The Economic & Financial Outlook with a Focus on South Carolina
Michael DolegaDirector & Senior Economist
TD Economics
2016 DHG Executive Briefing
Greenville, SC
November 15, 2016
Economic & Financial Themes
Global
• Weaker potential growth offers only thin cushion to absorb risks
• Implicit central bank backstop remains but less scope for support
• Governments look to increasingly open fiscal spigots
• Laundry list of risks: Brexit uncertainty, Eurozone issues, China rotation, etc.
US
• Global instability and disinflation can undermine the US cyclical advantage
• Domestic economy resilient; inflation diverging with global peers
• Political uncertainty heightened until agenda solidified on trade, taxes, spending, etc.
2
Potential Growth Rate of Key Economies Has Slowed
Slowdown in global economy upon us
– Significant in magnitude (0.5pp to 1pp)
– Broad (both DMEs and EMEs)
AE running speed in the 1% to 2% range
–Demographic factors
– Labor productivity
DEs also slowing
–Commodity price slump
–Capital outflows
–China's economic rotation
3
2.5 2.5
1.7
5.0
10.5
1.7 1.51.1
4.2
6.2
United States Canada Euro Area EMs ex-China**
China
What potential GDP is believed to have been, 2002-07, %
What economists think potential GDP is, 2015-20, %
Source: OECD November 2007 & 2016 June Economic Outlook &
AE Central Banks Rely On Negative Interest Rate Policy
Disinflationary pressures remain
Most DM central banks near ELB
Europe testing limits as ZIRP turns to NIRP
Liquidity remains plentiful
–ECB buying €80bn per month
–BoJ adding ¥80tn per year to balance sheet
More sovereign bonds with negative yield
–Low inflation expectations
–Low policy rates likely for extended period
4
-0.50
-0.25
0.00
0.25
0.50
0.75
Sweden ECB Japan UK Canada US
Central Bank Policy Rates, %
Source: Haver Analytics, TD Economics.
Globally, Governments Increasingly Step Into The Gap
Monetary policy has done most of the heavy lifting, but effectiveness waning near ELB
Focus turning to fiscal policy
– Infrastructure deteriorating
–Low interest rates
Substantial lags in implementation and economic impact
Issues remain
–Countries with fiscal space not always the same ones that require stimulus
–Political roadblocks and regulation
5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Change in government fiscal balances, % of GDP
Source: OECD June 2016 (No. 99) Economic Outlook, TD Economics. *
Forecast
Brexit Adds a Layer of Uncertainty to Outlook
Brexit took markets by surprise
Adjustment likely to negatively impact global economy
UK economy likely to be most impacted
–Lower business investment
–Higher inflation
–Exports to benefit from lower GBP
Eurozone less affected economically
Brexit raises risks of further disintegration
6
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
United States Canada UnitedKingdom
Eurozone GlobalGrowth
2016F
2017F
Forecast adjustment due to Brexit
Source: TD Economics. Forecast as at Sept 2016.
GDP growth, Y/Y % Chg.
China's Economy is Evolving
Rotation away from investment and export led growth underway
Old economy drove growth since 2000 but is now slowing sharply
Many 'old' industries face overcapacity
Implications for commodity prices
Slowdown reverberating through suppliers and many EEs
New economy sectors faring much better
7
-10
-5
0
5
10
15
20
ElectricityConsumption -Manufacturing
Freight Traffic(Tons)
ElectricityConsumption -Services andHouseholds
Civil AviationPassenger
Traffic(Persons)
Retail Sales
Old Economy New Economy
2014
2015
2016 YTD*
Y/Y % Chg.
Source: Haver Analytics. As of August 2016.
China's Shift to Consumption Offers Export Opportunities
Shift towards consumption-oriented economy supported by rising incomes
Growing middle class enlarges the market and could benefit U.S. and S.C. exporters
Rotation of growth drivers not without risks
–Exchange rate policy
–Capital flows
–High debt levels
Growth rate of economy to slow further
–Deceleration to about 6% by end of decade
8
1011
88
18
25
2001-2005 2006-2010 2011-2015 2016-2020**
Actual GDP growth (Avg. Y/Y % Chg. for period)
Middle class as a % of total population*
Source: China National Bureau of Statistics, Haver Analytics.*Note: 2011-
2015 figure for middle class as a share of total population is estimate as of
2011. **Forecast by TD Economics/IMF.
6-6.5
Capital Ebb and Flows Pose Risks for EMs
Capital flows to EM reflecting underlying fundamentals, but can exacerbate issues
Since recession, there have been three periods of outflows:
–EZ sovereign debt crisis
–Taper tantrum
–Commodity slump
Increasingly negative rates and QE from across AEs pushed money into EMs, but U.S. election results could reverse
–Higher growth prospects and interest rates
–Repatriated profits
9
-0.4
-0.2
0
0.2
0.4
0.6
0.8
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
EM Capital Flows (RHS)
EM Economic Growth (LHS)
3m/3m % chng.
Source: IIF, TD Economics
$billions per day
Global Trade Has Slowed
Global growth in trade has slowed:
–Eurozone sovereign debt crisis
–Shallow recession in Japan
–Chinese economic rotation
After post-recession rebound, trade growth slowed to 1.9% (vs. 5% prior to recession)
Value of shipments slumped further in 2014 alongside commodity price downturn
Rising protectionism sentiments poses further downside risk to trade
10
-20
-15
-10
-5
0
5
10
15
20
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Value
Volume
Global trade; y/y % chg.
Source: Netherlands Bureau for Economic Policy Analysis, TD Economics
Potential Pro-Growth Policies:
Infrastructure spending
Tax cuts
Repatriation of profits
Better trade deals
Lower regulation
–Financial sector
–Energy sector
Potential Risks:
Unfunded deficits
Inflation risk
Higher interest rates
Lower labor force growth (immigration)
Potential for trade wars
Increased uncertainty
11
Trump Presidency Adds Another Layer of Uncertainty
Trade Agenda Could Disrupt Global Supply Chains
Opposition to trade was key election theme, and President has significant scope
New agreements less likely
–TPP dead
–TTIP may be going nowhere also
Existing agreements to be renegotiated
–NAFTA renegotiation on the table
Other measures
–China labeled currency manipulator
–Punitive tariffs on China, Mexico, etc.
12
32% 32%
23%
15%
0%
10%
20%
30%
40%
China Mexico Canada U.S.
Share of foreign value-added in exports (2011)
Source: OECD Dataset - Trade in Value Added (TiVA), Origin of Value Added
in Gross Exports; TD Economics.
U.S. Dollar Likely To Remain Elevated
After years of weakness dollar has surged
Strength broad bases vs. majors and rest
Stemming from diverging monetary policy
–Expanded QE globally vs. no QE in U.S.
–NIRP vs. gradual tightening cycle in U.S.
Trump initiatives positive for dollar given potential for higher growth and interest rates
High dollar to weigh on U.S. exporters especially amidst weak global demand and rising protectionist sentiment
13
90
95
100
105
110
115
120
125
130
vs. Other Trading Partners
vs. Major Trading Partners
Nominal trade-weighted US dollar (Q2-2014=100)
Source: Haver Analytics. Forecast by TD Economics as at
Forecast
South Carolina's Manufacturing More Outward Focused
S.C. highly dependent on external demand
–Goods exports totaled $31 billion
–4th most exposed state
Manufacturing sector particularly sensitive
Transportation eq. accounts for half
–Autos and parts ~$11.5bn
–Aerospace ~$4bn
–Significant import content
Machinery, chemicals, and rubber also top export industries in the state
14
Goods exports as a share of GDP
S.C U.S.
2005 9.6% 6.9%
2015 15.6% 8.3%40
50
60
70
80
90
100
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
South Carolina
U.S.
Source: U.S. BEA, U.S. Census Bureau, TD Economics.
Manufacturing exports as a share of total manufacturing output, %
Why Trade Matters For South Carolina
S.C. export mix is favorable
Dependence on several key markets:
–60% of all exports go to just five countries
–China accounts for nearly 20% of exports
–NAFTA countries make up another 20%
TPP/TTIP would have lifted S.C. exports to FTA countries from 33% to 70%
Punitive tariffs on China, NAFTA renegotiation poses particular risks
S.C. exports have high import content, so global supply chain disruptions a concern
15
0 5 10 15 20
Mexico
UK
Canada
Germany
China
Source: U.S. Census Bureau, TD Economics. As of August 2016.
Share of total exports, %
S.C. Manufacturing Outpacing Nation, Charleston Red-Hot
Manufacturing jobs growing at healthy clip until this year, but remain well below 2007
–Decline in global trade
–Rapid rise in USD
S.C. also slowed, but outpacing national
–Favorable business climate
–Good transport infrastructure
–Port access
Charleston remains red-hot, as plenty of new investment leading to hiring
–Proximity to port is key
16
60
70
80
90
100
110
120
S.C. Charleston Columbia
Florence Greenville Hilton Head
Myrtle Beach Spartanburg Sumter
Source: BLS, TD Economics
Manufacturing payrolls (=100 in 2007)
U.S.
Investment Has Been Weak, But Profit Recession Ended
Business investment has been weak spot
Much of the softness related to energy-sector CapEx
Exporters hesitant to expand given global demand and high USD
Profit-recession also dented appetite
Outlook now improved
–Oil prices appear to have bottomed
–Most of the USD appreciation in rear-view
–Profits are once again rising
–Potential for profit repatriation
17
-20
-15
-10
-5
0
5
10
15
2000 2002 2004 2006 2008 2010 2012 2014 2016
Total non-residentialfixed investment
Excluding energyinvestment
Real business investment; y/y % chg.
Source: Bureau of Economic Analysis, TD Economics. As at Q2 2016.
Robust Payroll Gains to Continue; S.C. to lead nation
Despite weak investment, businesses have continued to hire
Hiring has been broad, across all industries but manufacturing, mining, and government
S.C. outperforming and will continue to lead the nation
Charleston, Myrtle Beach and Hilton Head leading the state
Payroll growth will slow as labor market slack is eliminated
18
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
S.C. Charleston Columbia
Florence Greenville Hilton Head
Myrtle Beach Spartanburg Sumter
Source: BLS, TD Economics
Nonfarm payrolls, y/y % chg. (2016Q3)
U.S.
Continued Job Growth Has Reduced Unemployment
Little slack remains as judged by the headline jobless rate
–Natural UR around 4.5% nationally
–S.C. at a 15-year low
Other measures indicate higher levels of labor market slack
–Many marginally attached, or part-time workers who would like full time job
–Large cohort of long-term unemployed
Charleston and Greenville have tightest markets. Spartanburg made most progress
Slack should become fully absorbed in the coming quarters; S.C. to dip below national
19
9.9
11.6
9.7 9.5
12.1
11.0
9.2
11.9
13.012.7
4.9 5.14.4
4.8
5.8
4.6 4.9
6.1
5.0
6.0
0
2
4
6
8
10
12
Peak Now
Unemployment rate; %
Source: BLS, TD Economics
Tighter Labor Markets Pressuring Wages
Tightening labor market resulting in wage pressures, and more is expected
Average hourly wages are up 2.8% y/y, still well below pre-recession pace, but due to:
–Pent up wage deflation
–Retiring baby-boomers
Wages in S.C. more volatile but rising sharply in recently on tightening labor market
Median wages suggest far more stronger pace of growth, on par with pre-recession
Infrastructure stimulus likely to boost wages
20
-4
-3
-2
-1
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Median; U.S.
Avg. Pvt. Sector; U.S.
Avg. Pvt. Sector; S.C.
Wages; y/y % chng.
Source: BLS, TD Economics
Income Gains and Improved Confidence Allowing Consumers to Spend on Discretionary Purchases
Falling unemployment and rising wages are boosting incomes and confidence
Low gasoline prices also helping shore up disposable incomes
Spending on discretionary items has been rising rapidly
Domestic tourism spending set to rise, benefiting many S.C. regions
21
-4
-3
-2
-1
0
1
2
3
4
5
6
2002 2004 2006 2008 2010 2012 2014 2016
Real Consumer Nondiscretionary Spending
Real Consumer Discretionary Spending
Source: Haver Analytics, TD Economics. *Nondiscretionary: food,
y/y % chg. (3-mma)
U.S. Inflation to Track Higher
U.S. inflation has been held down by surging dollar and falling energy prices
Transitory effects to dissipate uncovering stronger fundamentals
Wages growth to materialize in stronger inflation
Additional infrastructure spending likely to push inflation even higher
22
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2011 2012 2013 2014 2015 2016
UK* EZ* US
Core CPI, Y/Y % Chg.
Source: Haver Analytics, TD Economics. *12-month moving average.
Fed Nearing Targets to Raise Rates Again Next Month
Fed is increasingly near reaching its dual objectives:
– Jobless rate is nearing its neutral rate
– Inflation is trending towards 2%
Financial stability concerns remain
Global risks have subsided
Fed to raise rates next month, but likely to go slow thereafter (1-2 hikes per year)
Fiscal stimulus could result in quicker pace of fed hikes
23
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Now 2016 2017 2018 Long-term
Fed Dots (Sep-16)
TD Economics
Markets (Nov 7, 2016)
Markets (Nov 10, 2016)
Fed funds target (%)
Source: FRB, Bloomberg, TD Economics
Interest Rates Should Begin to Grind Higher
Interest rates are likely to go up
–Fed to continue on gradual tightening cycle
– Inflation expectations rebounding
–Term premium rebalancing
Rate rise will be gradual
Rates unlikely to reach prior peaks
Higher treasury yields to lift mortgage and other lending rates
Steepening curve to benefit financial industry
24
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Fed Funds 2-year 5-year 10-year 30-year
2004-07 2016Q3 2016 2017 2018
Interest rates (%)
Source: FRB, TD Economics
Strong Demand And Low Supply Boosting Home Prices
Still, mortgage rates should remain relatively low and unlikely to derail housing recovery
Home prices have all but rebounded in S.C., and remain just 8% off peaks nationally
Demand is strong but supply remains limited, pushing prices up 5% to 6%
As more supply comes online, price growth should moderate to 3% to 4% pace
Homebuilders responding, but supply constraints keeping increases measured
25
65
70
75
80
85
90
95
100
105
2005 2007 2009 2011 2013 2015 2017
U.S. S.C.
Home prices; =100 at pre-recession peak
Source: BLS, TD Economics
Forecast
S.C. to Benefit From New Wave of Retirees
Many people postponed retirement in the aftermath of recession due to wealth impact
Now with equities and home prices rebounding, the migration south continues
S.C. to benefit alongside other southern states (Fla., Az., etc)
Industries to benefit most are:
–Healthcare
–Housing
–Leisure
–Finance
26
0 1 2 3 4 5 6 7
Spartanburg
Greenville
Columbia
S.C.
Charleston
Hilton Head
Myrtle Beach
Population; 60+ (y/y % chg.)
Source: Census Bureau, TD Economics
State Government Revenues on the Rise
Rising sales, incomes and home prices are helping shore up government revenues
State and local spending to help shore up economic growth going forward
Infrastructure spending bill would also potentially provide a boost for economy
–Some benefit felt in 2017 if passed soon
–Mostly felt in 2018 and beyond
Higher defense spending would also be stimulative, with S.C. benefiting
27
1400
1600
1800
2000
2200
2400
2600
140,000
160,000
180,000
200,000
220,000
240,000
260,000
2005 2007 2009 2011 2013 2015
U.S. (LHS)
S.C. (RHS)
State revenues
Source: Census Bureau, TD Economics
State revenues
Consumer to Drive Economic Gains, South Carolina to Outpace the Nation
28
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2000-06
2007-09
2010-12
2013 2014 2015 2016 2017 2018
United States
South Carolina
Real GDP; Annual % Change
Source: Bureau of Economic Analysis. Forecasts by TD Economics
Forecast
-2
-1
0
1
2
3
4
Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 2017
Consumer spending Inventory Investment Fixed investment
Net exports Real GDP
Source Bureau of Economic Analysis. Forecast by TD Economics as at
October 2016.
Contribution to percent change in GDP
Forecast
29
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