1 National and Selected Regional Economic Conditions & Outlook March 24, 2015 Larry “Chip” Filer, Ph.D.

US economy –The US Consumer –Impact of Cheap Oil –Employment and Wages –Federal Reserve policy Regional economic conditions –Economic Growth and Employment –Housing 2 Presentation Outline

3 Growth in Real Gross Domestic Product (GDP), Source: Bureau of Economic Analysis and Old Dominion University Economic Forecasting Project. Seasonally adjusted annualized rate June 2009Dec Recession Last Four Quarters 2014:Q1-2.11% 2014:Q24.59% 2014:Q34.97% 2014:Q42.19%

Risk of Recession Index: 6 Months Forward 4 Source: Moody’s Economy.com.

The Outlook for Households 5

Personal Consumption Expenditures and Real Disposable Personal Income 6 Billions of Real Dollars Source: Bureau of Economic Analysis.

Personal Consumption Expenditures and Real Disposable Personal Income 7 Billions of Real Dollars Source: Bureau of Economic Analysis.

Total Household Debt Balances, 2003:Q1 – 2014:Q3 8 Source: Federal Reserve Bank of New York Household Debt and Credit Survey. Peak (2008Q4): $12.6 Trillion Trillions of Dollars

Household Debt-to-Income Ratios, 1980:Q1 – 2013:Q3 9 Source: Federal Reserve Board of Governors. Estimates began in 1980:Q1 Financial Obligations Ratio (FOR) = (debt service + rent + auto leases + others) / (after-tax income) Debt Service Ratio (DSR) = (minimum debt payments) / (after-tax income) 2007:Q PeakAll-Time LowCurrently DSR FOR

10 Credit Accounts by Type - (Millions of Accounts) Source: Federal Reserve Bank of New York Household Debt and Credit Survey.

Households have improved their balance sheet Though debt levels are rising again, households are keeping their obligations in line with income Consumption is poised to continue its important contribution to Real GDP in Summary 11

Oil Watch 12

13 Oil Spot Prices Price of a “Barrel” of Oil January 2005 – March 13, 2015 Source: United States Energy Information Administration.

14 Source: Federal Reserve of Cleveland, Board of Governors, and Old Dominion University Economic Forecasting Project. 10Y TIPS Spread and Cleveland Expected Inflation TIPS Spread: Treasury Yield minus TIPS Yield

15

Positive –$1000 per household –Equivalent to a $100 billion tax cut Negative –Global contraction? –Perhaps a.2 to.5 % decrease in fixed investment –Certain regions of the US might get squeezed 16 Impact of Cheap Oil

17 Nonresidential Fixed Investment Annual Energy Industry Share Source: Bureau of Economic Analysis.

Initial Unemployment Claims (4 week MA) 18

Positive –$1000 per household –Equivalent to a $100 billion tax cut Negative –Global contraction? –Perhaps a.2 to.5 % decrease in fixed investment –Certain regions may feel the squeeze Timing matters –2015 impact undoubtedly positive –Positive impacts deteriorate in future years 19 Impact of Cheap Oil

The Outlook for Employment and Wages 20

21 The Recession in Perspective % Decline in Total US Non-farm Payroll Employment from Pre-Recession Peak Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project Recession: Job losses recovered in May, 2014 (76 months)

Nonfarm Employment: Time Until Pre-Recession Level 22 Thousands, Seasonally adjusted January December 2014 Source: Bureau of Labor Statistics.

23 US Unemployment Situation Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project. Average 5.3% Average 9.1% Seasonally adjusted

Actual vs Projected Labor Force Participation Rates 24 Annual Percent, Already Outpacing the 2012 Projections! Source: Bureau of Labor Statistics.

Labor Force Flows from Prior Month 25 Down -12% from Dec UP 11% from Dec Source: Bureau of Labor Statistics and ODUFP calculations

Good to have slow wage growth right now Slow wage growth and labor market slack suggest a good deal of cyclical unemployment remains. Rapid wage growth with slack would suggest most of the unemployment was structural and those without jobs would be unlikely to get new ones. Structural vs. Cyclical Unemployment 26

Private Wage Growth 27 Semi-Annual Percent Change January 2007 – December 2014 Source: Bureau of Labor Statistics.

The labor market improved dramatically in Labor force participation continues to decline, but the recent declines are a result of demographic attrition (retirements) and not discouraged workers. Payroll growth has been flat, but that should change as the last remaining cyclical unemployment is absorbed. Summary 28

FED Watch 29

30 Shadow Rate Given Current Policy Tracking the Fed Funds Rate Percent, Quarterly Average January 2007 – December 2014 Source: Federal Reserve Board of Governors and Wu & Xia (2014).

Federal Reserve Balance Sheet, January 2007 – December 2014 Source: Federal Reserve Board of Governors. 31 Quantitative easing

When will the Fed raise the Federal Funds Rate target? Will short-term rates increase immediately when the target rate starts to increase? Questions for

33 Market Expectations of Policy Firming (Contract Settle Price on Jan. 5 (Green) and Feb. 27 (Orange)) Source: Chicago Board of Trade. Futures Market Implied Expected Federal Funds Rate

FOMC Expectations of Policy Firming 34 Expected year of first increase in target federal funds rate Source: Board of Governors of the Federal Reserve and Old Dominion University Economic Forecasting Project.

35 Yield Curve Comparisons Source: United States Department of the Treasury. Percent

Fed will need to: –Reduce the size of its balance sheet –Normalize short-term interest rates Accomplishing both objectives will require far more than just adjustments to the target rate We are not saying “Patient” anymore, but we are clearly going to be “Patient” Signs pointing toward a July/September rate increase. 36 What can we expect from the Fed in 2015?

Washington Watch 37

Looming “Battles” in March 16 Reinstatement of the Debt Ceiling March 31 So Long Doc Fix May 31 So Long Highway Trust Fund October 31 Current CRomnibus Bill Expires Source: Old Dominion University Economic Forecasting Project.

National Outlook for % 3.04% 1.70% %1.9% 1.60%1.7% 0.10% 2.86% 4.10% Historical 2015 Forecast Real Gross Domestic Product (GDP)2.78%1.92% Employmentgrowth1.65%1.70% Unemployment rate (%) Consumer price index (CPI)1.90%1.22% CPI–Core (excludes food and energy)1.89%1.71% 3-monthTreasury bill0.09%0.06% 10-year Treasury bond1.80%2.35% 30-year conventional mortgage rate3.66%3.98% 1.9% % 2.55% 4.17% Source: Old Dominion University Economic Forecasting Project.

Regional Economic Conditions 40

Source: Bureau of Economic Analysis and the Old Dominion University Economic Forecasting Project. Growth in Hampton Roads and the US

42 The Recession Including Virginia and Hampton Roads % Decline in Total US Non-farm Payroll Employment from Pre-Recession Peak Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project. Pre-Recession Peak Dates: US: January, 2008 Virginia: April, 2008 Hampton Roads: July, 2007

43 Month-to-Month Change in Hampton Roads Payroll Employment Source: Bureau of Labor Statistics and Old Dominion University Economic Forecasting Project Number of Jobs, Seasonally adjusted

44 Estimated Direct DOD Spending in Hampton Roads

45 Hampton Road’s Gross Regional Product Attributable to DOD Spending

Housing In Hampton Roads 46

47 Estimated Inventory of Existing Residential Homes as Measured by Active Listings In HR: 2007, 2010, and 2014 Source: Real Estate Information Network Inc. and the Old Dominion University Economic Forecasting Project. Information deemed reliable but not guaranteed. Average ( Jan through December 2014) = 7,814

Based on Average Sales in the Last 12 Months: January 1996 – December Source: Real Estate Information Network and Old Dominion University Economic Forecasting Project. Information deemed reliable but not guaranteed. Average (Jan December 2014) = 5.63 months December 2014: 5.90 Peak: (November 2010) Estimated Months of Supply of Existing Homes in Hampton Roads

Number of Existing, Short Sale, and REOs Residential Homes Sold Hampton Roads: Source: Real Estate Information Network and Old Dominion University Economic Forecasting Project. Information Deemed Reliable But not Guaranteed. YearAll Sales , , , , , , , , ,700 Short Sales Percent ShortSales 3<1% 40<1% , , , , REO Sales Percent REO Sales 56 <1% , , , , , ,

2015 Forecast for Hampton Roads MSA 2014*2015% Change *Figures for calendar year 2013 include predicted values for Dec Nominal Gross Regional Product $91.96B $95.49B Real Gross Regional Product (2009=100) $84.82B $86.48B Civilian Employment 755, Unemployment Rate 5.6 % 4.9 % Taxable Sales $20.94B $21.73B +3.8 Hotel Revenue $693.66M $727.65M +4.9 General Cargo Tonnage 19.06M 19.61M +2.9 Housing Permit Value $759.83M $784.15M +3.2