U.S. QUARTERLY STATE FORECAST

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1 U.S. QUARTERLY STATE FORECAST TD Economics September, 1 New England New England s economy will advance by 1.5% this year, slightly below the national. This theme will persist over the forecast horizon. Helped by a broadening recovery in housing and an improving international trade landscape, regional growth is projected to accelerate to.% in 1 and.% in 15. Middle Atlantic This year the Middle Atlantic economy is forecast to expand by 1.5%, but growth will pick up to 1.% in 1 and.% in 15. Improvement in exports will boost activity in manufacturing and wholesale trade. The leisure and hospitality industry will also fare better, as impact from Sandy-related destructions slowly dissipates. Upper South Atlantic Growth in the Upper South Atlantic should match the nation this year, but regional divergence will be ever present. Underperformers include Virginia, Maryland and the District of Columbia growing by just 1.% this year, and accelerating as the worst of federal cutbacks pass. In contrast, North Carolina will power ahead at nearly double the pace. Lower South Atlantic The Lower South Atlantic economy looks set to outpace the nation, growing by.1% this year, as a rapid housing recovery and lower exposure to federal funding work in its favor. Outperformance should persist, with growth reaching.% in 1 and.7% in 15, due to construction activity coupled with faster population growth. U.S. Macro Themes America s housing market has turned a corner, supporting consumer confidence, repairing household balance sheets and lifting revenues of state and local governments. Tax hikes and spending cuts were the main speed bumps to growth over the first half of this year. Fiscal drag will continue, but the worst of the adjustment appears to be in the rear-view mirror. Just as this obstacle is cleared, a swift rise in interest rates presents another challenge. Longer-term interest rates have risen a percentage point since early May. Economic growth will withstand this impact, but nearterm economic momentum will slow. We expect the U.S. economy to grow by 1.% in 1, improving to.% in 1, and.1% in REAL GROSS DOMESTIC PRODUCT FORECAST *Forecast as of June 1 Source: TD Economics TD State Forecasts Unemployment Rate Housing Starts Real GDP (% Chg.) Employment (% Chg.) Home Prices (% Chg.) (average, %) (thousands) National ,11 1, New England Middle Atlantic Upper South Atlantic Lower South Atlantic Sources: BEA, BLS, Census Bureau, CoreLogic, TD Economics. Forecasts by TD Economics as of September 1. Beata Caranci, VP & Deputy Chief Economist Michael Dolega, Economist Ksenia Bushmeneva, Economist

2 NEW ENGLAND (CT, MA, ME, NH, RI, VT) New England s economic outlook is little changed relative to our prior June forecast. We expect growth of 1.5% in 1, reflecting a slight downward revision and equally slight regional underperform relative to the nation. The ongoing housing sector recovery and the improving international trade landscape will be the main drivers of stronger growth over the forecast horizon. This will help propel New England s economy to healthier expansions of.% in 1 and.% in 15. Preliminary evidence of improving economic momentum in Europe bodes well for activity in manufacturing and wholesale trade. Together, these two industries will directly contribute.7 percentage points (ppts) and 1ppt to growth in 1 and 15. Connecticut: Glimpse of light at the end of a tunnel Recovery has been a long and hard road for CT. At the root of the problem was struggling finance and insurance industries, which account for 17% of state GDP, and a protracted recovery in the housing market. This year, CT will finally find its way out of the trough, with real GDP forecast to advance by.9% in 1 and accelerating to 1.% next year. The state should see stabilization in insurance and finance industries alongside sustainable improvements in the housing market. After peaking in March, the inventory of foreclosed homes at last began to recede. Likewise, home prices have turned a corner, and are expected to rise.1% and.% in 1 and 1, respectively. This is a modest growth, however, it will go a long way in terms of restoring shattered household wealth and consumer confidence. As far as new housing is concerned, the pace of residential construction has subsided from the near-5% y/y pace earlier this year to a % pace, which we believe can be sustained over the forecast horizon. The faster pace registered earlier reflected Sandy-related re-construction. However, the gain going forward will reflect improving economic fundamentals. So far this year, a third of all new jobs created in the state were in construction, and the industry will continue to prop employment and economic growth in the near-term. Massachusetts: Hiring hits a soft patch Bay State s labor market started the year with a bang: state employment returned to its pre-recession level and payrolls gained an equivalent of six months worth of jobs in January alone. However, hiring has slowed down and the jobless rate climbed as the year progressed. Employ- - - NEW ENGLAND GSP New England Source: TD Economics, Bureau of Economic Analysis NEW ENGLAND EMPLOYMENT Net job growth, thousands % NEW ENGLAND UNEMPLOYMENT RATE New England September, 1

3 ment growth has decelerated in the leisure and hospitality industry, and in some of MA s flagship industries, such as healthcare and education. The state s multiple universities and hospitals heavily rely on grants from National Institutes of Health (NIH) and National Science Foundation (NSF) to finance their research programs. As a result of sequestration, NIH s budget for fiscal 1 was reduced by $1.7B, leading to 7 fewer grants issued this year. Moreover, starting this fiscal year, increases in federal support to universities will be capped at % per year until 1. This will likely lead to subdued hiring for several years. As a result of these headwinds, the pace of state job creation is forecast to moderate in the near term, advancing by.9% in 1 and 1.1% a year later both well below the national average. However, employment and economic growth are not always perfectly aligned. Despite slower hiring, economic growth is actually forecast to accelerate over the next two years. High value-added industries, such as professional & business service and real estate & leasing will help boost growth from 1.% this year to.7% and.% in 1 and 15, respectively. Exports improve, but manufacturing is still on shaky grounds Last year, New England s nominal exports declined in 1 out of 1 months, and the trend persisted early in 1. However, export growth turned positive in Q, with improvements concentrated in MA, VT and NH. Europedestined exports appear to have finally stabilized, reflecting tepid improvements in the Eurozone s economy. In addition, year-to-date exports to Canada the top destination for New England exports were 1% higher than last year and exports to Hong-Kong have nearly doubled. Casting a shadow on these positive developments is the fact the bulk of the gains were not in traditional manufactured goods categories. Exports were buoyed by stronger sales of oil and gas products to Canada and primary metals to Hong-Kong. As a result, the outlook for New England s manufacturing sector remains uncertain. While manufacturing will benefit from rising export demand, hiring is likely to remain muted as the industry continues to operate in a challenging domestic environment. Defense-related manufacturers, such as Sikorsky and Pratt & Whitney, recently announced another round of layoffs, citing reduced federal defense spending, uncertainty related to sequestration and rising costs. This will particularly impact CT, where the bulk of the layoffs are expected to be Thousands NEW ENGLAND HOUSING STARTS NEW ENGLAND HOME PRICES New England Source: TD Economics, CoreLogic Y/Y % Chg. NEW ENGLAND POPULATION GROWTH U.S. average (1999-1) population growth ~.9 % September, 1

4 MIDDLE ATLANTIC (NJ, NY, PA) The Middle Atlantic housing sector continues to recover at a slow but steady pace. Construction and real estate & leasing sectors should finally contribute to regional growth this year. However, weaker performances in manufacturing and leisure & hospitality are undermining growth. As a result, the Mid-Atlantic economy is poised to advance by 1.5% in 1 roughly on par with last year. Growth prospects for wholesale trade and manufacturing will improve next year, alongside stronger export demand. Leisure and hospitality should also fare better, as the drag from Sandyrelated destruction gradually dissipates. Combined, these factors will help lift economic growth to 1.% in 1. New Jersey: Housing sector is on the mend NJ s economy continues to gradually improve, however the pace of growth is not expected to pick up until 1. This year, the Garden State s economy will expand by 1.1% slightly weaker than last year. Economic growth will be concentrated in four industries. Construction and real estate & leasing will add nearly.ppts to the headline number. Meanwhile, education & health and professional, scientific & business services two of the largest industries as a share of output will contribute the rest. On the other hand, leisure and hospitality, government and manufacturing will weigh on the economy s performance. Despite extensive re-building along the coast line, aggregate beach revenues in Jersey Shore tourism still suffered a blow this year. The rental market for vacation properties also did not fully rebound. Fortunately, significant progress has been made, and as these headwinds abate alongside a broadening housing market, NJ s economic growth will accelerate to 1.7% in 1. NJ s housing sector is finally showing nascent signs of healing. Although the pipeline of distressed homes remains high, a downward trend has taken hold. As a result, home prices moved off the floor, and should increase by.1% this year and.% in 1. The pace of new residential construction remains robust, particularly in the multi-family segment. Multiples have caught up to pre-recession levels and account for half of housing starts. However, this balance is unlikely to be sustained with a shift in building and buying preference back to single-family homes. Overall starts are projected to rise by nearly % this year and next. New York: Rising housing tide is lifting many boats The Empire State will lead the region this year, growing MID-ATLANTIC GSP Mid-Atlantic Source: TD Economics, Bureau of Economic Analysis MID-ATLANTIC EMPLOYMENT Net job growth, thousands % MID-ATLANTIC UNEMPLOYMENT RATE Mid-Atlantic September, 1

5 by 1.7%. Construction, real estate & leasing and professional & business services will account for the majority of growth. All these industries have ties to the housing sector, which is staging a strong comeback. Home prices rose.5% y/y in July the fastest pace in the Mid-Atlantic while housing starts rose % from last year. Not everyone is equally benefitting from increased activity. In Syracuse, activity remains in the doldrums, with starts down % compared to a year ago. New construction is also muted in Rochester (-%) and Albany-Schenectady-Troy (+7%). However, advances are brisk in New York (+%) and surging in Buffalo-Niagara (+15%). Despite this spotty record, housing will remain a key economic driver over the next two years. While job creation is accelerating in industries with close ties to construction, the pace of hiring has moderated elsewhere. Finance and insurance payrolls continue to stagnate. Employment growth also slowed in education services and accommodation and food services the latter churned out one-fifth of all new jobs last year. As such, state payrolls are expected to advance by 1.1% this year and.7% in 1. However, this growth must be benchmarked against the starting point. Last year, NY surpassed its pre-recession peak level of employment. So, as we move forward, employment growth will revert closer to its long-term trend of.%. Pennsylvania: Back at the helm in 1 Pennsylvania s economic growth will decelerate to 1.% this year, weighed down by a manufacturing sector that was hit by softer export demand and federal spending cuts. Moreover, even as natural gas production in the Marcellus Shale formation continues to rise, there has been a slowdown in the number of new rigs installed, as companies learn to operate existing rigs more efficiently. Consequently, reduced investment spending will tap the breaks on hiring in the mining industry. Meanwhile, job creation within local governments is being held back by the cash-strapped Philadelphia School District. Because of its inability to plug the budgetary shortfall, the District closed schools and laid off.5k employees in the new school year. While job creation will remain subdued both this year and next, PA s GDP growth is forecast to accelerate to 1.9% in 1 and.5% in 15 ahead of its Mid-Atlantic neighbors. Key drivers will be manufacturing and wholesale trade, where improved international demand has already manifested in the latest trade numbers. In addition, some regional defence manufacturers, such as Boeing and Lockheed Martin, will also benefit from recently received government contracts, valued at $B each Thousands MID-ATLANTIC HOUSING STARTS MID-ATLANTIC HOME PRICES Mid-Atlantic Source: TD Economics, CoreLogic Y/Y % Chg. MID-ATLANTIC POPULATION GROWTH U.S. average (1999-1) population growth ~.9 % September, 1 5

6 UPPER SOUTH ATLANTIC (DC, DE, MD, NC, VA, WV) Growth in the Upper South Atlantic should match the nation this year. However, just like the national economy, a regional divergence will be ever present. Underperformers include Virginia, Maryland and the District of Columbia with growth of 1.% this year. As the worst of federal cutbacks pass, growth should rebound near the national pace. In contrast, North Carolina will power ahead at a full steam. D.C., Maryland, Virginia: Fiscal clouds will clear One-fifth of the DC-MD-VA region is exposed to federal government spending. D.C. has borne the brunt of these cutbacks and will post another sub-1% year. Virginia s economy should expand just at that threshold, while Maryland s smaller government exposure results in less deceleration. Between March and August, federal employment in the tri-region fell by over,. The direct impact amounts to nearly % of payrolls, but this understates the full impact of sequestration. Furloughs while less severe then previously thought have lowered take-home pay. This has negatively impacted retail trade and leisure & hospitality industries vulnerable to swings in discretionary spending. Leisure & hospitality payrolls are growing at their slowest pace since the recovery began, while retail staff declined outright for the first time since the recession. Moreover, federal contractors within the private sector have also been subject to cuts. Many of these contractors are in the high value-added professional, scientific, & technical sector. Virginia has absorbed much of this impact. The sector has cut 1, jobs over 1 months the most severe pace of layoffs since the /1 tech bust. A proposed rollback of sequester-cuts in fiscal 1 would help, but even if it doesn t occur, declines should begin to subside. This critical sector should return to growth next year, alongside surging finance & insurance payrolls and a housing market recovery that will lift economic growth near the national pace. Professional, scientific & technical payrolls have had the opposite experience in Maryland. A continual expansion captures less exposure to federal contracts and a high concentration of cyber-security contractors. Demand for the latter has become acute in recent years, following several well publicized attacks on U.S. public and private entities. Increased focus of military resources on the field has led to the establishment of the U.S. Cyber Command. The Fort Meade unit reached operational capability in late 1 and is expected to add, military and civilian payrolls next year. Coupled with transport infrastructure spending for the UPPER SOUTH ATLANTIC GSP Upper South Atlantic Source: TD Economics, Bureau of Economic Analysis UPPER SOUTH ATLANTIC EMPLOYMENT Net job growth, thousands UPPER SOUTH ATLANTIC UNEMPLOYMENT RATE % Upper South Atlantic September, 1

7 Port of Baltimore, Maryland is well positioned to outpace the national economy, with growth of.7% and.% in 1 and 15, respectively. North Carolina: The manufacturing miracle North Carolina s economy is powering ahead with broadbased gains. A slowdown in manufacturing payrolls in Q proved to be short-lived. The sector is contributing more to economic growth this year than last due to continued rotation to higher value-added industries. Contraction in tobacco, textile, and apparel is being offset by job gains in electronics, transport, and chemicals. Two-thirds of chemical industry gains stem from the hi-tech pharmaceutical industry. The good news does not end there. The entire economy is expanding robustly with the exception of government and construction. The former is partly due to North Carolina s substantial military presence. But, most of the public sector cuts have come from state and municipal payrolls. Given a relatively austere budget, these won t quickly reverse. Construction payroll cuts are in line with a recent pullback in housing starts since the first quarter. Higher mortgage rates may be partially to blame, motivating a rotation to existing homes where buyers can lock into pre-existing lower rates. Transactions in this market are up nearly onefifth from last year alongside price growth of %. Despite reduced housing sector support and military presence, North Carolina is poised to outpace the nation, with growth accelerating to.% and.% in 1 and 15, respectively. Delaware and West Virginia: Credit and coal Economic growth in Delaware is highly correlated with the state s outsized finance & insurance industry, and more specifically the credit-intermediation sub-sector. Fortunately, consumer deleveraging appears to have come to an end. Household debt increased slightly in Q, while credit card balances registered a small year-over-year gain in August. In response, financial and professional & business services firms have ramped up hiring. In turn, this should help stabilize the housing market in the only state where it is still in decline. Growth in finance and less drag from real estate should boost Delaware s economy to.% growth this year, before decelerating to under % in subsequent years. Growth fortunes will be reversed in West Virginia. It s tracking a mere 1.% pace this year, with coal mining trending lower. Hiring picked up in the sector, but has so far not shown up in production. Given the delayed response and a recent improvement in overall payrolls, broader economic growth should accelerate to about 1.% next year and 1.7% by UPPER SOUTH ATLANTIC HOUSING STARTS Thousands UPPER SOUTH ATLANTIC HOME PRICES Upper South Atlantic Source: TD Economics, CoreLogic UPPER SOUTH ATLANTIC POPULATION GROWTH Y/Y % Chg. U.S. average (1999-1) population growth ~.9 % September, 1 7

8 LOWER SOUTH ATLANTIC (FL, GA, SC) The Lower South Atlantic economy will grow by.1% this year. The relative strength is due to higher exposure to the rapidly recovering housing market and lower exposure to federal funding, only partly offset by deceleration in manufacturing a key economic driver for South Carolina and Georgia. Still, the outperformance should persist, with growth reaching.% in 1 and.7% in 15, as rapid expansion in construction will be coupled with aboveaverage population growth and improving global demand. Florida: Growing steady Florida s economy is maintaining momentum and should grow by.% this year, substantially outpacing the nation, as the strong housing recovery offsets drag from government and tepid global growth. Real-estate sectors construction and real-estate & leasing will account for one-third of economic growth this year, up from one quarter in 1. These sectors will continue to underpin growth with the state economy accelerating to.% in 1 and.9% in 15. Florida s housing recovery is forging ahead at a solid pace. Yearly home price increases have accelerated to low double digits in recently. Cumulative gains boosted house prices by nearly % since their 11 lows, with many urban counties like Miami-Dade, Broward, and Orange benefiting even more. While the share of mortgages in negative-equity still stands at a staggering 1.5%, price gains have helped lift many into the black, helping mend confidence. According to a University of Florida survey, consumer sentiment in the Sunshine State this year is at its highest since 7, with more people feeling it is a good time to buy household goods than in the previous seven years. The Bureau of Economic and Business Research estimates that the rebound in home prices motivated Floridians to spend an additional $bn to $1bn so far a full percentage point of economic growth. New construction has cooled slightly, but the, yearly pace is still 5% above last year. The deceleration is due to the volatile multi-family segment. Still, the pace of multi-family building remains red-hot at more than double its summer 1 clip. Better job prospects and rising inmigration with lift the number of households, offering a solid foundation for housing starts to reach nearly 9, next year and rise further to 11, by 15. Activity in the residential and commercial sectors will boost economic growth by. to.5 percentage points in the next two years. It should also lead to more hiring in construction, which were largely absent in earlier stages of the housing recovery LOWER SOUTH ATLANTIC GSP Lower South Atlantic Source: TD Economics, Bureau of Economic Analysis LOWER SOUTH ATLANTIC EMPLOYMENT Net job growth, thousands LOWER SOUTH ATLANTIC UNEMPLOYMENT RATE % Lower South Atlantic September, 1

9 The tide has already started to shift. In the last six months, construction added 19, of the 7, new jobs a robust tally for a sector accounting for less than 5% of payrolls. Arguably, much of the rebound in housing and consumption has been spurred on by low interest rates. The recent run-up in rates will temper the pace of recovery but not derail it against a backdrop of tighter supply, still-high affordability and rising household formation LOWER SOUTH ATLANTIC HOUSING STARTS Thousands Georgia: More than keeping up While lagging out of the gate, the housing recovery in Georgia has accelerated sharply in recent months, surpassing Florida s by many measures. Housing starts are nearly % above last year s pace supported to a large degree by single-family construction. Existing home sales increased by nearly one-fifth and prices have soared by 1% from last July. Much of this improvement is related to lower distressed inventory overhang, as well as a rapid acceleration in employment growth. Over the last several months, net job creation in the Peach State matched Florida an economy nearly twice the size. Gains have been widespread, with substantial increases in services industries of professional & business, education & health, and tourism. It is growth in these sectors that will enable Georgia to outperform the nation with growth of.% this year. The outperformance will continue, with Georgia s economy accelerating to.1% and.% in 1 and 15, respectively. South Carolina: Staying competitive The slowdown in global trade has put a damper on South Carolina s manufacturing. While the sector has not substantially shed payrolls remaining just 1, jobs shy from the recent peak the stalling in employment growth will certainly manifest in the economy. The sector accounts for over 15% of direct economic output and was to credit for half of the economic growth in the preceding two years. This performance will not be repeated this year, as a slowdown in manufacturing, a more-muted rebound in residential construction and a lack of meaningful support from office-using services bite into growth. However, the economy should still expand at a healthy of %, due to earlier deployed capital in high value-added aerospace and automotive manufacturing, as well as infrastructure spending. Looking ahead, competitiveness within the state will be enhanced by a rail link from Spartanburg and Greenville to the Port of Charleston. This will provide exporters and importers with more efficient access to international markets. Manufacturing, transportation, and trade sectors should benefit, lifting growth to.5% next year and.7% in LOWER SOUTH ATLANTIC HOME PRICES Lower South Atlantic Source: TD Economics, CoreLogic LOWER SOUTH ATLANTIC POPULATION GROWTH Y/Y % Chg. U.S. average (1999-1) population growth ~.9 % September, 1 9

10 TD State Forecasts Real GDP (% Chg.) Employment (% Chg.) Unemployment Rate (average, %) Housing Starts (thousands) Home Prices (% Chg.) Population (% Chg.) National ,11 1, New England Connecticut Massachusetts Maine New Hampshire Rhode Island Vermont Middle Atlantic New Jersey New York Pennsylvania Upper South Atlantic District of Columbia Delaware Maryland North Carolina Virginia West Virginia Lower South Atlantic Florida Georgia South Carolina Source: BEA, BLS, Census Bureau, CoreLogic, TD Economics. Forecasts by TD Economics as of September 1 September, 1 1

11 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. 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. This 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 the 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. September, 1 11