Prepared for:Equipment Leasing & Finance Foundation

Prepared by:Robert F. Wescott, Ph.D.

President, Keybridge

Presented:San Diego

October 20, 2014

State of the Equipment Finance IndustryReview and Economic Outlook for 2014-15

EQ UI PMENT LEAS I NG & F I NA NCE F O UNDAT I O N

2

Agenda

I. Snapshot of our 2013 Report on Equipment Finance Activity

II. U.S. Macroeconomic Outlook 2014-15, including geopolitical risks

III. Trends in Equipment Investment

3

2006.Q2

2006.Q3

2006.Q4

2007.Q1

2007.Q2

2007.Q3

2007.Q4

2008.Q1

2008.Q2

2008.Q3

2008.Q4

2009.Q1

2009.Q2

2009.Q3

2009.Q4

2010.Q1

2010.Q2

2010.Q3

2010.Q4

2011.Q1

2011.Q2

2011.Q3

2011.Q4

2012.Q1

2012.Q2

2012.Q3

2012.Q4

2013.Q1

2013.Q2

2013.Q3

2013.Q4

2014.Q1

2014.Q2

60

80

100

120

140

160

180

151

112

134

I. 2013 equipment finance report: First the good news--low interest rates and an expanding economy increased propensity to finance.

Source: ELFF 2014 Survey of Equipment Finance Activity

Propensity to Finance IndexIndex, 2005.Q4 = 100

4

More good news: Portfolio performance strengthened in 2013, as delinquencies and charge-offs dropped to very low levels.

2009 2010 2011 2012 20130%

1%

2%

3%

4%

5%

6%

1.4%0.8% 0.7% 0.7% 0.3%

1.9%

1.2%0.9% 0.5%

0.4%

1.6%

1.5%

0.4%0.3%

0.2%

Portfolio QualityWeighted Average

Source: ELFF 2014 Survey of Equipment Finance Activity

Non-AccrualsCharge-Offs

Delinquencies 90+ Days

5

Pretty good news: New business volume increased solidly in 2013, but not by the double-digit rates of the previous two years.

2008 2009 2010 2011 2012 2013-40%

-30%

-20%

-10%

0%

10%

20%

-2.2%

-30.3%

3.9%

16.5% 16.4%

9.3%

Source: ELFF 2014 Survey of Equipment Finance Activity

New Business VolumeAnnual Percent Change

54%33%

14%

Share of 2013 New Business Volume

Banks

Captives

Independents

6

Bad news: Abundant liquidity and intense competition meant the cost of funds, spreads, and yields further declined.

2009 2010 2011 2012 20130%

1%

2%

3%

4%

5%

6%

7%

8%

3.3%2.5%

1.8% 1.4% 1.4%

3.9%

3.6%

3.3%3.1% 3.0%

Yield Composition

7.2%

6.1%

5.1%4.4%4.5%

Weighted Average

Source: ELFF 2014 Survey of Equipment Finance Activity

Pre-Tax SpreadPre-Tax Yield

Cost of Funds

Return on Equity Return on Assets0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

4.3%

1.0%

9.5%

1.5%

13.0%

2.2%

16.3%

2.1%

14.7%

1.9%

Bottom line for the industry: Financial performance remained strong in 2013, but profitability dipped. The result: a huge focus on productivity.

Profitability RatiosMedian

Source: ELFF 2014 Survey of Equipment Finance Activity

7

20102009

201120122013

8

II. U.S. Macroeconomic Outlook 2014-15—finally achieving escape velocity?

Source: The Economist

9

On balance, bright spots in the U.S. economy are outweighing negative factors. 2013-14 have brought a lot of healing.

Headwinds:Slowing World Economy

Geopolitical Risks

Bright Spots:Improving Labor MarketCredit Flowing AgainFiscal Healing

First reason for optimism: The U.S. labor market is rapidly healing. Adding 3 million workers in a year is boosting income.

2007.10

2007.11

2007.12

2008.01

2008.02

2008.03

2008.04

2008.05

2008.06

2008.07

2008.08

2008.09

2008.10

2008.11

2008.12

2009.01

2009.02

2009.03

2009.04

2009.05

2009.06

2009.07

2009.08

2009.09

2009.10

2009.11

2009.12

2010.01

2010.02

2010.03

2010.04

2010.05

2010.06

2010.07

2010.08

2010.09

2010.10

2010.11

2010.12

2011.01

2011.02

2011.03

2011.04

2011.05

2011.06

2011.07

2011.08

2011.09

2011.10

2011.11

2011.12

2012.01

2012.02

2012.03

2012.04

2012.05

2012.06

2012.07

2012.08

2012.09

2012.10

2012.11

2012.12

2013.01

2013.02

2013.03

2013.04

2013.05

2013.06

2013.07

2013.08

2013.09

2013.10

2013.11

2013.12

2014.01

2014.02

2014.03

2014.04

2014.05

2014.06

2014.07

2014.08

2014.09

2014.10

0%

2%

4%

6%

8%

10%

12%

0

100

200

300

400

500

600

700

Unemployment Rate Initial Jobless Claims

10

Unemployment Rate

Source: Macrobond Financial

Initial Claims

Percent Thousands, 4-week Moving Average

11

Second reason: Credit is flowing again. Bank lending to businesses is up notably. Credit is finally flowing again to consumers as well.

Wells Fargo

J.P. Morgan

Bank of America

PNC

U.S. Bancorp

Citigroup

5.9%

6.6%

8.3%

9.5%

9.7%

11.0%

Commercial/Corporate Bank Loans, 2014.Q1Percent Change, Y/Y

Source: Forbes, “A Look at the Loan Portfolios of the Largest US Banks”, 6/14/14

12

2006.Q2

2006.Q3

2006.Q4

2007.Q1

2007.Q2

2007.Q3

2007.Q4

2008.Q1

2008.Q2

2008.Q3

2008.Q4

2009.Q1

2009.Q2

2009.Q3

2009.Q4

2010.Q1

2010.Q2

2010.Q3

2010.Q4

2011.Q1

2011.Q2

2011.Q3

2011.Q4

2012.Q1

2012.Q2

2012.Q3

2012.Q4

2013.Q1

2013.Q2

2013.Q3

2013.Q4

2014.Q1

2014.Q2

-2%

-1%

-1%

0%

1%

1%

2%

Third reason: Sharp U.S. fiscal contractions/spending cuts are largely finished. And state spending is finally rebounding.

Federal Government Contribution to GDP GrowthPercent

Source: Macrobond Financial

Obama Stimulus Package

Fiscal Contraction

Spending cuts are winding

down

13

1990.Q2

1991.Q1

1991.Q4

1992.Q3

1993.Q2

1994.Q1

1994.Q4

1995.Q3

1996.Q2

1997.Q1

1997.Q4

1998.Q3

1999.Q2

2000.Q1

2000.Q4

2001.Q3

2002.Q2

2003.Q1

2003.Q4

2004.Q3

2005.Q2

2006.Q1

2006.Q4

2007.Q3

2008.Q2

2009.Q1

2009.Q4

2010.Q3

2011.Q2

2012.Q1

2012.Q4

2013.Q3

2014.Q2

-30%

-20%

-10%

0%

10%

20%

30%

60%

65%

70%

75%

80%

85%

90%

95%

100%

Still mending: Business capital spending. Business confidence needs a boost. Capacity utilization hitting 80% would help.

Real Nonresidential Investment: Equipment Capacity UtilizationPercent Change Y/Y Percent

Source: Macrobond Financial

80% capacity utilization-threshold for firm expansion

Housing is also still disappointing. Despite improved fundamentals, the housing recovery remains subpar.

1990.091990.101990.111990.121991.011991.021991.031991.041991.051991.061991.071991.081991.091991.101991.111991.121992.011992.021992.031992.041992.051992.061992.071992.081992.091992.101992.111992.121993.011993.021993.031993.041993.051993.061993.071993.081993.091993.101993.111993.121994.011994.021994.031994.041994.051994.061994.071994.081994.091994.101994.111994.121995.011995.021995.031995.041995.051995.061995.071995.081995.091995.101995.111995.121996.011996.021996.031996.041996.051996.061996.071996.081996.091996.101996.111996.121997.011997.021997.031997.041997.051997.061997.071997.081997.091997.101997.111997.121998.011998.021998.031998.041998.051998.061998.071998.081998.091998.101998.111998.121999.011999.021999.031999.041999.051999.061999.071999.081999.091999.101999.111999.122000.012000.022000.032000.042000.052000.062000.072000.082000.092000.102000.112000.122001.012001.022001.032001.042001.052001.062001.072001.082001.092001.102001.112001.122002.012002.022002.032002.042002.052002.062002.072002.082002.092002.102002.112002.122003.012003.022003.032003.042003.052003.062003.072003.082003.092003.102003.112003.122004.012004.022004.032004.042004.052004.062004.072004.082004.092004.102004.112004.122005.012005.022005.032005.042005.052005.062005.072005.082005.092005.102005.112005.122006.012006.022006.032006.042006.052006.062006.072006.082006.092006.102006.112006.122007.012007.022007.032007.042007.052007.062007.072007.082007.092007.102007.112007.122008.012008.022008.032008.042008.052008.062008.072008.082008.092008.102008.112008.122009.012009.022009.032009.042009.052009.062009.072009.082009.092009.102009.112009.122010.012010.022010.032010.042010.052010.062010.072010.082010.092010.102010.112010.122011.012011.022011.032011.042011.052011.062011.072011.082011.092011.102011.112011.122012.012012.022012.032012.042012.052012.062012.072012.082012.092012.102012.112012.122013.012013.022013.032013.042013.052013.062013.072013.082013.092013.102013.112013.122014.012014.022014.032014.042014.052014.062014.072014.082014.090

20

40

60

80

100

0

500

1000

1500

2000

2500

NAHB Builder Housing Market Index New Housing Starts

14

New Housing Starts

Source: Macrobond Financial

NAHB Builder Index

Index Thousands

15

Two wild cards for 2015: Slumping world growth and lower oil prices.

World Growth• U.S. exports added 0.5 percent to GDP growth in the past 4 quarters• Stronger dollar and slow foreign growth could subtract 0.3 to 0.4% off GDP in

2015.

Oil• Oil prices are down to their lowest level in 4 years (down from $108 to

$82/barrel).• A further drop to $70/barrel could boost GDP growth in 2015 by 0.5 to 0.8%

16

Russia Italy Japan France Germany Canada UK US0%

1%

2%

3%

4%

0.5%0.8% 0.8% 1.0%

1.5%

2.4%2.7%

3.1%

Bottom line: Compared to the rest of the developed world, the U.S. should be the growth leader. Expect growth of 3 to 3-1/2% in 2015.

Projected 2015 G-8 Growth RateY/Y % Change

Source: IMF, “World Economic Outlook, October 2014”

17

The brewing battle at Yellen’s Fed. The fight between the doves and new “financial imbalances” hawks is heating up.

Source: The Federal Reserve; The Economic Club of New York

TRADITIONAL DOVES

Janet Yellen, Fed Chair

"Too many Americans still can't find a job or are forced to work part-time…I promise to do all that I can, working with my fellow policymakers, to achieve the very important goals Congress has assigned to the Federal Reserve.”

“FINANCIAL IMBALANCES” HAWKS

Richard Fisher, Dallas Fed

“There is a tipping point where monetary accommodation comes to be viewed not as a pleasant stimulus…but instead becomes an agent of financial recklessness.”

VS.

1986.071986.081986.091986.101986.111986.121987.011987.021987.031987.041987.051987.061987.071987.081987.091987.101987.111987.121988.011988.021988.031988.041988.051988.061988.071988.081988.091988.101988.111988.121989.011989.021989.031989.041989.051989.061989.071989.081989.091989.101989.111989.121990.011990.021990.031990.041990.051990.061990.071990.081990.091990.101990.111990.121991.011991.021991.031991.041991.051991.061991.071991.081991.091991.101991.111991.121992.011992.021992.031992.041992.051992.061992.071992.081992.091992.101992.111992.121993.011993.021993.031993.041993.051993.061993.071993.081993.091993.101993.111993.121994.011994.021994.031994.041994.051994.061994.071994.081994.091994.101994.111994.121995.011995.021995.031995.041995.051995.061995.071995.081995.091995.101995.111995.121996.011996.021996.031996.041996.051996.061996.071996.081996.091996.101996.111996.121997.011997.021997.031997.041997.051997.061997.071997.081997.091997.101997.111997.121998.011998.021998.031998.041998.051998.061998.071998.081998.091998.101998.111998.121999.011999.021999.031999.041999.051999.061999.071999.081999.091999.101999.111999.122000.012000.022000.032000.042000.052000.062000.072000.082000.092000.102000.112000.122001.012001.022001.032001.042001.052001.062001.072001.082001.092001.102001.112001.122002.012002.022002.032002.042002.052002.062002.072002.082002.092002.102002.112002.122003.012003.022003.032003.042003.052003.062003.072003.082003.092003.102003.112003.122004.012004.022004.032004.042004.052004.062004.072004.082004.092004.102004.112004.122005.012005.022005.032005.042005.052005.062005.072005.082005.092005.102005.112005.122006.012006.022006.032006.042006.052006.062006.072006.082006.092006.102006.112006.122007.012007.022007.032007.042007.052007.062007.072007.082007.092007.102007.112007.122008.012008.022008.032008.042008.052008.062008.072008.082008.092008.102008.112008.122009.012009.022009.032009.042009.052009.062009.072009.082009.092009.102009.112009.122010.012010.022010.032010.042010.052010.062010.072010.082010.092010.102010.112010.122011.012011.022011.032011.042011.052011.062011.072011.082011.092011.102011.112011.122012.012012.022012.032012.042012.052012.062012.072012.082012.092012.102012.112012.122013.012013.022013.032013.042013.052013.062013.072013.082013.092013.102013.112013.122014.012014.022014.032014.042014.052014.062014.07-5

0

5

10

What should the Fed be doing if it followed its own historical experience? Taylor rules help to show this.

Source: Macrobond Financial, Keybridge

18

Taylor Rule Using PCE Inflation and Output GapPercent

Actual FFR

Taylor Rule

1986.071986.081986.091986.101986.111986.121987.011987.021987.031987.041987.051987.061987.071987.081987.091987.101987.111987.121988.011988.021988.031988.041988.051988.061988.071988.081988.091988.101988.111988.121989.011989.021989.031989.041989.051989.061989.071989.081989.091989.101989.111989.121990.011990.021990.031990.041990.051990.061990.071990.081990.091990.101990.111990.121991.011991.021991.031991.041991.051991.061991.071991.081991.091991.101991.111991.121992.011992.021992.031992.041992.051992.061992.071992.081992.091992.101992.111992.121993.011993.021993.031993.041993.051993.061993.071993.081993.091993.101993.111993.121994.011994.021994.031994.041994.051994.061994.071994.081994.091994.101994.111994.121995.011995.021995.031995.041995.051995.061995.071995.081995.091995.101995.111995.121996.011996.021996.031996.041996.051996.061996.071996.081996.091996.101996.111996.121997.011997.021997.031997.041997.051997.061997.071997.081997.091997.101997.111997.121998.011998.021998.031998.041998.051998.061998.071998.081998.091998.101998.111998.121999.011999.021999.031999.041999.051999.061999.071999.081999.091999.101999.111999.122000.012000.022000.032000.042000.052000.062000.072000.082000.092000.102000.112000.122001.012001.022001.032001.042001.052001.062001.072001.082001.092001.102001.112001.122002.012002.022002.032002.042002.052002.062002.072002.082002.092002.102002.112002.122003.012003.022003.032003.042003.052003.062003.072003.082003.092003.102003.112003.122004.012004.022004.032004.042004.052004.062004.072004.082004.092004.102004.112004.122005.012005.022005.032005.042005.052005.062005.072005.082005.092005.102005.112005.122006.012006.022006.032006.042006.052006.062006.072006.082006.092006.102006.112006.122007.012007.022007.032007.042007.052007.062007.072007.082007.092007.102007.112007.122008.012008.022008.032008.042008.052008.062008.072008.082008.092008.102008.112008.122009.012009.022009.032009.042009.052009.062009.072009.082009.092009.102009.112009.122010.012010.022010.032010.042010.052010.062010.072010.082010.092010.102010.112010.122011.012011.022011.032011.042011.052011.062011.072011.082011.092011.102011.112011.122012.012012.022012.032012.042012.052012.062012.072012.082012.092012.102012.112012.122013.012013.022013.032013.042013.052013.062013.072013.082013.092013.102013.112013.122014.012014.022014.032014.042014.052014.062014.07-5

0

5

10

Crisis: QE was a logical policy choice, because of the difficulty of negative rates.

Source: Macrobond Financial, Keybridge

19

Taylor Rule Using PCE Inflation and Output GapPercent

Actual FFR

Taylor Rule

1986.071986.081986.091986.101986.111986.121987.011987.021987.031987.041987.051987.061987.071987.081987.091987.101987.111987.121988.011988.021988.031988.041988.051988.061988.071988.081988.091988.101988.111988.121989.011989.021989.031989.041989.051989.061989.071989.081989.091989.101989.111989.121990.011990.021990.031990.041990.051990.061990.071990.081990.091990.101990.111990.121991.011991.021991.031991.041991.051991.061991.071991.081991.091991.101991.111991.121992.011992.021992.031992.041992.051992.061992.071992.081992.091992.101992.111992.121993.011993.021993.031993.041993.051993.061993.071993.081993.091993.101993.111993.121994.011994.021994.031994.041994.051994.061994.071994.081994.091994.101994.111994.121995.011995.021995.031995.041995.051995.061995.071995.081995.091995.101995.111995.121996.011996.021996.031996.041996.051996.061996.071996.081996.091996.101996.111996.121997.011997.021997.031997.041997.051997.061997.071997.081997.091997.101997.111997.121998.011998.021998.031998.041998.051998.061998.071998.081998.091998.101998.111998.121999.011999.021999.031999.041999.051999.061999.071999.081999.091999.101999.111999.122000.012000.022000.032000.042000.052000.062000.072000.082000.092000.102000.112000.122001.012001.022001.032001.042001.052001.062001.072001.082001.092001.102001.112001.122002.012002.022002.032002.042002.052002.062002.072002.082002.092002.102002.112002.122003.012003.022003.032003.042003.052003.062003.072003.082003.092003.102003.112003.122004.012004.022004.032004.042004.052004.062004.072004.082004.092004.102004.112004.122005.012005.022005.032005.042005.052005.062005.072005.082005.092005.102005.112005.122006.012006.022006.032006.042006.052006.062006.072006.082006.092006.102006.112006.122007.012007.022007.032007.042007.052007.062007.072007.082007.092007.102007.112007.122008.012008.022008.032008.042008.052008.062008.072008.082008.092008.102008.112008.122009.012009.022009.032009.042009.052009.062009.072009.082009.092009.102009.112009.122010.012010.022010.032010.042010.052010.062010.072010.082010.092010.102010.112010.122011.012011.022011.032011.042011.052011.062011.072011.082011.092011.102011.112011.122012.012012.022012.032012.042012.052012.062012.072012.082012.092012.102012.112012.122013.012013.022013.032013.042013.052013.062013.072013.082013.092013.102013.112013.122014.012014.022014.032014.042014.052014.062014.07-5

0

5

10

However, today, Taylor rules would suggest that the long period of zero rates should be ending. Might the Fed be behind the curve?

Source: Macrobond Financial, Keybridge

20

Taylor Rule Using PCE Inflation and Output GapPercent

Actual FFR

Taylor Rule

21

Larry Summers’ worry – are rich countries doomed to “secular stagnation”?

Source: The Atlantic; Reuters

“We may be in a period of secular stagnation in which sluggish

growth, output, and employment at levels well below potential, and problematically low real interest

rates might coincide for quite some time to come.”

22

Might rich countries have permanently lower economic growth?

The Secular Stagnation Debate

Factors that could indicate “secular stagnation”:

• Aging population• Interest rates at their zero bound• Lack of productive investments• Inflation that is “too low”• Increased inequality• Lack of innovation

23

Are we stuck in a 2% growth world? This is too pessimistic. U.S. potential GDP growth = %CH (labor force) + %CH (productivity).

1974 1984 1994 2004 20140%

1%

2%

3%

1.8%

1.2% 1.2%0.8% 0.9%

Civilian Non-institutional Population, Ages 20-64Y/Y % Change

Source: Census Bureau

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

-5%

0%

5%

10%

And productivity is not as bad as pessimists say. It should average 1.6% a year over the next decade. Potential growth can be 2.4% to 2.7%.

Source: Macrobond Financial

24

Nonfarm Business Sector Labor Productivity, Output per HourY/Y % Change

1974 - 1984:1.5%

1994 - 2004:2.8%

1984 - 1994:1.7%

2004 - 2014:1.5%

25

Where will growth come from? A strong construction rebound offers the best short-run hope.

Source: World Property Channel

26

Possible sources of longer-term growth—high-growth, high-reward industries.

Source: National Science Foundation, AdvaMed, International Federation of Robotics

Industrial AutomationAdvanced Medical Technology

Nanotechnology

By 2020, forecast to:• Create 2 million jobs in US• Build $1 trillion final products market• Boost productivity in energy, medicine, and

electronics industries

Currently generates:• 300,000 jobs directly• $17.1b market, cost has fallen 50% since 1990• Boosts manufacturing productivity

Currently generates:• 1.9 million jobs• $381 billion in US economic output• For every 1 billion in industry revenues, estimated

$1.69 billion added to GDP

By 2020, forecast to:• Save $5.8b/year on consumer fuel costs• Add 300,000 jobs• Add $38.1 billion to GDP in 2020

Unconventional Oil Exploration

27

Geopolitical risks that keep me awake at night.

Russia-Ukraine

LibyaSyria/Iraq/ISIS

China Growth Slowdown

Ebola Outbreak

28

How do geopolitical risks affect global financial markets?

Transmission Mechanisms

Global Oil Prices

Business & Investor Confidence

Capital Outflows & Safe Haven Effects

Regional Contagion Effects

Risk of Expropriation

Flows of People & Goods

29

Putin’s aggression seems driven by Russia’s “inferiority complex” after losing the cold war. Economic problems have contributed.

“First and foremost it is worth acknowledging that the demise of the

Soviet Union was the greatest geopolitical catastrophe of the 20th century.”

-Putin, 2005

Source: The Guardian, The Washington Post, “Russia is re-making itself as the leader of the anti-Western world” 03/30/14, NBC

30

My Russian concerns:

• Crimea or economic growth? Putin will take Crimea.

• Sanctions are biting—maybe a little too tough? If oil prices drop further, how will Russia endure the pain?

• Impact on business confidence in the EU (and Germany) has been worse than expected

• Natural gas games this winter?

• Geopolitical accidents? (Russia playing games in Sweden, Lithuanian, etc., doing trial incursions, submarine probes, Cold War tricks)

31

China: Construction slowdown is well-entrenched. How much will it slow the overall Chinese economy? (and the world economy)?

32

Xi Jinping’s balancing act: Sustaining growth and social cohesion as construction slows. Can consumption pick up the ball?

-73.3%-17.0%

-15%Drop in sales price in large and medium-

sized cities from Jan-Aug 2014

Decline in Y/Y change of total floor space under construction

Drop in housing rent

Vacancy Rate in 2013

22.4%

In the first seven months of 2014:

Source: Mingtiandi, “China Housing Sales Drop 10.5% in 2014 as Credit Dries Up”, 8/14/14; Macrobond

33

Ebola: Low probability but high impact risk. Africa is largely disconnected from the world economy, but…

Source: Wired

34

8 years 6 years

1999.Q2

1999.Q4

2000.Q2

2000.Q4

2001.Q2

2001.Q4

2002.Q2

2002.Q4

2003.Q2

2003.Q4

2004.Q2

2004.Q4

2005.Q2

2005.Q4

2006.Q2

2006.Q4

2007.Q2

2007.Q4

2008.Q2

2008.Q4

2009.Q2

2009.Q4

2010.Q2

2010.Q4

2011.Q2

2011.Q4

2012.Q2

2012.Q4

2013.Q2

2013.Q4

2014.Q2

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

III. Equipment investment has clawed its way back to a reasonably normal share of GDP. Further growth requires a breakout of demand.

Source: Macrobond Financial, Keybridge

Equipment & Software InvestmentShare of Real GDP

Software Investment

Equipment Investment

35

Illustrating the need for a new investment breakout is the fact that new leasing business volume in 2014 is roughly flat with 2013 levels.

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$56.6

$82.9 $87.0$80.2

$54.6 $59.3

$74.0$84.4 $87.3 $86.7

MLFI-25 New Business VolumeBillion Dollars

*ProjectedSource: ELFA MLFI-25, 2014 projection from Keybridge

Annualized rate through August 2014. Down

0.7% from 2013.

36

Most likely source of a breakout? Capacity utilization rising above 80% would likely support a new wave of capex spending.

Oil & Gas

Mining

Coal

Syth

ethic F

ibers

Moto

r Veh

icles

Primary

Meta

l

Mac

hinery

Fabric

ated M

etal

Food &

Bevera

geTo

tal

Plastics

Non-Durables

Durables

Aerosp

ace

Chemica

ls

Texti

les

Comm. Equip.

Apparel

Computers

Semico

nductors

0%

20%

40%

60%

80%

100%

Capacity Utilization, August 2014Percent of Capacity

Source: Macrobond Financial

80% Threshold Indicates Expansion

37

Meanwhile, the energy boom is for real: As domestic oil production has jumped (5 mbd to 8.8 mbd), rail shipments of oil have surged.

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Rail Traffic – Carloads Originated

Source: Macrobond Financial

Y/Y Percent Change, 6-month Moving AveragePetroleum

CoalOther Commodities

38

And finally, the U.S. manufacturing renaissance is for real and should be sustained.

Boston Consulting Group Manufacturing Cost Competitiveness

Out of the 25 largest exporters, the U.S. is now the 2nd most competitive, behind China. European firms are looking to shift production to the U.S.

U.S. manufacturing costs are 10-25% lower than all other top 10 goods-exporting countries (except China).

The gap between the U.S. and China is narrowing: In 2004, U.S. manufacturing costs were 14% higher, compared to only 5% today.

On current trends, U.S. manufacturing will be less expensive than China’s by 2018.

Source: Boston Consulting Group, NPR, “Study: U.S. Manufacturers Gaining Competitiveness,” 04/25/14

1

2

3

4

39

In conclusion: U.S. growth seems on track, but turbulence abroad creates risks. Getting capacity utilization above 80% is key.

Source: Getty Images, CosmeticsDesign

The U.S. economy is healing. 2015 should be the best year since 2006.

The Fed may face pressure to raise rates sooner than planned. U.S. potential growth may be better than the 2% rate pessimists fear.

Russia and China and Ebola present geopolitical worries.

Capacity utilization reaching 80% and a strong housing rebound are probably necessary for an acceleration in business investment.