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The Economic Outlook James Marple, Senior Economist TD Economics March 20, 2013 This time is different Average real GDP growth three years after recession trough (annual rate) 9 8 7.8 Average recovery growth = 4.4% 7 5.8 5.8 6 5.2 5 4.5 4.2 4.0 4 3.2 3 2.9 2.4 2.2 2 1 0 194952 195457 195861* 196164 197073 197578 198083* 198285 199194 *Recessions contained within period. Source: Bureau of Economic Analysis 200104 200912 What’s in store for the economy? Lots of upside potential: Housing Consumer spending Investment & job creation Weighing on growth: Fiscal drag – tax hikes, sequestration… Global prospects & risks Global slowdown a near-term headwind Global trade volume (y/y %change) Global PMI*, below 50 indicates contraction 25 75 20 70 15 65 10 60 5 55 0 50 -5 45 -10 40 Global PMI* (rhs) -15 35 Global Trade Volume (lhs) -20 30 -25 25 2000 2002 2004 2006 2008 2010 2012 *Purchasing managers index. Source: TD Economics, Bloomberg, Haver Analytics. Grey area marks U.S. recession. U.S. exporting more to the Americas, less to Europe Share of U.S. goods exports; %,12-month moving average 40 35 30 25 20 15 North America Pacific Rim Europe South/Central America 10 5 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: BEA, U.S. Census Bureau Faster economic growth is on the horizon… Real GDP, annualized quarter/quarter % change 6 Forecast Recession 4 2 0 -2 Forecast Y/Y % Chg. (Q4/Q4 % growth) 2013F 1.9% (2.3%) 2014F 2.8% (3.1%) -4 -6 -8 -10 2008 2009 2010 2011 Forecast by TD Economics as of March 2013 Source: Bureau of Economic Analysis 2012 2013F 2014F …In Pennsylvania too Real gross domestic product; annual % change 4 3 2 1 0 -1 -2 -3 Forecast Pennsylvania United States -4 -5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bureau of Economic Analysis. Forecasts by TD Economics Private “deleveraging” giving way to public U.S. net saving/borrowing by sector; % of GDP 10 Net Saving 8 6 4 2 0 -2 -4 -6 Foreigners -8 Net Borrowing Business -10 Households & nonprofits -12 Government -14 1990 1992 1994 1996 1998 Source: Federal Reserve Flow of Funds 2000 2002 2004 2006 2008 2010 2012 Federal deficits are getting smaller… Total federal deficit (% of GDP) 4 Forecast 2 0 -2 -4 -6 -8 -10 -12 2000 2002 2004 2006 2008 2010 Source: Congressional Budget Office, February 2013 Baseline Forecast 2012 2014 …At least for now… Federal government spending, % of GDP 16 Healthcare 14 Social Security 11.4% Everything else (except interest) 12 10 5.5% 8 6 4 2 0 2000 2010 2020 2030 Source: Congressional Budget Office, Long Term Forecast, June 2012 2040 2050 Housing headwind becoming a tailwind Contribution to real GDP growth, percentage points 1.5 Forecast 1.0 Housing Wealth Residential Investment 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Housing wealth estimates by TD Economics. Source: Bureau of Economic Analysis Construction to catch up to household growth Housing starts (units, 000s); change in households (000s) 2,500 Fcst. 2,000 1,500 1,000 Demographic adjusted households + depreciation 500 Housing starts 0 1980 1983 1986 1989 1992 1995 Source: U.S. Census Bureau, TD Economics 1998 2001 2004 2007 2010 2013 Market is clearing and house prices are growing U.S. home prices; year-over-year % change 20 S&P Case-Shiller HPI* 15 CoreLogic HPI 10 5 0 -5 -10 -15 -20 2002 2004 2006 2008 2010 Source: CoreLogic, S&P Case-Shiller, Haver Analytics. As of February 2013. *Twenty city composite. 2012 Auto sales still have room to grow U.S. light vehicle sales per 1,000 persons 16 years of age or older 110 100 90 80 18% below average 70 60 50 40 30 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 Source: Bureau of Economic Analysis, TD Economics 2007 2011 Credit conditions are improving Net-percentage of banks tightening C&I loans to small firms* 120 Qualifying standards 100 Spreads 80 60 Tightening 40 20 0 -20 -40 -60 Easing -80 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 *Small firms are classifed as having annual sales of less than $50 million. Source: Federal Reserve Senior Loan Officer Survey. As of March 1st 2013. 2010 2012 Uncertainty keeping firms on sidelines Index of Economic Policy Uncertainty (1995-2009 average = 100) 300 Debt Ceiling, Euro Crisis 250 Lehman and TARP Sept. 11 200 Balanced Budget Act 1st Gulf War Black Monday 150 2nd Gulf War Clinton Election Bush Election Stimulus Debate Russian Crisis/LTCM 100 50 1985 1988 1991 1994 1997 2000 2003 2006 2009 Source: "Measuring Economic Policy Uncertainty", (2012), Scott R. Baker, Nicholas Bloom and Steve Davis, Stanford mimeo. 2012 Layoffs down, but need more hiring Percent of total employment 6 Separation rate Hiring rate Quit rate Firing rate 5 4 3 2 1 2001 2002 2003 2004 2005 2006 2007 2008 Source: BLS - Job Openings and Labor Turnover Survey 2009 2010 2011 2012 Fed will continue to prime the pumps 3.0 Monetary Base, US$ Trillions Monetary Base 2.5 Monetary Base = Currency + Bank Reserves 2.0 1.5 Bank Reserves 1.0 0.5 Currency 0.0 2006 2007 2008 Source: Federal Reserve Board 2009 2010 2011 QE 2012 2013 America still has a jobs deficit Private Sector Jobs, Jan. 2008 =100 102 100 98 96 94 92 US Pennsylvania New Jersey New York 90 2008 2009 2010 Source: BLS, TD Economics. Data to January 2013 2011 2012 2013 Employment growth is key to reducing vacancies Office vacancy rate, Philadelphia; % Completions, Absorptions; (000s SF) 16% 2000 14% 1500 12% 1000 10% 500 8% 0 6% Net Completions Net Absorptions 4% -500 -1000 Vacancy rate 2% -1500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Property & Portfolio Research Low interest rates likely here for a while U.S. interest rates; percent 10 Fcst. 9 3-month T-Bill 8 10-Year government bond 7 6 5 4 3 2 1 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: Federal Reserve Board; Forecast by TD Economics at September 2012 2012 2014 The bottom line • Housing improvement a fillip to economic growth • Tax hikes & spending cuts are a drag • Global growth improving, but risks remain • Fed to remain stimulative • Real GDP growth of ~2.0% in 2013, ~3.0% in 2014 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.