December 26, 2013

Economic Forecast OUTPUT AND EMPLOYMENT

WHAT THE TABLE SHOWS:  Virginia’s GDP forecast is derived from the

United States Real GDP $ billions (fourth quarter) % change over the four quarters Nonfarm employment Job count (fourth quarter) % change over the four quarters Average monthly change

2007

2008

2009

2010

2011

2012

2013

2014

$14,996 1.9%

$14,575 -2.8%

$14,540 -0.2%

$14,942 2.8%

$15,242 2.0%

$15,540 2.0%

$15,907 2.4%

$16,464 3.5%

national forecast by allocating output to each of the 50 states based on employment shares. So, forecast misses reflect surprises in the aggregate forecast as well as

137,943,000 135,153,333 129,526,667 130,283,667 0.9% -2.0% -4.2% 0.6% 99,750 -232,472 -468,889 63,083

132,286,667

134,462,667

136,729,000

138,288,195

1.5% 166,917

1.6% 181,333

1.7% 181,333

1.1% 181,333

unexpected shifts in a state’s GDP share.  Virginia’s recovery is tracking along with the national recovery.

Virginia Real GDP $ billions (fourth quarter) % change over the four quarters

$367 0.6%

$365 -0.3%

$369 0.9%

$379 2.8%

$383 1.1%

$387 1.1%

$395 1.8%

$407 3.2%

Nonfarm employment Job count (fourth quarter) % change over the four quarters Average monthly change

3,771,433 0.8% 2,647

3,740,867 -0.8% -2,547

3,620,367 -3.2% -10,042

3,658,433 1.1% 3,172

3,702,033 1.2% 3,633

3,743,967 1.1% 3,494

3,782,730 1.0% 3,230

3,819,663 1.0% 3,078

KEY MESSAGES:  Virginia’s economy is forecast to grow a little faster than it has into 2014, despite headwinds related to the sequestration. Note: GDP figures are based on quarterly values that are interpolated from annual GDP estimates using quarterly employment changes. Unbolded figures are reported actual values and bold figures represent forecasts. Sources: US Department of Commerce; US Department of Labor.

Regional Perspectives: Virginia Economic Outlook

Commercial Banking

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December 26, 2013

The Economy’s Structure PERCENT OF TOTAL GDP DERIVED FROM SELECTED INDUSTRIES

WHAT THE CHART SHOWS:  The figure compares the relative importance of selected industries to the state’s economy

20 US industry mix

18

Virginia industry mix

with the national footprint of each industry

16

(state and national figures reflect the value

14

added of each industry as a percent of

12

aggregate state or US nominal GDP,

10

respectively).

8

 Professional and business services as well

6

Regional Perspectives: Virginia Economic Outlook

Government

Other services

Hotel and food service

Arts, entertainment, and recreation

Health care and social assistance

Educational services

Administrative and waste management services

Management of companies

Professional and technical services

Real estate

Finance and insurance

Information

Transportation

Retail trade

Wholesale trade

Nondudrable manufacturing

Durable manufacturing

0

Construction

disproportionate amount to the state’s GDP. Utilities

2 Mining

as the government sector contribute a

Agriculture

4

KEY MESSAGES:  The important service sector is an asset for the state. Source: US Department of Commerce. Updated through 2011.

Commercial Banking

3

December 26, 2013

Bankruptcies RATIO OF BANKRUPTCY FILINGS TO THE 2007 Q4 NUMBER

WHAT THE CHART SHOWS:  The figure illustrates trends in bankruptcy

6

6

filings by businesses and persons relative to the number of filings in 2007 Q4, prior to the recession.

Business bankruptcy filings Nonbusiness bankruptcy filings

5

5

 Bankruptcy filings have fallen back to normal.

4

4

All US bankruptcy filings (shaded area)

KEY MESSAGES:  Indicators of financial stress are a useful

3

3

coincident indication of economic distress.  Bankruptcy filings are tracking the same

2

2

course as in the previous recession and are running slightly below the national average.

1

0 1990

1

Source: Administrative Office of the U.S. Courts; Updated through September 2013.

0

1992

1994

1996

1998

2000

Regional Perspectives: Virginia Economic Outlook

2002

2004

2006

2008

2010

2012

Commercial Banking

4

December 26, 2013

FRB Richmond Business Survey REAL GDP (% CHANGE 12 MONTHS EARLIER)

DIFFUSION INDEXES (0 = NO CHANGE)

WHAT THE CHART SHOWS:  The figure features GDP growth in Virginia

8

30 Virginia real GDP (left scale) FRB-Richmond manufacturing survey (right scale)

6

25 Forecast

4

20

5 0 -5

0

Richmond’s manufacturing survey.  The index readings represent the one-month percent change and are volatile.

15 10

2

and the Federal Reserve Bank of

-10

KEY MESSAGES:  Indicators of future activity point to improvement. Sources: Federal Reserve Bank of Richmond; US Department of Commerce. Updated through November 2013 (surveys) and 2013 Q3 (GDP).

-15

-2

-20 -25

-4

-30

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

Regional Perspectives: Virginia Economic Outlook

Commercial Banking

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December 26, 2013

Initial Jobless Claims RATIO OF INITIAL CLAIMS FOR UNEMPLOYMENT INSURANCE TO THE 2007 Q4 LEVEL

WHAT THE CHART SHOWS:  The figure tracks layoffs in Virginia and the

2.50 2.25

2.50 Virginia US (solid area)

2.25

2.00

2.00

1.75

1.75

1.50

1.50

1.25

1.25

1.00

1.00

0.75 2007

0.75

national level of claims.  Weekly layoffs, both the state and national tallies, are illustrated in the figure as a ratio to the level of layoffs in the fourth quarter of 2007, prior to the recession.  The layoff pace is almost back to prerecession levels.

KEY MESSAGES:  Layoffs, because they are reported so promptly, are a useful indicator of changing economic trends.  The declining level of layoffs signals that the

2008

2009

2010

Regional Perspectives: Virginia Economic Outlook

2011

2012

2013

economy is on the mend. Source: US Department of Labor. Updated through November 16, 2013 (state) and November 23, 2013 (US).

2014

Commercial Banking

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December 26, 2013

Economic Growth REAL GDP GROWTH (PERCENT CHANGE FROM FOUR QUARTERS EARLIER)

WHAT THE CHART SHOWS:  Real GDP growth in Virginia (the line in the

9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6

Virginia US Forecast

9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6

figure) is superimposed on top of US real GDP growth (bars in the figure).  Virginia’s economy has picked up a little speed from its 2011 slowdown.

KEY MESSAGES:  Virginia’s economy is expected to speed up in coming years. Source: US Department of Commerce. Updated through 2012 (state) and 2013 Q3 (US). Quarterly estimates for states after 2012 are interpolated from employment figures, based on the historical correlation of state and national employment changes.

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Regional Perspectives: Virginia Economic Outlook

Commercial Banking

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December 26, 2013

Economic Output REAL GDP LEVEL (RATIO TO 2000 Q4)

WHAT THE CHART SHOWS:  The figure illustrates the evolution of real

1.40

Forecast

1.40

1.35

1.35

1.30

1.30

GDP of the state and the overall US economy since the fourth quarter of 2000, the peak of the previous business cycle— that is, at any point in time the lines trace the

1.25

Virginia

1.25

1.20

1.20

1.15

1.15

1.10

1.10

1.05

1.05

ratio of real GDP to its level in 2000 Q4.  Virginia has fared better than the national economy for the past decade and the state’s economy merely stalled when the nation slipped into a recession.

KEY MESSAGES:  Virginia’s economy is forecast to continue to

US

1.00

1.00

0.95

0.95 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Regional Perspectives: Virginia Economic Outlook

pace the national economic recovery. Source: US Department of Commerce. Updated through 2012 (state) and 2013 Q3 (US). Quarterly estimates for states after 2012 are interpolated from employment figures, based on the historical correlation of state and national employment changes.

Commercial Banking

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December 26, 2013

Employment Growth NONFARM PAYROLL EMPLOYMENT (PERCENT CHANGE FROM 12 MONTHS EARLIER)

WHAT THE CHART SHOWS:  Virginia’s employment trend, compared with

5

5 Virginia US

4

Forecast

4

3

3

2

2

1

1

0

0

-1

-1

-2

-2

-3

-3

-4

-4

-5

the nation’s.  Employment is growing at a respectable pace in Virginia.

KEY MESSAGES:  Virginia’s labor market is likely to continue to expand. Source: US Department of Labor. Updated through October 2013.

-5

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Regional Perspectives: Virginia Economic Outlook

Commercial Banking

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December 26, 2013

Employment NONFARM PAYROLL EMPLOYMENT (RATIO TO THE 2000 Q4 LEVEL)

WHAT THE CHART SHOWS:  The figure illustrates the evolution of

1.10

1.10 Forecast

1.09

1.09

employment in the state compared with the nation since 2000 Q4, the peak of the previous business cycle. The lines trace out

1.08

1.08

1.07

1.07

1.06

1.06

1.05

1.05

1.04

1.04

1.03

1.03

KEY MESSAGES:

1.02

1.02

 The state’s job market outlook is relatively

1.01

1.01

rosy despite federal budget constraints

1.00

1.00

related to the sequester.

0.99

0.99

0.98 0.97

Virginia

US

0.96

0.98 0.97

the ratio of employment at the time to employment in 2000 Q4.  Businesses have replaced or recovered most of the jobs lost during the recession.

Source: US Department of Labor. Updated through October 2013.

0.96 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Regional Perspectives: Virginia Economic Outlook

Commercial Banking

10

December 26, 2013

Intrastate Employment NONFARM PAYROLL EMPLOYMENT IN SELECTED COMMUNITIES (RATIO TO 2000 Q4 LEVEL)

WHAT THE CHART SHOWS:  Employment trends in local communities

1.20 1.18 1.16 1.14 1.12 1.10 1.08 1.06 1.04 1.02 1.00 0.98 0.96 0.94 0.92 0.90 0.88 0.86 0.84 0.82 0.80

Forecast

2001

2003

2005

2007

2009

Regional Perspectives: Virginia Economic Outlook

2011

2013

2015

1.20 1.18 1.16 1.14 1.12 1.10 1.08 1.06 1.04 1.02 1.00 0.98 0.96 0.94 0.92 0.90 0.88 0.86 0.84 0.82 0.80

US forecast US Northern Virginia

across the state.  Lines are the cumulative percent change in employment since 2000 Q4, the peak of the previous business expansion.

Charlottesville Winchester

 Economic performance across the state exhibits a wide disparity of performance.

Harrisonburg BlacksburgChristiansburg-Radford Richmond

KEY MESSAGES:  Many of the local communities that were booming are again faring quite well.

Virginia Beach-NorfolkNewport News

Lynchburg

Source: US Department of Labor. Updated through April 2013.

Roanoke Danville Virginia forecast Virginia

Commercial Banking

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December 26, 2013

Unemployment UNEMPLOYMENT (PERCENT OF THE LABOR FORCE)

WHAT THE CHART SHOWS:  Trends in Virginia’s unemployment rate,

12

12 Forecast

10

US (shaded)

6

 The region’s rise in unemployment nearly mirrors the national average, even though

10

Virginia 8

compared with the national average.

the level of unemployment remains below the national average.

8

 Unemployment crested around 7 percent and has fallen back under 6 percent.

6

KEY MESSAGES:  The unemployment rate is the single best

4

4

indicator of the relative economic performance of a region.

2

2

 Stable unemployment is a sign that the economy is expanding again.

0 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Regional Perspectives: Virginia Economic Outlook

0

Source: US Department of Labor. Updated through October 2013.

Commercial Banking

12

December 26, 2013

Relative House Prices RATIO OF THE STATE’S HOUSE PRICES TO THE NATIONAL AVERAGE (1995 Q2 = 1.0)

WHAT THE CHART SHOWS:  The figure tracks the relative price of houses

1.3

1.3

in the state versus the nation—that is, it reflects the ratio of the state price index to the national house price index, with that ratio set to unity in the summer of 1995. A drop

1.2

1.2

in the line means that house prices in the state lag the national trend. States that did not suffer from speculative conditions saw a

1.1

1.1

decline in the relative price of houses in this last decade.  House prices in Virginia mirrored national trends and then some.

1.0

1.0 KEY MESSAGES:  Virginia’s housing markets are expensive, even though they have corrected some.

0.9

0.9 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Regional Perspectives: Virginia Economic Outlook

Source: FHFA. Updated through 2013 Q3.

Commercial Banking

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December 26, 2013

Real Estate Markets HOUSE PRICES IN SELECTED COMMUNITIES (RATIO TO THE 1995 Q2 LEVEL)

WHAT THE CHART SHOWS:  The figure tracks the cumulative percentage

2.50

2.50

deviation in house prices since 1995 in selected local markets and compares those

2.25 2.00 1.75 1.50

2.25 US Roanoke Harrisonburg Kingsport Lynchburg Charlottesville

2.00 1.75 1.50

Blacksburg

1.25

1.25

with the national average.  Real estate values are beginning to hold steady, after coming down somewhat from the 2007 peak.

KEY MESSAGE:  Northern Virginia remains anchored by the robust demand that comes from turnover in the nation’s capital. Source: FHFA. Updated through 2013 Q3.

1.00

1.00

0.75

0.75 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Regional Perspectives: Virginia Economic Outlook

Commercial Banking

14

December 26, 2013

New Home Building HOUSING STARTS (RATIO TO THE JULY 1990 LEVEL)

WHAT THE CHART SHOWS:  The pace of new home building (housing

2.0

2.0

starts) in Virginia, compared with the national trends.  New home building is down to about ½ of the peak level and that is relatively better

1.5

1.5

Virginia US

than the national performance, where home building is running at ¼ the pace of the peak

Forecast

years.

1.0

1.0

 Home building is creeping back up.

KEY MESSAGES:  Virginia’s housing slowdown is more related

0.5

0.5

to the recession than to inflated housing markets. Source: Census Department. Updated through August 2013.

0.0

0.0 2000

2003

2006

Regional Perspectives: Virginia Economic Outlook

2009

2012

2015

Commercial Banking

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December 26, 2013

Office Markets PERCENT OF OFFICE SPACE THAT IS VACANT

WHAT THE CHART SHOWS:  Trends in the commercial real estate

25

20

25 Northern Virginia Norfolk

markets.  Office vacancy rates remain quite elevated from Northern Virginia down to Norfolk.

20 KEY MESSAGES:  Office vacancy trends mirror the health of

15

15

the state’s economy and it is telling that office vacancies are not as troublesome as they were in the early 2000s business cycle.

10

10

5

5

Note: Data not available for Northern Virginia prior to 2008. Source: CB Richard Ellis (formerly CB Commercial Property Information Systems), Office Vacancy Index of the United States. Updated through 2013 Q2.

All metropolitan areas (shaded area) 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Regional Perspectives: Virginia Economic Outlook

0

Commercial Banking

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