JOB SITUATION INCOME. 3 rd Quarter 2015 PITTSBURGH

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1 3 rd Quarter PITTSBURGH JOB SITUATION The Pittsburgh market area will continue to experience slow and steady economic growth through the remainder of and into next year. The market area s employment is at all-time highs, but growth has been below the national average across all industries over the past two years (Chart 1). This trend has also stalled Pittsburgh s unemployment rate at just above 5 percent. In fact, this is a healthy rate of joblessness for the market area in an equilibrium environment. Unfortunately, Pittsburgh s labor force growth only edged back into positive territory as of mid-, meaning that labor force participation is somewhat below expectations. Whatever its near-term hurdles, Pittsburgh s labor market is recovered from recession and is in the midst of a sustainable growth trend. Continued job creation in construction, natural resources development, high-tech, and consumer-oriented industries over the coming year will keep the local labor market progressing steadily toward rectifying workforce supply and demand turbulence. INCOME Income gains in the Pittsburgh market area have settled into a sustainable trend for the near term. Median household income (Chart 2) is only slightly below the national average, but represents greater purchasing power in Pittsburgh thanks to the market area s below-average cost of living. Income growth in the coming year will be enough to support local consumer spending gains, given the expected low energy prices and low consumer price inflation. Labor force trends in Pittsburgh have been positive but not strong over the past year. This slowdown has kept average hourly wages in the market area flat since early Natural resources development, construction, and manufacturing will raise average wages over the long term, but growth will be subdued while local labor force trends right themselves through hiring. 7% 6% 4% - - Chart sources: Bureau of Labor Statistics; The PNC Financial Services Group $55.0K $54.5K $54.0K $53.5K $53.0K $52.5K $52.0K $51.5K $51.0K $50.5K Chart 1 Job Growth, (% change year ago) & Unemployment Rate, (%, SA) Unemployment Rate Manufacturing Chart 2 Median Household Income (Ths. $, SA) Median Household Income Total Services (ex. Ed. & HC) Chart sources: Bureau of Census; Moody s Analytics; The PNC Financial Services Group

2 PITTSBURGH HOUSING Pittsburgh s housing market is on track for steady gains over the coming year. Existing home prices in the market area are only stalled during the recession (Chart 7), but experienced no outright declines. Home values have been rising since 2009, and are now 17 percent above levels seen at the end of Steady job creation, high affordability, and no measurable excess housing supply in the market area will keep prices trending steadily upward for the foreseeable future (Chart 3). New residential permitting activity in Pittsburgh enters the second half of somewhat below the pace seen over the past two years. This coincides with slowdowns in many other aspects of the local economy as its recovery has matured into a sustainable trend. But, again, gauging the market area s performance requires perspective. Despite slower recent performance, the pace of permitting for construction of new single-family homes in Pittsburgh is closer to equilibrium than in either the state or nation as a whole. In housing markets, as with job creation, the outlook for the rest of this year and next is one of continued steady gains, as opposed to attention-grabbing acceleration. DEMOGRAPHICS Pittsburgh s long-time trend of population declines appears to be in the early stages of a turnaround (Chart 4). With housing market strength and stability in its job market, Pittsburgh is well positioned to attract and retain young workers going forward. Reliable education, healthcare and financial industry employers are firmly entrenched and will support workforce development for the foreseeable future. And Pittsburgh is well positioned to benefit from gas drilling activity in the Marcellus Shale formation over the longer term. Skilled workers already experienced in this industry will find Pittsburgh s low living costs attractive, and migration trends are likely to see a boost as a result. 6% 4% 25.8K 25.7K 25.6K 25.5K 25.4K 25.3K 25.2K 25.1K 25.0K Chart sources: National Association of Realtors; Fiserv, Inc.; The PNC Financial Services Group 1.2K 0.9K 0.6K 0.3K 0.0K -0.3K Chart 3 Home Sales (Ths., SAAR) & Price Growth, (% change year ago) Existing Home Sales (R) Case-Shiller Price Index (L) Chart 4 Demographic Growth, (% change, year ago) & Net Migration, (Ths., SA) Net Migration (L) Population Growth (R) Households Growth (R) Chart sources: Bureau of Census; Bureau of Economic Analysis Moody s Analytics; The PNC Financial Services Group 2

3 OUTLOOK SUMMARY PITTSBURGH Pittsburgh s economic growth for the remainder of will follow a pattern familiar to the region that is, a steady pace of new job creation, moderate income gains, and stable housing markets. The market area s unemployment rate may find some resistance against further topline improvement, given a turnaround after twoyears worth of labor market weakness in terms of labor force participation. But an unimpressive performance on this front will be more a statistical quirk than a lack of economic progress. Job creation will continue, the question will be only whether employers can entice workers back into its ranks through a long-awaited spark in wage growth. Pittsburgh s manufacturing and transportation industries will require an acceleration of business expansion at the national level. The market area s manufacturing base is concentrated in the production of primary metals, computer components, and machinery, all of which would do well if businesses put profits to use toward building new facilities and expanding operations. Capacity utilization for the U.S. economy is nearing 8, which is where that metric has plateaued during the each of the past economic expansions. The result of reaching that level again may be that businesses are forced to expand to keep up with even moderate demand growth. Pittsburgh should grow even more strongly if that benchmark does trigger broad business expansion over the coming year. Pittsburgh s highly regarded universities and hospitals support stable income and employment trends. Over the longer term, Marcellus Shale natural gas drilling operations and ongoing expansion of high-tech employers such as Westinghouse provide the basis for a significantly faster growth pace than that seen over the past few decades. Already, demographic trends appear to be reversing from steady net out-migration. Highly affordable living costs add further support for the idea that Pittsburgh may be just at the start of a stronger economic future. FORECAST TABLE Table sources: Bureau of Census; Bureau of Labor Statistics; Bureau of Economic Analysis; National Association of Realtors; National Association of Home Builders; FHFA; Moody's Analytics; The PNC Financial Services Group 3

4 PITTSBURGH LONG-RUN EMPLOYMENT TRENDS % - -6% Chart 5 Total Employment, (% change year ago) % - -6% Pittsburgh U.S. Chart sources: Bureau of Labor Statistics; The PNC Financial Services Group LONG-RUN DEMOGRAPHIC TRENDS % 0.6% 0.4% % -0.6% -0.8% Chart 6 Population, (% change year ago) Pittsburgh U.S. Chart sources: Bureau of Census; Moody s Analytics; The PNC Financial Services Group LONG-RUN HOUSE-PRICE TRENDS Chart 7 Case-Shiller House Price Index, (% change year ago) Pittsburgh U.S. Chart source: National Association of Realtors; Fiserv, Inc.; The PNC Financial Services Group Visit to view the full listing of economic reports published by PNC s economists. Disclaimer: The material presented is of a general nature and does not constitute the provision of investment or economic advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions and forecasts expressed herein are subject to change without notice. Relevant information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. 4

5 THE PNC ECONOMIC OUTLOOK Survey of Small & Middle-Market Business Owners October More PA Businesses Plan to Hire Workers and Boost Wages AN A L Y S I S B Y Kurt Rankin PNC Economist Our fall survey shows small and mid-sized business owners in PA are optimistic about the next six months. More owners plan to hire additional full-time employees and give raises. While the pace of job creation will vary by region across Pennsylvania, moderate income gains and stable housing markets are more consistent across the state. Marcellus Shale natural gas drilling operations will mean more job opportunities while consolidation in the pharmaceuticals industry will be a restraint on growth. Universities and hospitals continue to support stable income and employment trends. This survey has proven to be an accurate forecast for U.S. job market trends. Based on the overall results, the U.S. job market will continue to grow for at least six more months. It is also encouraging that Inflation pressure is lacking. Fewer owners expect their prices to increase while more plan to boost employees salaries. K E Y F I N D I N G S Hiring and Sales Outlook Improves More Pennsylvania business owners plan to hire full-time employees compared to the spring. When it comes to sales, 49% expect an increase while 39% expect profits to grow, a slight improvement from spring. Pennsylvania vs. U.S.: Nationally, 26% plan to hire more employees, the most since 2012, and 5 expect sales to go up. Overall Outlook Stable Among Owners 8 are optimistic about their company s prospects, consistent with 8 in the spring. Their optimism about the local economy has become more moderate. In terms of the U.S. economy, 5 are optimistic compared to 64% six months ago. Pennsylvania vs. U.S.: Nationally, 88% are optimistic about their prospects and 77% are optimistic about their local economy % 44% Outlook for the next six months Outlook for Hiring 1 17% 8 76% Expect 4% decrease 1 1 My Business 24% 56% 57% 19% 16% More Pay Raises: 4 of Pennsylvania owners expect to increase employees pay, which is well above the 29% in the spring. In terms of the amount, 5 plan to give raises of or more during the next six months. Good Help Wanted: One in three say it has become harder to hire qualified employees than six months ago. One in 10 who are not hiring say it is because they cannot find the right skilled workers Further Decline in Pricing Pressure: 28% plan to charge higher prices, versus 3 one year ago. For prices charged by suppliers, 6 expect price hikes compared to 5 in spring. 8 expect consumer prices to rise in the coming year compared to 94% a year ago, partly reflecting the sharp drop in energy prices. Housing Prices Steady: 44% expect prices to rise in their local market in the next 6-12 months, compared to 48% in the spring and 4 a year ago. 24% Expect increase No change Very optimistic (8-10) Optimistic (5-7) Pessimistic (1-4) Outlook for Sales 4 46% Local Economy % 36% 4 4 PNC

6 THE PNC ECONOMIC OUTLOOK Survey of Small & Middle-Market Business Owners October Most PA Business Owners Expect Profitable Year, Few Want New Loans Profits: Most Expect Strong Year 7 Seven in 10 Pennsylvania owners expect to make a net profit this year. The average profit is about 8% of sales. 27% expect to make more than 1 over operating expenses. For owners who expect to have excess cash at the end of this year, they are most likely to*: Loans and Lines of Credit: Little Demand Three in four (77%) owners say they will not pursue new loans or lines of credit in the next six months while 19% will. When asked about access to credit now vs. three months ago, 24% say it is easier and only 1 say it is harder. 4 Four in 10 say they have spent from a loan or line of credit in the past two years. The top use is the purchase of equipment or supplies. 38% % Add to cash Invest in business Pay off Distribute reserves operations business debts to owners Payments: Emphasis on Online and Mobile Options* Cash flow is the lifeblood of a business, so owners need to find ways to make the most of it. 4 Four in 10 offer a variety of ways for customers to make payments, including online and mobile options. A smaller group (24%) charge penalties for late payments or offer discounts for early payments (18%). 2 say they get paid with the services so these options do not apply. PNC INSIGHT Keep Credit Clean: Small businesses should perform periodic checks of their credit reports and scores. Any errors should be challenged immediately with the appropriate credit bureau. If a credit report contains a negative issue, negotiate directly with the creditor for a lower balance, an extended payment schedule or removal of the item in exchange for immediate payment in full. Analyze credit reports for info that can be seen as credit weaknesses by potential lenders, such as high balances related to credit limits and too many open accounts. PNC INSIGHT Three Ways to Get Paid Faster: Automate Payments: With the permission of your customers, you can keep credit card or bank account information on file and then initiate payment just by generating an invoice. Require Up-Front Deposits: These advance payments confirm a client s commitment and speed up your cash flow. Use Discounts as Rewards: By offering a reward for more desirable payment behavior, you can improve cash flow and also cultivate a better client base. *NOTE: Totals exceed 10 because owners could choose more than one response Forecasting: Professional Help is Top Tool* The creation of a simple forecast to predict when payments come in and go out is key to cash flow management. In the PNC survey, owners say the top tool for forecasting is professional help from an accountant or banker followed by internal spreadsheets and accounting software. 47% % 1 Internal Accounting Online spreadsheets software banking Professional help from accountant or banker Online cash flow management resources The PNC Financial Services Group, Inc. (NYSE: PNC) is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking; residential mortgage banking; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. METHODOLOGY: Artemis Strategy Group conducted the telephone survey from 7/21/ to 8/20/, among small and mid-sized businesses. 520 interviews were conducted nationally. Sampling error is +/- 8% at the 9 confidence level based on 155 interviews in Pennsylvania. DISCLAIMER: This report was prepared for general information purposes only and is not intended as specific advice or recommendations. Any reliance upon this information is solely and exclusively at your own risk. PNC