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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