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The Economic Outlook Alistair Bentley Economist October 2011 TWO SPEED GLOBAL GROWTH Share of Global Economy (%) 70 65 Advanced Economies 60 55 50 45 40 Emerging Markets 35 30 1987 1991 1995 1999 2003 Forecast by TD Economics as at June 2011 Source: IMF, TD Economics 2007 2011 2015 2019 2023 2027 GLOBAL FINANCIAL RISK ELEVATED Dow Jones Global Stock Price Index (Dec. 91 = 100) 350 300 250 200 150 100 50 0 2005 2006 Source: Wall Street Journal 2007 2009 2010 EUROPE IN FISCAL CRISIS 10-Year National Bond Yields Less 10-Year German Bunds 2,100 1,800 Portugal Ireland Spain Italy Greece 1,500 1,200 900 600 300 0 Jan-10 Mar-10 Jun-10 Source: Bloomberg, TD Economics Sep-10 Dec-10 Feb-11 May-11 Aug-11 EMERGING MARKETS COOLING BUT REMAIN STRONG 12 Real GDP, Annual Avg. % Chg. 10 2010 2011 F 2012 F 8 6 4 2 0 Advanced Brazil Forecast by TD Economics as at September 2011 Source: IMF, National Statistics Agencies, TD Economics India China A U.S. RECESSION UNLIKE ANY IN RECENT MEMORY U.S. recessions & recoveries in real GDP Real GDP growth 4-quarters post-trough (%) 9 1957-58 8 7 1953 1960-61 6 1974-75 1970 5 1981-82 4 1980 3 2 2008-09 1990-91 1 2001 0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Peak-to-trough decline in real GDP (%) Source: Bureau of Economic Analysis, TD Economics 4.5 5.0 5.5 A BALANCE SHEET RECESSION & RECOVERY Net worth, % DPI* Personal saving rate, % DPI* 650 14 600 12 550 10 500 8 450 6 400 4 Net worth (lhs) 350 2 Personal saving rate (rhs) 300 1960 0 1965 1970 1975 1980 1985 1990 *Disposable personal income Source: Federal Reserve, Bureau of Economic Analysis 1995 2000 2005 2010 LOTS OF PENT UP DEMAND U.S. light vehicle sales per 1,000 persons 16 years of age or older 110 100 90 80 70 30% below average 60 50 40 30 1967 1971 1975 1979 1983 1987 1991 1995 Source: Bureau of Economic Analysis, TD Economics 1999 2003 2007 2011 RECOVERY STILL VERY FRAGILE Real GDP, annualized quarter/quarter % change 6 Recession 4 Forecast 2 0 -2 Forecast Y/Y % Chg. (Q4/Q4 % growth) 2011F 1.5% (1.0%) 2012F 1.7% (2.2%) -4 -6 -8 -10 2008 2009 2010 Forecast by TD Economics as at August 2011 Source: Bureau of Economic Analysis 2011F 2012F JOB GROWTH IS KEY… Output, hours worked, & productivity; year-over-year % change 15 Hours Worked Labor Productivity 10 Output 5 0 -5 -10 1980 1985 1990 1995 *Real output per hour worked, non-farm business sector. Source: Bureau of Labor Statistics 2000 2005 2010 …BUT RUNNING UP AGAINST STRUCTURAL ISSUES Median and average duration of unemployment; weeks 45 40 Average Duration of Unemployment 35 Median Duration of Unemployment 30 25 20 15 10 5 0 1995 1997 1999 2001 Source: Bureau of Labor Statistics 2003 2005 2007 2009 2011 ITS BEEN A TOUGH RIDE FOR SOUTH ATLANTIC JOB MARKET Non Farm Payrolls (Index, Jan 2007 = 100) 104 102 100 98 96 FL GA 94 SC NC 92 VA US 90 88 07 08 Source: Bureau of Labor Statistics 09 10 11 HOUSING MARKET REMAINS A MAJOR HEADWIND Housing Starts (000's) 3,000 2,500 Fundamentally Supported Housing Starts ~ 1.6 mln 2,000 1,500 1,000 500 0 1959 1963 1967 1972 Source: Commerce Department 1976 1980 1985 1989 1993 1998 2002 2006 2011 PRICE EXCESSES ARE BEING UNWOUND 160 Price to rent and price to income ratio indexes (1994=100) 150 140 Price to rent Price to income 130 120 110 100 90 80 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: National Association of Realtors, U.S. Census Bureau, Bureau of Labor Statistics BUT THERE IS STILL TOO MUCH SUPPLY Seriously delinquent (000s of mortgages) 4,500 4,000 3,500 Inventory of homes for sale* = 3.6 million Home sales* (May, SAAR) = 4.8 million "Shadow inventory" = 3.5 million 3,000 2,500 2,000 1,500 1,000 90+ days delinquent In foreclosure 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 *Existing homes. Source: Mortgage Bankers Association, TD Economics 2009 2010 2011 DELINQUENCIES RATES ARE FALLING Mortgage delinquencies, percent of total loans 6 30 days past due 5 60 days past due 90 days past due 4 3 2 1 0 1980 1985 1990 1995 2000 Source: Mortgage Banker's Association, Moody's Economy.com 2005 2010 MORE DELINQUENT MORTGAGES ARE BECOMING CURRENT Percent of Mortgages Delinquent 30-60 Days 60 50 40 30 Transitioning into Current Transitioning into 90+ Delinquent 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 Source: Quarterly Report on Household Debt and Credit, FRBNY 2008 2009 2010 2011 MORTGAGE MODIFICATIONS OFTEN RE-DEFAULT 12-month re-default performance* (%) by delinquency status at modification 70 60 Principal Mod Interest Rate Mod 50 Capitalization Mod 40 30 20 10 0 <=2 DQ 3-6 DQ 7-12 DQ Source: Amherst Securities Group LP, CoreLogic. *data for 20-40% pay relief >12 DQ FORECLOSURE COMPLETIONS RUNNING BEHIND STARTS Monthly foreclosure actions (thousands)* 160 140 Foreclosure starts Foreclosure completions 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 *Non-agency loans. Source: Bloomberg, RealtyTrak, TD Economics 2010 2011 SO, FORECLOSURES REMAIN ELEVATED Millions of mortgages 3.5 Jan-08 Jan-09 Jan-10 Jan-11 Jul-11 3.0 2.5 2.0 1.5 1.0 0.5 0.0 30 days 60 days Source: Lender Processing Services 90+ days Foreclosure RENTAL MARKET ABSORBING HOUSING DEMAND 120 Households, Mlns Homeownership Rate, % 70 68 80 Renters 66 64 40 Homeowners 0 62 60 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 Source: Census Bureau SOUTH CAROLINA HOME PRICES FHFA Home Prices (Index 1990Q1 = 100) 240 220 US 200 SC 180 160 140 120 100 1990Q1 1993Q1 Source: FHFA 1996Q1 1999Q1 2002Q1 2005Q1 2008Q1 2011Q1 U.S. POLITICAL DIVISION INJECTS MORE UNCERTAINTY INTO OUTLOOK Fiscal stimulus, percentage point impact on real GDP growth 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 If $1.5T deal is not reached -1.5 Full expiration of Bush tax cuts Partial expiration of Bush tax cuts -2.0 Fiscal stimulus/drag -2.5 -3.0 2009 2010 Estimates by TD Economics 2011F 2012F 2013F BIG CUTS AT STATE & LOCAL LEVEL State & local government spending; percent of real GDP 16 15 14 13 12 11 10 1956 1961 1966 1971 1976 1981 1986 Source: Bureau of Economic Analysis, TD Economics 1991 1996 2001 2006 2011 MAJOR LONG-RUN FISCAL CHALLENGES U.S. Federal Surlpus/Deficit (-) as a % of GDP 4 Forecast 2 0 -2 -4 -6 -8 -10 -12 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: Congressional Budget Office/Haver Analytics THE FED’S DUAL MANDATE: LOW INFLATION VS FULL EMPLOYMENT % 12 Unemployment Rate 10 Headline CPI (Y/Y) Core CPI (Y/Y) 8 6 4 2 0 -2 -4 2000 2002 Source: Bureau of Labor Statistics 2004 2006 2008 2010 SIZE AND MAKE UP OF FED’S BALANCE SHEET Federal Reserve Securities Held Outright, $U.S. (billions) 3,500 3,000 Liquidity Programs & Other Treasury securities Agency securities Mortgage backed securities Total 2,500 2,000 1,500 1,000 500 0 2007 2008 Source: Federal Reserve Board 2009 2010 2011 FEDERAL RESERVE ON HOLD UNTIL MID-2013, LONG-TERM YIELDS TO REMAIN LOW U.S. Bond Yields, % 18 16 3-mth T-Bill 14 30-Year Bond 12 Forecast 10 8 6 4 2 0 1982 1985 1988 1991 1994 1997 Forecast by TD Economics as at August 2011 Source: Federal Reserve, TD Economics 2000 2003 2006 2009 2012 FINAL THOUGHTS U.S. economy likely to struggle to break through to capacity absorbing growth. Headwinds to economic growth include: housing, credit, structural unemployment, and government restraint. As the headwinds ebb and flow, it will create volatility in economic performance. The financial implications are continued low interest rates for the foreseeable future, and a relatively weak U.S. dollar. TD Economics www.td.com/economics This report is provided by TD Economics for customers of TD Bank Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.