The Economic OutlookJames Marple, Senior Economist

TD Economics

March 20, 2013

This time is different

7.8

4.2

5.8

5.2

4.5

2.4

5.8

3.22.9

2.2

4.0

0

1

2

3

4

5

6

7

8

9

1949-52

1954-57

1958-61*

1961-64

1970-73

1975-78

1980-83*

1982-85

1991-94

2001-04

2009-12

Average real GDP growth three years after recession trough (annual rate)

*Recessions contained within period. Source: Bureau of Economic Analysis

Average recovery growth = 4.4%

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

-25

-20

-15

-10

-5

0

5

10

15

20

25

2000 2002 2004 2006 2008 2010 2012

25

30

35

40

45

50

55

60

65

70

75

Global PMI* (rhs)

Global Trade Volume (lhs)

Global PMI*, below 50 indicates contractionGlobal trade volume (y/y %change)

*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

0

5

10

15

20

25

30

35

40

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

North America Pacific Rim

Europe South/Central America

Share of U.S. goods exports; %,12-month moving average

Source: BEA, U.S. Census Bureau

Faster economic growth is on the horizon…

-10

-8

-6

-4

-2

0

2

4

6

2008 2009 2010 2011 2012 2013F 2014F

Forecast by TD Economics as of March 2013Source: Bureau of Economic Analysis

Real GDP, annualized quarter/quarter % change

Recession

Forecast Y/Y % Chg.(Q4/Q4 % growth)

2013F 1.9% (2.3%)2014F 2.8% (3.1%)

Forecast

…In Pennsylvania too

-5

-4

-3

-2

-1

0

1

2

3

4

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pennsylvania

United States

Real gross domestic product; annual % change

Source: Bureau of Economic Analysis. Forecasts by TD Economics

Forecast

Private “deleveraging” giving way to public

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Foreigners

Business

Households & nonprofits

Government

Net Borrowing

Net Saving

Source: Federal Reserve Flow of Funds

U.S. net saving/borrowing by sector; % of GDP

-12

-10

-8

-6

-4

-2

0

2

4

2000 2002 2004 2006 2008 2010 2012 2014

Forecast

Total federal deficit (% of GDP)

Source: Congressional Budget Office, February 2013 Baseline Forecast

Federal deficits are getting smaller…

…At least for now…

11.4%

5.5%

0

2

4

6

8

10

12

14

16

2000 2010 2020 2030 2040 2050

Healthcare

Social Security

Everything else (except interest)

Federal government spending, % of GDP

Source: Congressional Budget Office, Long Term Forecast, June 2012

Housing headwind becoming a tailwind

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Housing Wealth

Residential Investment

Contribution to real GDP growth, percentage points

Housing wealth estimates by TD Economics. Source: Bureau of Economic Analysis

Forecast

Construction to catch up to household growth

0

500

1,000

1,500

2,000

2,500

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Demographic adjusted households + depreciation

Housing starts

Housing starts (units, 000s); change in households (000s)

Source: U.S. Census Bureau, TD Economics

Fcst.

Market is clearing and house prices are growing

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012

S&P Case-Shiller HPI*

CoreLogic HPI

U.S. home prices; year-over-year % change

Source: CoreLogic, S&P Case-Shiller, Haver Analytics. As of February 2013.*Twenty city composite.

Auto sales still have room to grow

30

40

50

60

70

80

90

100

110

1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

U.S. light vehicle sales per 1,000 persons 16 years of age or older

18% below

average

Source: Bureau of Economic Analysis, TD Economics

Credit conditions are improving

-80

-60

-40

-20

0

20

40

60

80

100

120

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Qualifying standards

Spreads

*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.

Net-percentage of banks tightening C&I loans to small firms*

Tightening

Easing

Uncertainty keeping firms on sidelines

50

100

150

200

250

300

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Index of Economic Policy Uncertainty (1995-2009 average = 100)

Balanced Budget Act

Black Monday

1st Gulf War Clinton Election

Russian Crisis/LTCM

Bush Election

Sept. 11

2nd Gulf War

Lehman and TARP

Stimulus Debate

Debt Ceiling, Euro Crisis

Source: "Measuring Economic Policy Uncertainty", (2012), Scott R. Baker, Nicholas Bloom and Steve Davis, Stanford mimeo.

Layoffs down, but need more hiring

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Separation rate Hiring rate

Quit rate Firing rate

Percent of total employment

Source: BLS - Job Openings and Labor Turnover Survey

Fed will continue to prime the pumps

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2006 2007 2008 2009 2010 2011 2012 2013

QE

Monetary Base = Currency + Bank Reserves

Monetary Base

Currency

Bank Reserves

Monetary Base, US$ Trillions

Source: Federal Reserve Board

America still has a jobs deficit

90

92

94

96

98

100

102

2008 2009 2010 2011 2012 2013

US Pennsylvania

New Jersey New York

Source: BLS, TD Economics. Data to January 2013

Private Sector Jobs, Jan. 2008 =100

Employment growth is key to reducing vacancies

2%

4%

6%

8%

10%

12%

14%

16%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-1500

-1000

-500

0

500

1000

1500

2000

Net Completions

Net Absorptions

Vacancy rate

Office vacancy rate, Philadelphia; % Completions, Absorptions; (000s SF)

Source: Property & Portfolio Research

Low interest rates likely here for a while

0

1

2

3

4

5

6

7

8

9

10

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

3-month T-Bill

10-Year government bond

U.S. interest rates; percent

Source: Federal Reserve Board; Forecast by TD Economics at September 2012

Fcst.

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

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