What Comes Next? U.S. & Virginia Economic Outlook. Gary D. Keith, Regional Economist M&T Bank Virginia GFOA Spring Conference May 22, 2013

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1 What Comes Next? U.. & Virginia conomic Outlook Gary D. Keith, Regional conomist M&T Bank Virginia GFOA pring Conference May 22, 2013

2 Give me a one-handed economist! All my economists say: On the one hand on the other. Harry. Truman 2

3 Trillions of Constant Q Dollars $16.0 $15.8 $15.6 easonally Adjusted at Annual Rate U.. Real Gross Domestic Product On the One Hand Output is olidly Above the Pre-recession Peak Real GDP has topped 2007 levels for six consecutive quarters Typical expansion growth rate $16.0 $15.4 $15.2 $15.0 $14.8 $14.6 In the 10 previous expansions since WWII, the average time needed for real GDP to surpass the pre-recession peak was roughly 2 quarters 4.7% contraction was the worst since 1946 $14.8 $14.4 ource: U.. Bureau of conomic Analysis Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q

4 Relative Change ince Q U.. Real GDP and mployment 6% 4% But On the Other mployment Remains Underwater ven though GDP has rebounded, the labor market has not employment would be nearly 7 million higher today if this were a normal post-wwii recovery 5.3% 2% 0% Real GDP -2% -4% Real wage & salary income would be $500 billion (+9%) higher if this was a typical post-wwii recovery -1.9% mployment -6% ources: U.. Bureau of conomic Analysis, U.. Bureau of Labor tatistics Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q

5 Year-Over-Year Percentage Change U.. Private ector Job Growth 2% 1% At the current hiring pace, the private sector job count will surpass the pre-recession peak in mid % 0% -1% -2% -3% -4% -5% -6% -7% ource: U.. Bureau of Labor tatistics Y-o-Y Change in Private Jobs (000s) , % , % , % 2008 (1,085) (0.9%) 2009 (6,021) (5.3%) 2010 (894) (0.8%) , % , % 13 Apr 2, % Reason For Optimism: Hiring Continues at a teady Pace While sluggish, the rate of private job creation is consistent with the pre-recession average Apr 5

6 easonally Adjusted U.. Unemployment Rate 18% 16% 14% 12% 10% 8% 6% * Reason For Concern: till Too Much Labor lack The jobless rate remains at a two-decade high Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force U-6 Unemployment Rate* R C I O N 10.5% average since Jan % average since Jan 1994 R C I O N April % Oct % 13.9% 7.5% 4% 2% ource: U.. Bureau of Labor tatistics Unemployment Rate Apr 6

7 U.. Household Debt ervice Payments As a Percent of Disposable Income 14% 13% 12% A BIG Positive: De-leveraging Frees Up Cash Consumers continue to repair battered balance sheets, freeing up disposable income to support additional spending Average ince % Q % 11% 10% 10.51% Q Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt ource: Federal Reserve Q % 7

8 Percentage of Gross Domestic Product Government Consumption xpenditures 22.0% 21.5% 21.0% 20.5% 20.0% 19.5% 19.0% 18.5% Real spending would be an annualized $340 billion (+11%) higher if this was a typical post-wwii recovery And a BIG Negative: Government Austerity Undercuts Private ector Growth Federal tax hikes & spending cuts loom over the 2013 outlook Current xpansion (ince Q3 2009) ource: U.. Bureau of conomic Analysis Average at ame Point in Post-WWII xpansions Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q % 18.9% 8

9 Contribution to Real GDP Growth Private conomy Continues to trengthen 6% Fiscal Policy Reduces 2013 GDP Growth by 1.5 Points Despite fiscal policy drag, private output is building momentum as major impediments (housing bust, consumer deleveraging) recede 4% 2% 0% -2% -4% -6% Private conomy Federal Fiscal Policy Total equestration, American Taxpayer Relief Act tax increase, Hurricane andy ources: Moody s Analytics, M&T Bank forecast Forecast 9

10 Trillions of Constant Q Dollars $16.5 $16.0 easonally Adjusted at Annual Rate U.. Real Gross Domestic Product Barring a Major hock Modest xpansion is xpected to Continue After growing 2.2% in 2012, real GDP is expected to increase 2.0% in 2013 and 2.7% in 2014 $15.8 Typical expansion growth rate $16.2 $16.7 $15.5 $15.0 $14.5 $15.3 F O R C A T $14.0 ources: U.. Bureau of conomic Analysis, Consensus forecast

11 Interest Rate Forecast As of May 20, % 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% Monetary Policy Will Remain Accommodative hort-term rates are expected to remain well anchored throughout 2013 and beyond The Committee decided to keep the target range for the federal funds rate at 0% to 0.25% and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee s 2% longer-run goal, and longer-term inflation expectations continue to be well anchored. FMOC May 1, 2013 Forecast 10 Year LIBOR swap 2.55% 1.75% 1.0% 0.5% 0.0% 5 Year LIBOR swap 1 Year LIBOR 1-Month LIBOR % 0.24% 11

12 How s the Virginia conomy Performing? 12

13 Billions of Constant 2012 Dollars Virginia Real Gross tate Product Billions of Constant 2012 $ $445 $440 On the One Hand Third Consecutive Year of xpansion Real Gross tate Product is up 5.3% since 2009 (versus a 6.5% U.. average gain) $445 $435 $430 $425 $420 $415 $410 ources: U.. Bureau of conomic Analysis Moody s Analytics forecast for 2012 Recession Year-Over-Year Percent Change % % 2008 (0.1%) 2009 (0.7%) % % % Forecast 13

14 Relative Change ince January 2007 Virginia and U.. Non-Farm mployment Index: Jan 2007 Job Count = 100% 101% 100% April Million Payroll mployment is Almost Fully Recovered 171,000 jobs have been added since February 2010, with 19,000 more needed to top the April 2008 peak April million 100.2% 99% 98% 97% Virginia Feb Million 98.8% United tates 96% 95% 94% ource: U.. Bureau of Labor tatistics Apr 14

15 Year-Over-Year Percentage Change Non-Farm Payroll mployment Growth Virginia vs. United tates 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% But on the Other Hand Less Bust, But Also Less Boom Hiring pace is two-thirds the U.. norm United tates ource: U.. Bureau of Labor tatistics Virginia Y-o-Y Percentage Change in Jobs Virginia U Nov 1.0% 1.6% Dec 0.9% 1.7% 2013 Jan 1.0% 1.6% Feb 1.0% 1.6% Mar 0.9% 1.5% Apr 1.1% 1.6% Apr 1.6% 1.1% 15

16 easonally Adjusted Unemployment Rate Virginia vs. United tates 10% 9% 8% 7% 6% Jobless Rate till levated Mixed hiring performance keeps labor slack above historic norm United tates 7.5% 5% 4% Virginia 5.2% 3% 2% ource: U.. Bureau of Labor tatistics Apr 16

17 Billions of Constant 2012 Dollars Virginia Real Gross tate Product Private ector Billions C2012 $ $370 Private ector Left cale Red Public ector Right cale Blue Public ector Billions C2012 $ $82 $365 Recession $80 $360 $78 $355 $350 $345 $340 $335 ource: Moody s Analytics Public ector Drag Government spending cuts offset private sector gains Forecast $76 $74 $72 $70 17

18 tates With the Largest mployment Losses from equestration Budget Cuts California VIRGINIA Texas D.C. Maryland Florida Pennsylvania New York 58,690 57,905 51,467 92,545 84, , , ,118 tiff Headwind to Continue Furloughs could reduce the affected workers payroll by up to 20% (10% annual reduction over 6-mth period) ource: GMU Center For Regional Analysis GP Loss (Billions) $16.74 $15.44 $11.85 $9.30 $8.45 $5.89 $5.81 $

19 ources: Moody s Analytics, U.. Census Bureau, regional definitions by Weldon Cooper Center For Public ervice University of Virginia Valley Northern outhwest West Central outhside Richmond astern Hampton Roads 2012 Gross Regional Product (Billions) hare of Total 2012 Population (Millions) hare of Total Population Growth Northern $ % % 4.2% Hampton Roads $ % % 1.1% Richmond $ % % 1.7% ubtotal $ % % 2.7% West Central $ % % 0.6% Valley $ % % 1.2% outhwest $ % % (0.9%) outhside $ % % (1.3%) astern $ % % 0.4% TOTAL $ % % 2.0% 19

20 Billions of Constant 2012 Dollars Northern Virginia Real GRP* Billions of Constant 2012 $ $175 $170 $165 $160 $155 Output till Rising, But Momentum lowed For econd Consecutive Year Real GDP is up 5.7% since 2009 (versus a 6.5% U.. average gain) * Gross Regional Product Recession Year-Over-Year Percent Change % % % % % % % ources: U.. Bureau of conomic Analysis Moody s Analytics forecast for Forecast $176 20

21 Year-Over-Year Percentage Change Private ector mployment Growth Northern Virginia vs. United tates 4% Job Growth Downshifts 3% 2% 1% 0% Local hiring pace has noticeably eased since mid-2012 Northern VA 2.0% 1.3% -1% -2% -3% -4% -5% -6% -7% United tates ource: U.. Bureau of Labor tatistics Y-o-Y Percentage Change in Jobs Northern VA U Nov 1.4% 2.0% Dec 1.3% 2.1% 2013 Jan 1.1% 2.0% Feb 0.6% 2.0% Mar 0.8% 1.9% Apr 1.3% 2.0% Apr 21

22 November 2012 Number of Federal mployees & Retirees Non-Defense NORTHRN VA Yet More Pain: Department of Defense furloughs of one day per week (for 11 weeks) for most civilian employees will begin July 8 157, ,368 Hampton Roads 89,973 47,688 Central VA 37,534 In the ye of equestration Hurricane 29,040 All Other VA 37,534 Concerns over Federal furloughs may be restraining hiring/spending 30,681 ource: ye on Washington 22

23 Billions of Constant 2012 Dollars Richmond Metropolitan Area Real GDP Billions of Constant 2012 $ $68.5 $68.0 A olid (If Unspectacular) Recovery From the Great Recession Real GDP has increased 4.0% since 2009 (versus a 6.5% U.. average gain) $68.3 $67.5 Recession $67.0 $66.5 $66.0 $65.5 $65.0 ources: U.. Bureau of conomic Analysis Moody s Analytics forecast for Forecast 23

24 4% 3% 2% 1% 0% Year-Over-Year Percentage Change Private ector mployment Growth Richmond Metro Area vs. United tates Positive, But Choppy Hiring Momentum has eased since mid- 2012, but remains on par with U.. Richmond 2.0% 1.5% -1% -2% -3% -4% -5% -6% -7% United tates ource: U.. Bureau of Labor tatistics Y-o-Y Percentage Change in Jobs Richmond U Nov 1.6% 2.0% Dec 1.4% 2.1% 2013 Jan 2.2% 2.0% Feb 2.9% 2.0% Mar 1.8% 1.9% Apr 1.5% 2.0% Apr 24

25 Private ector mployment Richmond Metro Area vs. United tates Index: January 2007 mployment Level = 100% 102% 101% 100% 99% 98% 97% Feb ,600 Richmond Almost Back to Normal After 3-plus years, the local job count is close to pre-recession levels While U.. employment is still 1.7 million below January 2007 level April , % 98.8% United tates 96% 95% 94% 93% 92% Note: Richmond data seasonally adjusted by M&T ource: U.. Bureau of Labor tatistics Apr 25

26 Billions of Constant 2012 Dollars Hampton Roads Real GRP* Billions of Constant 2012 $91$ $90 $89 $88 $87 $86 $85 $84 Year-Over-Year Percent Change % % 2008 (1.4%) 2009 (2.0%) % 2011 (1.9%) % Recession On the Other Hand: till Under ignificant tress Real GRP has declined 0.8% since 2009 (vs. 6.5% U.. average gain) * Gross Regional Product ources: U.. Bureau of conomic Analysis Moody s Analytics forecast for Forecast $

27 Year-Over-Year Percentage Change Private ector mployment Growth Virginia Beach/Norfolk Metro Area vs. U.. 4% 3% 2% 1% Better News! Local hiring pace has sharply accelerated since Q % 2.0% 0% -1% -2% -3% -4% -5% -6% -7% United tates ource: U.. Bureau of Labor tatistics Virginia Beach/ Norfolk Y-o-Y Percentage Change in Jobs VA Beach U Nov 1.7% 2.0% Dec 2.3% 2.1% 2013 Jan 1.9% 2.0% Feb 2.3% 2.0% Mar 1.7% 1.9% Apr 2.1% 2.0% Apr 27

28 Year-Over-Year Percentage Change Private ector Job Gain/Loss Q Absolute Change Richmond 2.3% 11,500 Virginia Beach- Norfolk 2.0% 11,200 United tates 1.9% 2,065,000 VA ex. Northern VA Virginia Average Roanoke Northern VA 1.1% 1.0% 0.9% 0.8% Good tart to 2013 Local job growth was double the statewide average in Q1 21,300 30,100 1,300 8,800 ource: U.. Bureau of Labor tatistics 28

29 Billions of Constant 2012 Dollars Virginia Regional Real GRP* $24.0 $23.5 $23.0 $22.5 $22.0 Valley Region Up 13.2% since 2009 Versus 6.5% for U.. $23.9 $15.8 $15.6 $15.4 $15.2 $15.0 $14.8 outhwest Region Up 8.0% since 2009 Versus 6.5% for U.. $15.7 $21.5 $14.6 $21.0 $21.1 $ $14.4 $14.2 $ $14.5 $14.0 outhside Region Up 6.9% since 2009 Versus 6.5% for U.. $14.0 $35.0 $34.5 $34.0 West Central Up 5.0% since 2009 Versus 6.5% for U.. $34.7 $13.5 $33.5 $13.0 $13.1 $33.0 $33.1 * Gross Regional Product $12.5 $ ources: U.. Bureau of conomic Analysis, Moody s Analytics forecast for

30 Near-Term Outlook 30

31 Index R C I O N The Conference Board U.. Consumer Confidence Index Index: 1985 = average since Jan 1990 ource: The Conference Board (Data protected by copyright) R C I O N For Now, Confidence Remains Fragile Consumers will remain wary until the jobs picture improves July The February 2009 reading was the lowest in the history of the survey, which dates back to Apr R C I O N

32 Inflation-Adjusted Year-Over-Year Percentage Change U.. Personal Consumption pending Growth 6% 5% 4% 3% 2% 1% R C I O N 2.7% average since Jan 1990 R C I O N Keeping a Lid on pending With consumer spending representing 70% of GDP, limited support from this sector is a major headwind R C I O N 2.2% 0% -1% -2% -3% -4% ource: U.. Bureau of conomic Analysis Mar 32

33 Year-Over-Year Percentage Change xisting Home Price Appreciation Virginia vs. United tates 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% R C I O N Q % Note: Purchase only excludes refi loans ource: Federal Housing Finance Agency Game Changer? Housing Anchor is lowly Being Raised Rising prices provide a boost to underwater homeowners and thaw frozen labor mobility Virginia 4.4% R C I O N Q4 5.5% United tates 33

34 easonally Adjusted Annual Rate Virginia xisting ingle-family Home ales Thousands Q Pent Up Demand Will upport Further Home ales, Consumer pending The National Association of Realtors estimates that one job is generated for every two existing homes sold The National Association of Home Builders estimates that each newly built home creates 3 jobs ource: Moody s Analytics R C I O N Average F O R C A T

35 Constant Q Dollars $10.20 $10.00 Inflation-Adjusted Per Capita Average Virginia Consumer Credit Outstanding Job Creation Will Generate More Consumer Borrowing Further timulating conomic Growth Real credit card and installment loan usage by Virginia residents expected to rise 2.1% through 2014 (vs 7.5% for U..) $9.80 $9.60 $9.40 $9.20 $9.00 $8.80 Non-mortgage credit (revolving & installment) ources: Moody s Analytics, Federal Reserve, U.. Bureau of conomic Analysis R C I O N $8.94 Q Q $ F O R C A T $

36 Percentage Change Fifteen Quarters From nd of Recession Real Post-Recession Consumer Debt Growth* 53.9% This Time RALLY Has Been Different Consumer borrowing which typically acts as a powerful economic stimulant has been a drag in the current cycle 40.4% 31.7% 36.4% 27.6% 39.5% 38.7% 28.3% 16.9% 13.3% * Data include residential mortgage, installment and revolving consumer credit Mortgage data for 1949 to 1951 and Q are M&T estimates -12.3% Average Recession Recession Recession Recession Recession Recession Recession Recession Recession Recession Note: excludes the 1980 recession since the time interval until the downturn was less than 15 quarters ources: Federal Reserve, U.. Bureau of conomic Analysis, M&T estimates 36

37 Inflation-Adjusted 4-Quarter Running Total Virginia Real Taxable ales Billions of Constant Q $ $102 $100 $98 Q Net Result: The Beginning of a New Up Cycle Real taxable sales rose $3 billion (3.4%) in 2012 $96 $94 $92 $90 $88 $86 $84 ources: Virginia Department of Taxation U.. Bureau of conomic Analysis R C I O N Average $93.1 $

38 Inflation-Adjusted Year-Over-Year Percentage Change Virginia Real GP* Growth Forecast Virginia United tates 6% 5% 4.9% Forecast 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% 1.9% * Gross tate Product 1.0% ources: Bureau of conomic Analysis, Moody s Analytics -0.1% -0.7% 3.0% 0.3% 1.9% 2.4% 3.3% lowly Building Momentum Growth expected to accelerate later this year and into

39 Inflation-Adjusted Percentage Change From 2012 to 2014 Virginia Real GRP* Growth Forecast astern Valley outhside outhwest Richmond 5.2% Northern 5.2% U.. Average 4.7% Hampton Roads 4.3% Western 4.0% 7.4% 6.9% 8.1% 9.7% Positive Outlook 6 of the 8 regions are expected to outperform the U.. through 2014 with the best growth prospects outside major population centers * Gross Regional Product ources: Bureau of conomic Analysis, Moody s Analytics 39

40 tates With the Largest Federal Procurement pending as a Percent of GP VIRGINIA 19.8% pending Per Capita $10,564 Maryland New Mexico 10.6% 10.0% $5,527 $3,864 Alaska Connecticut Missouri Alabama U.. Average 8.3% 8.0% 7.6% 7.0% 3.4% On the Other Hand: A BIG Wildcard Federal budget pressures will persist will fiscal policy uncertainty delay business hiring and investment / consumer spending decisions? $5,747 $4,905 $2,933 $2,253 $1,517 ources: U.. General ervices Administration, U.. Bureau of conomic Analysis, Census Bureau NOT: GP data are for

41 What Comes Next? U.. & Virginia conomic Outlook Gary D. Keith, Regional conomist M&T Bank Virginia GFOA pring Conference May 22, 2013

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