 is quite likely to lift the economy out of this downturn in 2009.