In Sync 2014 Summit

Pace 2014 PresentationJohn Slavic Economic Overview

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The PEO\Payroll Employment Index

The Slavic PEO\Payroll Employment Index

2008200920102011201220132014

The Slavic PEO\Payroll Employment Index

2008200920102011201220132014PEO Index GDP

The Slavic PEO\Payroll Employment Index

2008200920102011201220132014

The Slavic PEO\Payroll Employment Index

2008200920102011201220132014

Economic Overview

Most reliable indicator of future economic activity

Dow Jones 5-Year Chart

Economic Overview

Economic Overview

Lending Standards Relaxing

Economic Overview

Four Key Indicators (Weather Affected) Point to Continued Strength

Economic Overview

Most Monetary Indicators Are Positive

- Business investment growth is accelerating.Most Monetary Indicators Are PositiveBank lending is at a healthy rate.13

The Fed's current policy of buying $55B per month has continued to climb to $4T by the end of April.Most Monetary Indicators Are Positive

The strength of the economy, apart from housing, is coming from increased commercial demand combined with relaxed lending standards.- Other forms of more costly financing are diminishing as bank lending is increasing.Most Monetary Indicators Are Positive

Strengthening Economy Is Still Percolating

US Philly Fed indicates strength following the harsh winter conditions.

- shipments index +22.7% from 5.7%- new orders +14.8% from 5.7%- employment index +6.9% from 1.7%- work week +5.0 from 3.1%

The Philly Fed report is consistent with most other national reports.

Strengthening Economy Is Still Percolating

First Quarter GDP increased at an annual rate of 1.7%; second quarter could be as strong as 3.5%.

We might finally break out of the five-year funk, with projected growth of:2.8% in 20143.0% in 2015

Strengthening Economy Is Still Percolating

Manufacturing output strengthens in March reflecting some pent-up demand from the winter weather slowdown.

Manufacturing output strengthens in March reflecting some pent-up demand from the winter weather slowdown.

Strengthening Economy Is Still Percolating

Inflation is beginning to pick-up; soon to be above 2%.

Strengthening Economy Is Still Percolating

Retail sales rebound sharply (70% of all economic activity is directly related to the consumer).

Strengthening Economy Is Still Percolating

Productivity in America

Productivity in AmericaProductivity growth in America surged in response to the IT revolution in the 80s and 90s. IT peaked in 2005 at 3.1% but has leveled out at 1.6% in the last few years.

Productivity has declined across all sectors of the economy.

Software improvements have grown, but hardware development has declined. In the 1960s and 1970s chip speeds doubled every two years, however, now it is stagnating.

Productivity in America

The aging population has a very negative impact on productivity. Generational differences account for some of the decline.

Productivity in America

Innovation as measured by patents and trademarks has increased to record levels at $255B annually.

Productivity in AmericaResearch & Development Have Rebounded

New firm formation continues its long-term trend lower.

Productivity in America

Productivity Conclusion

The slowdown in productivity is principally due to the fading effects of the IT revolution and the aging population.

Likely, productivity will level-out at .6%, requiring additional skilled labor to fill the gap.

If R&D pays-off unexpectedly, it could be a positive disrupter.

Productivity in America

Labor Dynamics

The unemployment rate has fallen from 10% in late 2009 to 6.6% only marginally above the Fed's 6.5% threshold.

Labor Dynamics

The participation rate has also fallen consistently since 2000 hitting a 35-year low.Labor Dynamics

The aging population has a negative structural impact on the participation rate, dropping by more than 900,000 in the next four years.

Labor Dynamics

Prime-age workers are also cyclically declining as they are ill-adapted to the changing economy and have had the moral-hazard of protracted Federal entitlements.

Labor Dynamics

The low participation rate trend is removing "slack" from the labor markets likely prompting wage inflation soon. Here are eight reasons why:

Labor Dynamics

Labor Dynamics

Labor Dynamics

Labor Dynamics

The Positive Long-Range View

The energy revolution in the US is fundamentally changing the economy. By 2020 it is projected that the US will be energy self-sufficient. This will be achieved by the combination of expansive new oil and gas production and energy conservation and efficiency.

Source: Bloomberg

The Positive Long-Range View

International demand, especially from developing countries, will keep oil prices at $100 per barrel despite the new supplies being produced domestically. The US is now very close to being a net exporter of natural gas and the world's largest untapped reserves.

The Positive Long-Range View

By 2020 GDP could increase as much as 2% to 3% based on energy calculations alone; thereby creating 2.7 million new jobs. 515,000 will be manufacturing where businesses are structurally re-aligned based on this energy paradigm.

The Positive Long-Range View

60% of the current trade deficit comprises energy imports. By 2020 the trade deficit could be substantially reduced and the US dollar could substantially appreciate against other currencies.

The Positive Long-Range View

By 2020 Europe's demand for natural gas will increase by 65%. Most of Germany's manufacturing relies on natural gas. German Mercedes Benz production is 100% run on LNG. This makes the Ukrainian crisis very complex, as nearly all of Europe's LNG is imported via that country.

The Positive Long-Range View

The Negative Long-Range View

April 2014 marks the centennial of World War II. Events in eastern Europe sparked the start of the war, which was largely unexpected by the rest of the world. The Russian invasion of Crimea and the ensuing Ukrainian crisis could be the start of a protracted conflict with Russia.Newt Gingrich's podcast on Putin's Chess game explains the history and high stakes game presented by the determined leader - Putin.

The Negative Long-Range View

The debt issue could reach a tipping point as wage inflation resumes and interest rates begin to rise back to historically normal levels such as 4% to 5%. US debt service at 5% interest rates, would require all of last year's tax revenue just to pay the interest. If the economy can grow at +4%, then tax revenues would be sufficient to survive, but short of that, we will enter another financial crisis far more powerful than was prompted by housing.

The Negative Long-Range View

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