The Economic Outlook

Alistair BentleyEconomist

October 2011

TWO SPEED GLOBAL GROWTHTWO SPEED GLOBAL GROWTH

30

35

40

45

50

55

60

65

70

1987 1991 1995 1999 2003 2007 2011 2015 2019 2023 2027

Share of Global Economy (%)

Forecast by TD Economics as at June 2011 Source: IMF, TD Economics

Advanced Economies

Emerging Markets

GLOBAL FINANCIAL RISK ELEVATEDGLOBAL FINANCIAL RISK ELEVATED

0

50

100

150

200

250

300

350

2005 2006 2007 2009 2010

Dow Jones Global Stock Price Index (Dec. 91 = 100)

Source: Wall Street Journal

EUROPE IN FISCAL CRISISEUROPE IN FISCAL CRISIS

0

300

600

900

1,200

1,500

1,800

2,100

Jan-10 Mar-10 Jun-10 Sep-10 Dec-10 Feb-11 May-11 Aug-11

Portugal Ireland

Spain Italy

Greece

10-Year National Bond Yields Less 10-Year German Bunds

Source: Bloomberg, TD Economics

EMERGING MARKETS COOLING BUT REMAIN STRONGEMERGING MARKETS COOLING BUT REMAIN STRONG

0

2

4

6

8

10

12

Advanced Brazil India China

2010 2011 F 2012 F

Forecast by TD Economics as at September 2011Source: IMF, National Statistics Agencies, TD Economics

Real GDP, Annual Avg. % Chg.

A U.S. RECESSION UNLIKE ANY IN RECENT MEMORYA U.S. RECESSION UNLIKE ANY IN RECENT MEMORY

0

1

2

3

4

5

6

7

8

9

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5

U.S. recessions & recoveries in real GDP

Rea

l GD

P g

row

th 4

-qua

rter

s po

st-t

roug

h (%

)

Peak-to-trough decline in real GDP (%)

Source: Bureau of Economic Analysis, TD Economics

1970

1960-61

1980

1990-91

1981-82

1974-75

1957-58

1953

2001

2008-09

A BALANCE SHEET RECESSION & RECOVERYA BALANCE SHEET RECESSION & RECOVERY

300

350

400

450

500

550

600

650

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

0

2

4

6

8

10

12

14

Net worth (lhs)

Personal saving rate (rhs)

*Disposable personal incomeSource: Federal Reserve, Bureau of Economic Analysis

Personal saving rate, % DPI* Net worth, % DPI*

LOTS OF PENT UP DEMANDLOTS OF PENT UP DEMAND

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

30% below

average

Source: Bureau of Economic Analysis, TD Economics

RECOVERY STILL VERY FRAGILERECOVERY STILL VERY FRAGILE

-10

-8

-6

-4

-2

0

2

4

6

2008 2009 2010 2011F 2012F

Forecast by TD Economics as at August 2011Source: Bureau of Economic Analysis

Real GDP, annualized quarter/quarter % change

Recession

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

2011F 1.5% (1.0%)2012F 1.7% (2.2%)

Forecast

JOB GROWTH IS KEY…JOB GROWTH IS KEY…

-10

-5

0

5

10

15

1980 1985 1990 1995 2000 2005 2010

Hours Worked

Labor Productivity

Output

*Real output per hour worked, non-farm business sector. Source: Bureau of Labor Statistics

Output, hours worked, & productivity; year-over-year % change

…BUT RUNNING UP AGAINST STRUCTURAL ISSUES…BUT RUNNING UP AGAINST STRUCTURAL ISSUES

0

5

10

15

20

25

30

35

40

45

1995 1997 1999 2001 2003 2005 2007 2009 2011

Average Duration of Unemployment

Median Duration of Unemployment

Median and average duration of unemployment; weeks

Source: Bureau of Labor Statistics

ITS BEEN A TOUGH RIDE FOR SOUTH ATLANTIC JOB MARKETITS BEEN A TOUGH RIDE FOR SOUTH ATLANTIC JOB MARKET

88

90

92

94

96

98

100

102

104

07 08 09 10 11

FL

GA

SC

NC

VA

US

Non Farm Payrolls (Index, Jan 2007 = 100)

Source: Bureau of Labor Statistics

HOUSING MARKET REMAINS AMAJOR HEADWINDHOUSING MARKET REMAINS AMAJOR HEADWIND

0

500

1,000

1,500

2,000

2,500

3,000

1959 1963 1967 1972 1976 1980 1985 1989 1993 1998 2002 2006 2011

Housing Starts (000's)

Source: Commerce Department

Fundamentally Supported Housing Starts ~ 1.6 mln

PRICE EXCESSES ARE BEING UNWOUNDPRICE EXCESSES ARE BEING UNWOUND

80

90

100

110

120

130

140

150

160

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Price to rent

Price to income

Price to rent and price to income ratio indexes (1994=100)

Source: National Association of Realtors, U.S. Census Bureau, Bureau of Labor Statistics

BUT THERE IS STILL TOO MUCH SUPPLYBUT THERE IS STILL TOO MUCH SUPPLY

90+ days delinquent

In foreclosure

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

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

Seriously delinquent (000s of mortgages)

*Existing homes. Source: Mortgage Bankers Association, TD Economics

Inventory of homes for sale* = 3.6 millionHome sales* (May, SAAR) = 4.8 million

"Shadow inventory" = 3.5 million

DELINQUENCIES RATES ARE FALLINGDELINQUENCIES RATES ARE FALLING

0

1

2

3

4

5

6

1980 1985 1990 1995 2000 2005 2010

30 days past due

60 days past due

90 days past due

Mortgage delinquencies, percent of total loans

Source: Mortgage Banker's Association, Moody's Economy.com

MORE DELINQUENT MORTGAGES ARE BECOMING CURRENTMORE DELINQUENT MORTGAGES ARE BECOMING CURRENT

0

10

20

30

40

50

60

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

Transitioning into Current

Transitioning into 90+ Delinquent

Percent of Mortgages Delinquent 30-60 Days

Source: Quarterly Report on Household Debt and Credit, FRBNY

MORTGAGE MODIFICATIONS OFTEN RE-DEFAULTMORTGAGE MODIFICATIONS OFTEN RE-DEFAULT

0

10

20

30

40

50

60

70

<=2 DQ 3-6 DQ 7-12 DQ >12 DQ

Principal Mod

Interest Rate Mod

Capitalization Mod

12-month re-default performance* (%) by delinquency status at modification

Source: Amherst Securities Group LP, CoreLogic. *data for 20-40% pay relief

FORECLOSURE COMPLETIONS RUNNING BEHIND STARTS FORECLOSURE COMPLETIONS RUNNING BEHIND STARTS

0

20

40

60

80

100

120

140

160

2005 2006 2007 2008 2009 2010 2011

Foreclosure starts

Foreclosure completions

Monthly foreclosure actions (thousands)*

*Non-agency loans. Source: Bloomberg, RealtyTrak, TD Economics

SO, FORECLOSURES REMAIN ELEVATEDSO, FORECLOSURES REMAIN ELEVATED

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

30 days 60 days 90+ days Foreclosure

Jan-08 Jan-09 Jan-10 Jan-11 Jul-11

Millions of mortgages

Source: Lender Processing Services

RENTAL MARKET ABSORBING HOUSING DEMANDRENTAL MARKET ABSORBING HOUSING DEMAND

0

40

80

120

1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009

60

62

64

66

68

70Homeownership Rate, %

Source: Census Bureau

Renters

Homeowners

Households, Mlns

SOUTH CAROLINA HOME PRICESSOUTH CAROLINA HOME PRICES

100

120

140

160

180

200

220

240

1990Q1 1993Q1 1996Q1 1999Q1 2002Q1 2005Q1 2008Q1 2011Q1

US

SC

FHFA Home Prices (Index 1990Q1 = 100)

Source: FHFA

U.S. POLITICAL DIVISION INJECTS MORE UNCERTAINTY INTO OUTLOOKU.S. POLITICAL DIVISION INJECTS MORE UNCERTAINTY INTO OUTLOOK

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2009 2010 2011F 2012F 2013F

If $1.5T deal is not reached

Full expiration of Bush tax cuts

Partial expiration of Bush tax cuts

Fiscal stimulus/drag

Fiscal stimulus, percentage point impact on real GDP growth

Estimates by TD Economics

BIG CUTS AT STATE & LOCAL LEVELBIG CUTS AT STATE & LOCAL LEVEL

10

11

12

13

14

15

16

1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

State & local government spending; percent of real GDP

Source: Bureau of Economic Analysis, TD Economics

MAJOR LONG-RUN FISCAL CHALLENGESMAJOR LONG-RUN FISCAL CHALLENGES

-12

-10

-8

-6

-4

-2

0

2

4

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Source: Congressional Budget Office/Haver Analytics

U.S. Federal Surlpus/Deficit (-) as a % of GDP

Forecast

THE FED’S DUAL MANDATE: LOW INFLATION VS FULL EMPLOYMENTTHE FED’S DUAL MANDATE: LOW INFLATION VS FULL EMPLOYMENT

-4

-2

0

2

4

6

8

10

12

2000 2002 2004 2006 2008 2010

Unemployment Rate

Headline CPI (Y/Y)

Core CPI (Y/Y)

%

Source: Bureau of Labor Statistics

SIZE AND MAKE UP OF FED’S BALANCE SHEETSIZE AND MAKE UP OF FED’S BALANCE SHEET

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2007 2008 2009 2010 2011

Liquidity Programs & OtherTreasury securitiesAgency securitiesMortgage backed securitiesTotal

Federal Reserve Securities Held Outright, $U.S. (billions)

Source: Federal Reserve Board

FEDERAL RESERVE ON HOLD UNTIL MID-2013, LONG-TERM YIELDS TO REMAIN LOWFEDERAL RESERVE ON HOLD UNTIL MID-2013, LONG-TERM YIELDS TO REMAIN LOW

0

2

4

6

8

10

12

14

16

18

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

3-mth T-Bill 30-Year Bond

U.S. Bond Yields, %

Forecast

Forecast by TD Economics as at August 2011Source: Federal Reserve, TD Economics

FINAL THOUGHTSFINAL THOUGHTS

U.S. economy likely to struggle to break through to capacity absorbing growth.

Headwinds to economic growth include: housing, credit, structural unemployment, and government restraint.

As the headwinds ebb and flow, it will create volatility in economic performance.

The financial implications are continued low interest rates for the foreseeable future, and a relatively weak U.S. dollar.

TD Economics

www.td.com/economics

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