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Exhibit 5: Change in US Personal Savings Rate Surrounding Historical Recessions The increase in the personal savings rate in this recovery has been unusually large. Deviation from Start of Recession (Percentage Points) 8 Historical Range Median a By aaa Current iy 6 4-2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 Quarters Relative to Start of Recession Data through 03 2016. Note: Quarter 0 marks the start of each recession since 1950, defined as the NBER recession cycle start. The cycle is measured from the start of each recession until the beginning of the next recession. Source: Investment Strategy Group, Datastream, National Bureau of Economic Research. Exhibit 6: Ratio of US Household Net Worth to Disposable Income Real estate price and financial asset gains have boosted the ratio to near pre-crisis highs. % 700 639 600 500 - 400 300 + 1951 1959 1967 1975 1983 1991 1999 2007 2015 Data through 03 2016. Source: Investment Strategy Group, Datastream. The anemic (but steady) pace of this recovery has fueled a debate about its causes. The theories fall into six categories: e A “hangover” from the global financial crisis’! e “Secular stagnation” due to unfavorable demographics * “Secular stagnation” due to declining productivity growth ¢ Mismeasurement of GDP statistics * Poor policies in Washington e A steady onslaught of external shocks We briefly examine each of these six theories below—some of which we have touched upon in our prior Outlook publications. While there has been further research on the topic over the past year, the debate has not yet been resolved and likely never will be to everyone’s satisfaction. One star-studded group of experts believes that most contributing factors other than weaker demographics have dissipated or will dissipate, and the US economy will remain structurally vibrant. Another star-studded group believes that the best days of the US are behind it, contending that even radical policy changes will not reverse this decline and that the 2016 election results are a testament to this “secular stagnation.” A Hangover from a Crisis Proponents of the “hangover” theory suggest that recoveries after a major financial crisis generally have been slower. In their book, This Time Is Different: Eight Centuries of Financial Folly, Carmen Reinhart and Kenneth Rogoff use historical data from 66 countries between 1810 and 2010 to demonstrate that, historically, recoveries following a major financial crisis have been markedly slower than other recoveries. Fundamentally, one can argue that households deleverage for a long time to increase precautionary savings, and corporations limit capital expenditures to build up precautionary cash, out of fear that another major financial crisis is looming. As shown in Exhibit 4, the pace at which households deleveraged in this most recent crisis was faster than in any other recovery in the post-WWII period; commensurately, the increase in the personal savings rate since the start of the recession is unusually large relative to previous cycles (see Exhibit 5). Along with higher savings, the increase in home prices to levels matching the February 2007 peak (as measured by the S&P/Case-Shiller US National Home Price Index on a seasonally adjusted basis} and the appreciation in financial assets have boosted the ratio of household net worth to disposable income to near pre-crisis levels, as Outlook | Investment Strategy Group 9 HOUSE_OVERSIGHT_014542