U.S. & New York State Economic Trends & Outlook Gary Keith Vice President, Regional Economist Commercial Planning & Analytics Department September 26, 2017
Sentiment Points to Faster Economic Growth 130 125 120 115 110 105 100 95 90 The Conference Board U.S. Consumer Confidence Index Index: 1985=100 91.1 average since January 1990 85 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A 2015 2016 2017 Small Business Optimism Jumps to a 12-Year High Higher optimism resulted first in higher employment activity, and now we re seeing more small business owners making capital investments. Juanita Duggan, President and CEO, National Federation of Independent Business 122.9 Consumer Outlook Swings Sharply Higher Consumers assessment of current conditions remains at a 16-year high and expectations for the near-term outlook remain optimistic. Lynn Franco, Director of Economic Indicators, The Conference Board National Federation of Independent Business U.S. Small Business Optimism Index 90 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A 2015 2016 2017 2 108 106 104 102 100 98 96 94 92 Index: 1986=100 97.4 average since January 1990 105.3
Seasonally Adjusted Annual Rate U.S. Real Gross Domestic Product Growth But a Sobering Reality: Economic Growth Remains Modest, Highly Volatile On an annualized basis, GDP growth has topped 2.5% in just 3 of the past 9 quarters and has averaged 1.8% for the entire period trailing even the 2.1% pace from 2010-16 Past Seven Years Past Nine Quarters 6% 2.1% average 1.8% average 5% 4% 3% 2% 1% 2.5% 1.6% 2.2% 1.7% 2.6% 2.9% 1.5% 2.7% 1.6% 0.5% 0.6% 2.2% 2.8% 1.8% 1.2% 3.0% 0% -1% -2% -3% -4% -2.8% 3.0% annual average from 1990-2007 2009 2010 2011 2012 2013 2014 2015 2016 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2015 2015 2015 2016 2016 2016 2016 2017 2017 Source: U.S. Bureau of Economic Analysis 3
Crux of the Economic Problem 4 Source: Shutterstock.com 4
Year-Over-Year Percentage Change U.S. Real GDP Components If Growth is to Accelerate, Here Are The Areas to Focus On Consumers will do their part but trade and business investment will be key Personal Consumption (69% of GDP) Government Expenditures (18% of GDP) Gross Exports (13% of GDP) Non-residential Fixed Investment (13% of GDP) 6.0% 4.3% 1.5% 2.9% 3.2% 2.7% 1.8% 0.8% 3.5% 0.1% 3.5% 2.1% -0.9% -0.3% -0.6% -2.9% 13 14 15 16 13 14 15 16 13 14 15 16 13 14 15 16 Source: U.S. Bureau of Economic Analysis 5
Positive Signs on Business Investment 20% 15% 10% -5% -10% -15% Year-Over-Year Percentage Change U.S. New Orders For Core Capital Goods* 5% 0% * Non-defense capital goods aircraft (Note: data are 3-month moving average) New Orders +5.1% +3.3% Capex Still Soft But The Bottom Appears To Be In After several years of treading water, new orders are starting to rebound suggesting that factory activity will strengthen into 2018-20% -25% -30% Unfilled Orders 07 08 09 10 11 12 13 14 15 16 17 July Total North America Oil & Gas Rig Count Oil Rigs In Operation 1,800 Gas Rigs In Operation 400 Pressure On The Oil Patch Is Easing Rig count has risen in 44 of the past 52 weeks and is up 86% over past year As a proxy for business capital investment, this trend is encouraging 1,600 1,400 1,200 1,000 800 600 400 200 0 Oil Rigs (Left Scale) Gas Rigs (Right Scale) 2014 2015 2016 2017 Sept 8 350 300 250 200 150 100 50 0 Sources: U.S. Census Bureau, Baker Hughes Corp. 6
Year-Over-Year Percentage Change* Growth in World Merchandise Trade 6% 5% 4% 3% 2% World Merchandise Trade U.S. Exports 4.7% 4.3% 1% 0% -1% -2% -3% -4% Global Trade Growth Is At a Six-Year High World merchandise trade is expanding at the fastest rate since 2011 boosting U.S. exports -5% J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J 2013 2014 2015 2016 2017 Source: CPB World Trade Monitor Data are three-month moving averages 7
Year-Over-Year Percentage Change U.S. Real GDP Components A Positive Sign For Faster Economic Growth in 2018 Consumers remain stalwart but trade and business investment are now contributing as well, pointing to stronger economic growth next year Personal Consumption (69% of GDP) Government Expenditures (18% of GDP) Gross Exports (13% of GDP) Non-residential Fixed Investment (13% of GDP) 6.0% 1.5% 3.2% 2.9% 2.7% 2.8% 1.8% 3.5% 4.3% 3.2% 3.5% 2.1% 3.9% 0.8% 0.1% -0.9% -0.1% -0.3% -0.6% -2.9% 13 14 15 16 17YTD 13 14 15 16 17 YTD 13 14 15 16 17 YTD 13 14 15 16 17 YTD Source: U.S. Bureau of Economic Analysis 8
6.5 6.0 5.5 Seasonally Adjusted Annual Rate Number of U.S. Nonfarm Job Openings Employment Outlook Remains Highly Positive Millions 6.2 Strong hiring plans set the stage for faster income and spending growth in 2017-18 5.0 3.9 million annual average from 2000-07 4.5 4.0 3.5 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J 2013 2014 2015 2016 2017 Source: U.S. Bureau of Labor Statistics 9
Seasonally Adjusted U.S. Employment-to-Population Ratio Persons 25 to 54 Years Old 82% Job Seekers Are Slowly Coming Off the Sidelines 81% 80% 79% 78% 77% R E C E S S I O N R E C E S S I O N The U.S. workforce increased by 1.1 million (0.7%) over the past year with prime age participation at the highest level since October 2008 78.4% 76% 75% 79.8% average from 2000-07 74% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: U.S. Bureau of Labor Statistics Aug 10
Constant 2016 Dollars U.S. Real Median Household Income Real Household Income Surges to a New High $60,000 $59,000 $58,000 $57,000 $56,000 R E C E S S I O N Adjusted for inflation, household income is up 10.7% since 2012 and is now 0.6% above the 1999 peak $58,149 R E C E S S I O N $59,039 $55,000 $54,000 $53,000 $57,214 average from 2000-07 $53,331 $52,000 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: U.S. Census Bureau 11
Inflation-Adjusted Year-Over-Year Percentage Change U.S. Personal Consumption Spending Growth 7% 6% 5% 4% 3% 2% 1% R E C E S S I O N Consumers Provide a Solid Foundation With personal consumption representing 69% of GDP, strong performance in this sector helps put a floor under economic growth R E C E S S I O N 2.7% 0% -1% -2% -3% -4% 3.3% average Jan 1990 to Dec 2007 90 92 94 96 98 00 02 04 06 08 10 12 14 17 R E C E S S I O N Source: U.S. Bureau of Economic Analysis 2.2% average July 2009 to July 2017 July 12
10% 9% 8% 7% 6% 5% U.S. Real Gross Domestic Product Growth 2018 Growth Should Improve With Plenty of Wildcards! The economy is expected to grow at a modestly faster pace in 2018 with a potential lift from expanded fiscal policy, regulatory reform and rebuilding from Hurricanes Harvey and Irma 4% 3.8% 3.3% 3% 2% 2.7% 1.8% 2.5% 2.2% 2.4% 1.6% 1.7% 2.6% 1.6% 2.6% 2.1% 1% 0% -1% -2% -0.3% 3.0% annual average from 1990-2007 FORECAST -3% -4% -2.8% 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Sources: U.S. Bureau of Economic Analysis, Moody s Analytics and M&T Bank forecast 13
Interest Rate Forecast September 1, 2017 4.5% 4.0% Monetary Policy Will Continue to Slowly Tighten, But Remain Accommodative by Past Recovery Standards The next Fed rate hike is expected in May 2018 with no more increases through year-end 2019. Meanwhile, modest global growth and a tame inflation outlook will keep downward pressure on medium- and long-term rates. 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 10 Year LIBOR swap 2 Year LIBOR swap Forecast 1 Month LIBOR 2.28% 1.89% 1.59% 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 14
New York State Economic Trends 15
Relative Change Since 2007 Real Gross State Product Growth Upstate & Downstate New York vs. United States 20% 15% 10% The Recovery Remains Uneven in the Two States of New York Upstate GDP has been relatively anemic while Downstate growth has topped the U.S. norm Downstate NY +14.3% +12.0% United States 5% 0% Upstate NY +3.6% -5% 07 08 09 10 11 12 13 14 15 16 Sources: U.S. Bureau of Economic Analysis, Moody s Analytics 16
NYC Non-Farm Payroll Employment Versus S&P 500 Index S&P 500 Index S&P 500 Index (Left Scale Red) NYC Private Employment (Right Scale Blue) Seasonally Adjusted Non-farm Employment (Millions) 2,500 2,300 2,100 1,900 As Equity Markets Go, So Goes the NYC Job Count With approximately a 2-3 month lag 4.50 4.40 4.30 4.20 1,700 4.10 1,500 4.00 1,300 1,100 900 S&P 500 Index 3.90 3.80 3.70 700 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 3.60 Sept MTD Sources: U.S. Bureau of Labor Statistics, Standard & Poor s 17
Year-Over-Year Percentage Change NYC Private Sector Job Growth August 2017 YTD Health Care Services Professional & Business Services Leisure & Hospitality Private Education Financial Activities Construction Manufacturing Wholesale and Retail Trade -2,300-6,100 3,800 1,200 10,600 8,600 23,400 22,800 Diversification Lessens Financial Sector Exposure Unlike previous recoveries, NYC s job growth is being driven by healthcare, business services & hospitality rather than Wall Street Percentage Change 4.9% 3.1% 2.2% 3.1% 2.6% 0.6% -3.2% -1.1% 18 Source: U.S. Bureau of Labor Statistics 18
Seasonally Adjusted 3-Month Moving Average NYC Business Conditions Index Index Numbers Greater Than 50 = Expansion 58 56 54 Business Outlook Remains Positive NYC business conditions are still firmly in expansion mode, setting the stage for continued growth in 2018 57.6 52 50 48 46 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A 2015 2016 2017 19 Source: ISM New York Business Outlook Survey 19
Relative Change Since 2004 Real Manufacturing GDP 20% 15% The Reason Why Upstate NY Continues to Underperform: Deindustrialization Remains a Major Drag Upstate manufacturing output has continued to contract, creating a significant headwind for the broader economy 10% 12.5% 5% 0% -5% -10% -15% Albany-Schenectady-Troy, Buffalo-Niagara Falls, Rochester, Syracuse, Binghamton, Utica-Rome, Ithaca, Elmira, Glens Falls, Kingston and Watertown metro areas U.S. Metro Area Mean Upstate New York $6.7 billion decrease since 2006 04 05 06 07 08 09 10 11 12 13 14 15 16 est. Sources: U.S. Bureau of Economic Analysis, Moody s Analytics, M&T forecast -12.0% 20
Seasonally Adjusted 3-Month Moving Average NYS Manufacturing Business Conditions Index Current Activity vs. Previous Month Index Numbers Greater Than 0 = Expansion 20 15 10 5 Positive Sign For 2018? Factory Activity On The Upswing The manufacturing index has moved solidly into expansion mode and is at the highest level since September 2014, creating momentum for growth in 2018 19.8 0-5 -10-15 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S 2015 2016 2017 Source: Federal Reserve Bank of New York Empire Manufacturing Survey 21
Seasonally Adjusted Relative Change Since January 2015 Upstate New York Manufacturing Job Growth* 2.0% 1.5% 1.0% Disappointing Headwind For 2018 Employment is Still Out of Step With National Performance While Upstate job losses have eased since April, overall job count remains underwater relative to the U.S. United States +1.5% 0.5% 0.0% Upstate NY -0.5% Albany-Schenectady-Troy, Buffalo-Niagara Falls, Rochester, Syracuse, Binghamton, Utica-Rome, Ithaca, Elmira, Glens Falls, Kingston and Watertown metro areas, Dutchess, Orange & Putnam counties -0.6% -1.0% J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A 2015 2016 2017 Source: U.S. Bureau of Labor Statistics Upstate NY data seasonally adjusted by M&T Bank 22
Upstate New York s Industrial Legacy Depth of the Problem: Despite Years of Contraction, Manufacturing Exposure Remains Widespread 38 of the 52 Upstate counties (73%) derive a higher share of overall payroll income from manufacturing than the U.S. average Watertown Rochester Syracuse Utica- Rome Buffalo Albany Ithaca Binghamton Share of 2016 Payroll Income Derived From Industry Relative to U.S. Average Poughkeepsie- Newburgh Above Average Manufacturing Below Average Manufacturing Balanced Approximate U.S. Average Unique Structure Above average reliance on one key industry New York City Tarrytown Source: U.S. Bureau of Labor Statistics 23
Seasonally Adjusted Relative Change Since January 2015 Upstate NY Private Non-Manufacturing Job Growth* 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% Solid Non-Industrial Job Growth Outside the manufacturing sector, private employment has increased by ~40,000 jobs since the start of 2015 Private Ex. Manufacturing U.S. Average Increase = 5.3% +2.2% 0.0% -0.5% -1.0% Albany-Schenectady-Troy, Buffalo-Niagara Falls, Rochester, Syracuse, Binghamton, Utica-Rome, Ithaca, Elmira, Glens Falls, Kingston and Watertown metro areas, Dutchess, Orange & Putnam counties -0.6% Manufacturing -1.5% J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A 2015 2016 2017 Source: U.S. Bureau of Labor Statistics Upstate NY data seasonally adjusted by M&T Bank 24
Billions of Dollars Upstate NY Private Payroll Income by Sector $26 $25 $24 $23 $22 $21 $20 $19 $18 $17 $16 $15 $14 Private Education & Heath Care Manufacturing 06 07 08 09 10 11 12 13 14 15 16 $25.3 $17.5 New Economic Leadership An aging population and demand for lifelong workforce skills enhancement will continue to drive health care and education job growth $19 Significant Boost From Value Added Services Workforce education and labor cost advantages will drive further professional & business services employment growth $18 $17 $16 $15 $14 $13 $12 Manufacturing Professional & Business Services $17.5 $17.5 $11 06 07 08 09 10 11 12 13 14 15 16 Sources: U.S. Bureau of Economic Analysis, Moody s Analytics, M&T estimates 25
Upstate Metros With Higher New Economy Industry Concentrations Will Outperform Economy 2.0 Share of GDP Ithaca U.S. Metro Areas Rochester Buffalo-Niagara Albany Syracuse Utica-Rome Binghamton 53.0% 49.8% 47.6% *Economy 2.0 Sectors 62.1% 60.8% 57.4% 56.3% Education & Health Care, Business Services, Real Estate Rental & Leasing, Construction, Finance & Insurance, Information, Retail Trade, Leisure & Hospitality 78.0% Rochester Buffalo-Niagara Ithaca Albany U.S. Metro Areas Syracuse Binghamton Utica-Rome Diversification is the Key Regions that reduce their reliance on manufacturing, government and other old economy sectors will see faster employment & income growth Change in Economy 2.0 Real GDP Since 2007-0.4% 5.4% 3.5% 16.5% 14.5% 21.5% 19.6% 22.7% 26 Sources: U.S. Bureau of Economic Analysis, M&T Bank estimate for 2016 26
Near-Term Economic Outlook Hot* Medium* Mild* Buffalo-Niagara Rochester Syracuse Albany Utica-Rome Binghamton 27 * By historic performance standards 27
Upstate NY Community Bank Performance Trends 28
Year-Over Year Percentage Change* Upstate NY Community Bank Loan Growth 12% 10% 8% 6% 4% 2% Total Loans U.S. Community Banks Total Assets Under $10 Billion Upstate NY Community Banks 11.3% Loan Growth Is Sharply Outpacing the U.S. Norm 2.0% Upstate community banks continue to see double digit loan growth, in contrast to their industry counterparts nationwide 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2015 2016 2017 Driven by a Major Boost From Commercial Lending CRE and C&I loan growth is nearly 5X the U.S. community banking industry average 12% 10% 8% 6% 4% 2% 0% Total CRE and C&I Loans U.S. Community Banks Upstate NY Community Banks Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2015 2016 2017 Source: FDIC Statistics on Depository Institutions (data are 4-quarter moving averages for smoothing) 11.8% 1.7% 29
Year-Over Year Percentage Change* Upstate NY Community Bank Loan Growth 12% 10% 8% 6% 4% 2% 0% 1-4 Family Residential Mortgages Upstate NY Community Banks U.S. Community Banks Total Assets Under $10 Billion Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2015 2016 2017 9.5% -0.1% 12% Residential Mortgage Growth Is Also Topping the Industry Average Upstate community banks continue to see strong consumer mortgage growth, in contrast to the nationwide trend Total CRE and C&I Loans 10% As is Consumer Lending Growth has been solidly higher than the national average for the past two years 8% 6% 4% 2% 0% -2% U.S. Community Banks Upstate NY Community Banks Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2015 2016 2017 Source: FDIC Statistics on Depository Institutions (data are 4-quarter moving averages for smoothing) 7.5% -0.4% 30
Upstate NY Community Bank Assets Per Employee Millions of Dollars $6.0 $5.5 $5.0 $4.5 Net Result: Solid Balance Sheet Growth vs. the Industry Upstate community bank assets per employee have gone from 12% below the industry average in 2009 to 14% above the norm in 2017 U.S. Community Banks Total Assets Under $10 Billion $5.9 $5.2 $4.0 $3.5 Upstate NY Community Banks $3.0 07 08 09 10 11 12 13 14 15 16 17 Source: FDIC Statistics on Depository Institutions Q2 31
Upstate NY Community Bank Net Interest Margins 4.20% On the Other Hand Are Loan Margins Being Sacrificed For Market Share Gains? Upstate community bank loan margins have fallen considerably below industry standards since 2010 4.00% 3.80% 3.60% U.S. Community Banks Total Assets Under $10 Billion 3.78% 3.40% 3.20% Upstate NY Community Banks 3.31% 3.00% 07 08 09 10 11 12 13 14 15 16 17 Source: FDIC Statistics on Depository Institutions Q2 32
Upstate NY Community Bank Return on Assets 1.50% 1.00% 0.50% 0.00% Returns Are Relatively In Line With Historic Norms But Are Falling Behind The Industry Trend The average ROA for Upstate community banks in Q2 2017 was just 4 bp below the 0.95% long-term average since 2005 Upstate NY Community Banks 1.24% 0.91% -0.50% -1.00% U.S. Community Banks Total Assets Under $10 Billion -1.50% 07 08 09 10 11 12 13 14 15 16 17 Source: FDIC Statistics on Depository Institutions Q2 33
Questions? gkeith@mtb.com Note: This presentation is for informational and educational purposes only. Nothing herein should be considered or relied upon as legal, tax, accounting or financial advice. The author assumes no responsibility or liability for the specific applicability of the information provided. Please consult your own legal counsel for any legal advice.