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Volume XXIII, Number 4 / December 2012 XXIII, Number 4 Volume Page 11 If Washington does the right thing, the U.S. economy is ready to shift into higher gear. is ready economy U.S. the thing, the right does Washington If U.S. Macro Outlook 2013: Poised for Liftoff for Outlook 2013: Poised U.S. Macro

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The Regional Financial Review is edited by Steven G. Cochrane Analysis Features 11 U.S. Macro Outlook 2013: Poised for Liftoff 1 Executive Summary Mark Zandi By Mark Zandi If Washington does the right thing, the U.S. economy is ready to shift into higher gear. 4 Forecast Assumptions MARK ZANDI

14 U.S. Regional Outlook 2013: 63 FAQ A Broadening Expansion

By Steven G. Cochrane Forecast Reviews Each region has specific drivers ready to accelerate. The West has the most with housing, technology and trade potentially lifting the region. The Northeast has International the greatest risks tied to financial services and linkages with Europe. 66 European Macro and Metro Area 25 Global Macro Outlook 2013: Another Slow Year Ahead U.S. State and Metropolitan Area By Alfredo Coutino, Glenn Levine, Ruth Stroppiana and Petr Zemcik The U.S., Japan, and major emerging economies in the Asia-Pacific region and 74 Northeast Southern Cone shed substantial momentum in 2012 as Europe sank back into recession. The global economy will continue to grow below potential in 2013. Slow- growing advanced economies will cap global demand. 86 Midwest

33 Global Metro Area Outlook 2013: 98 South Persistent Recession for Most of Europe 110 West By Ed Friedman and the European Research Staff Most European metro areas will remain in recession. Metro areas in Asia and Latin America will do better. Differences will be shaped by national and regional fiscal policy, and by exposure to contracting financial services. Demographics help de- Regional Tables termine short- and long-term trends. U.S. macro and regional forecast tables as well as state and metro area historical tables 49 A New Measure of Country Risk are available exclusively to subscribers via www.economy.com. By Mark Hopkins and Bodhi Ganguli Moody’s Analytics has developed quantitative metrics to measure and compare risk along six distinct dimensions for 188 countries. These include measures of macroeconomic, business, financial, social, political and security risk, useful for weighing the costs and benefits of global strategy. 6 MOODY’S ANALYTICS / Regional Financial Review / December 2012 EXECUTIVE SUMMARY

Poised for Liftoff BY MARK ZANDI—December 11, 2012

he U.S. economy in 2013 will feel the contrasting drafts of a retrenching federal government and a reviving private sector. Stiff fiscal headwinds will prevail during the first half of the year and growth will be weak, T but by the second half, business investment will be rising, as will bank lending and household spending on cars and homes. The biggest threat to this outlook remains a failure by Washington to reasonably address the nation’s fiscal challenges. But assuming Congress and President Obama do roughly the right thing—and the political stars are aligned so that they should—the economy will be back to a healthy pace of growth by 2014.

Intense fiscal drag mum tax and Medicare’s reimbursement sequestration deal and the resulting cuts to The current tax and budget negotiations schedule for doctors and hospitals. the defense budget, but they will insist on could play out in many ways, but the most Together, these changes will produce fis- other spending cuts. likely scenario has lawmakers agreeing on a cal drag equal to 1.25% of GDP in 2013 (see The resulting agreement will thus have to comprehensive budget plan in early 2013. Chart 1). The impediment to growth will be include a broader program of deficit reduc- The plan we envision would scale back the significant—particularly during the first half tion, including tax and entitlement reform. tax hikes and spending cuts now set to take of next year—but manageable. Real GDP Doing all this will be impossibly complex effect in January, raise the Treasury’s statu- will grow around 2%, roughly the pace since in a short period; therefore lawmakers will tory debt ceiling, and lay out a credible path the recovery began. The amount of fiscal likely lay out a broad framework and let to fiscal sustainability. drag will also be roughly unchanged from congressional committees hash out the de- The scheduled tax hikes and spending 2012, a year in which federal, state and local tails next year. cuts known collectively as the fiscal cliff will governments cut spending. There should be A plausible framework could include be reduced enough to prevent a new reces- little drag from state and local governments $1.5 trillion in tax revenue increases over sion. There are various ways for Congress to in 2013. the next decade, $750 billion from higher do this; each would add some fiscal drag, As part of the fiscal cliff agreement, the tax rates and the remaining $750 billion holding back economic growth over the debt ceiling will be raised high enough to through tax reform. The framework will also year. The most likely agreement would allow last past the 2014 elections. But this will not include $2 trillion in spending cuts, including the 2011-2012 payroll tax holiday to expire happen without the (adding a fiscal drag equal to 0.6% of GDP); consent of House Chart 1: From Fiscal Stimulus to Fiscal Drag phase out the emergency unemployment Republicans, who in Fiscal policy contribution to real GDP growth, %

insurance program (fiscal drag equal to summer 2011 used 4.5 Bush-era tax cuts (>$250k) 0.35% of GDP); end the Bush-era tax rates the debt ceiling as a 4.0 Bush-era tax cuts (<$250k) 3.5 ACCA tax for households with income of more than lever to cut $1 tril- Spending cuts 3.0 Payroll tax & emergency UI $250,000 per year (0.24%); and allow taxes lion of government 2.5 Recovery Act 2.0 Other stimulus to rise on higher- income households to help spending over 10 Cash for clunkers 1.5 Tax rebate checks pay for healthcare reform (0.06%). years through dis- 1.0 Total fiscal policy This means lawmakers are likely to ex- cretionary spending 0.5 tend the Bush-era tax rates for households caps, and another 0.0 -0.5 making less than $250,000 a year; eliminate $1 trillion through -1.0 the spending cuts scheduled under the 2011 sequestration. House -1.5 sequestration agreement, and extend the Republicans will 08 09 10 11 12 13F inflation adjustment to the alternative mini- happily jettison the Source: Moody’s Analytics

MOODY’S ANALYTICS / Regional Financial Review / December 2012 1 EXECUTIVE SUMMARY �� Poised For Liftoff

Chart 2: Businesses More Profitable Than Ever Chart 3: Well-Capitalized and Profitable Banks After-tax corporate profit margin, % Commercial banks 18 9.25 1.6 1.4 16 8.75 1.2 8.25 14 1.0

12 7.75 0.8 0.6 10 7.25 Core capital ratio (L) 0.4 6.75 8 Return on assets (R) 0.2 6 6.25 0.0 45 50 55 60 65 70 75 80 85 90 90 00 05 10 90 92 94 96 98 00 02 04 06 08 10 12 Sources: BEA, Moody’s Analytics Sources: FDIC, Moody’s Analytics cuts to Social Security and Medicare. Includ- capital, putting important benchmark ratios Political risks ing the $1 trillion in spending cuts agreed near all-time highs (see Chart 3). Tighter Optimism that a stronger private sector to in the 2011 debt-ceiling deal, the ratio underwriting since the recession has greatly will lift the economy by this time next year of spending cuts to tax increases would be improved credit conditions. The quality is tempered mainly by political risks. An 2 to 1. Assuming future lawmakers stick to of commercial and industrial loans, credit agreement to tackle the nation’s fiscal issues this plan, deficits a decade from now will be cards, and auto loans is about as good as is clearly easier said than done. To generate small enough to allow the U.S. debt-to-GDP it gets. Even among first mortgage loans, the necessary political will, negotiations will ratio to decline. the number delinquent between one and likely need to extend into 2013. That is, the two months is at record lows. The missing nation will need to temporarily go over the Strong balance sheets ingredient to stronger bank profits is more fiscal cliff, experiencing the scheduled tax Despite the fiscal drag, the economy lending, and banks are steadily opening the hikes and spending cuts at least temporarily. should gain traction by the second half of credit spigot. The effect will not be catastrophic, particu- 2013, powered by a reviving private sector. The picture among household balance larly if the Treasury decides not to change An excess of leverage led to the Great Re- sheets is less uniformly good, but they tax withholding schedules in anticipation of cession, but firms and households have rap- too are much improved. Higher-income a deal being struck during the first few weeks idly pared down their debts since then, and households have shed debt; most have only of the new year. Government agencies could balance sheets now are strong. With some fixed-rate mortgages that have been made also delay their most draconian budget cuts additional clarity from Washington on taxes cheaper through refinancing. Lower-income for a time. and budgets, businesses, banks and house- households still struggle to make mortgage However, the economic damage will holds should all become more aggressive in and student loan payments, but across all mount with each passing day, as businesses, investing, hiring, lending and spending. households, the debt service burden—the investors and consumers begin to doubt that U.S. companies are in especially good proportion of after-tax income needed to policymakers can come to terms. By early shape. They significantly lowered their cost stay current on out- structures during the recession and have standing debt—will Chart 4: Households Rapidly Deleverage kept unit labor costs—compensation per soon be at record % of disposable income unit of output—unchanged since the down- lows (see Chart 4). 14.5 19.0 Debt service (L) turn. Profit margins thus expanded, and Households are not 14.0 18.5 have never been wider (see Chart 2). Strong likely to ramp up Financial obligations (R) 13.5 18.0 profits and low interest rates have allowed borrowing any time 13.0 17.5 firms to substantially lighten their debts and soon (and lenders 12.5 17.0 generate a flood of cash. But businesses in- are unlikely to give 12.0 16.5 creasingly realize that to keep their earnings them the oppor- 11.5 and stock values healthy, they need to seek tunity), but most 11.0 16.0 new growth opportunities. consumers no lon- 10.5 15.5 The U.S. financial system has arguably ger have to curtail 10.0 15.0 never been sounder. Depository institu- spending to manage 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 tions have raised hundreds of billions in new their debts. Sources: Federal Reserve, BEA, Moody’s Analytics

2 MOODY’S ANALYTICS / Regional Financial Review / December 2012 EXECUTIVE SUMMARY �� Poised For Liftoff

February, as the Treasury runs out of options policymakers had failed, and that progress to- everyone, which no legislators—particularly to avoid the debt ceiling, stock prices will ward fiscal sustainability would require a seri- not House Republicans—want. Neither do slump, bond and credit default swap spreads ous financial crisis. Businesses would remain they want spending to be cut across the will widen, and business and consumer con- under a cloud, unsure of their taxes, the size board, with chaotic results to defense and fidence will slide. Political pressure will grow, of future government contracts, and the na- nondefense programs. The debt ceiling also which is precisely the stress needed to forge tion’s long-term fiscal situation. The economy gives House Republicans significant lever- an agreement. The danger is that instead would throttle back to a new normal, charac- age that they have shown a willingness to of a comprehensive deal, lawmakers could terized by a much slower pace of growth. use. And both President Obama and House choose to kick the can, extending current But while the threat of political failure Speaker John Boehner are concerned about tax and spending policy for a few months or cannot be dismissed, the times appear fa- their legacies, giving them reasons to aim another year while raising the debt ceiling vorable for something out of the ordinary. for a historic deal and put the U.S. economy enough to get past this period. This president and Congress do not have back on track. With less fiscal drag, the economy would to be made of different stuff than their What Winston Churchill is reputed to grow more quickly in 2013, but the long-term predecessors; they just have to respond in have said about Americans doing the right prospect would be much worse. Kicking the the usual ways to unusual circumstances. thing—after they have exhausted all other can down the road would be a signal that If they do not act, tax rates are going up on possibilities—should still apply.

MOODY’S ANALYTICS / Regional Financial Review / December 2012 3 EXECUTIVE SUMMARY

Forecast Assumptions BY MARK ZANDI—December 11, 2012

Monetary policy ment not to raise rates, which is currently bottom interest rates to take some financial The Federal Reserve continues to pursue mid-2015. pressure off debtors—refinancing activity an extraordinarily aggressive easy monetary The Fed is also expected to end its Op- is strong—and prompt investors and credi- policy in response to an economy that is eration Twist program—selling short-term tors to take more risk, thus supporting stock operating well below its potential. Also mo- Treasury securities and using the proceeds to prices and more lending. Indeed, despite tivating the Fed’s stance are low and stable purchase long-term securities—at the end of some downsides to the Fed’s extraordinary inflation and inflation expectations that re- the year. There are not enough outstanding actions, they have to date lifted real GDP main near the Fed’s 2% target and unsettled short-term securities to continue on with by 1.25 percentage points, supporting more global financial markets given the ongoing the program. The Fed will instead simply than 1 million additional jobs, and lowering European debt crisis and weaker conditions buy long-term Treasuries by expanding its the unemployment rate by approximately in the emerging world. balance sheet. Along with QE3, its holdings 0.7 percentage point. With short-term interest rates at the of Treasuries and mortgage securities will Quantitative easing is expected to end zero bound, the Fed has been working hard expand by approximately $80 billion per by mid-2014, and the Fed is expected to to lower long-term rates. To this end, poli- month. Given the Moody’s Analytics outlook begin raising short-term interest rates by cymakers recently announced a third round for unemployment to fall through 7% by late 2014. However, it will be summer 2016 of quantitative easing, involving open-ended mid-2014, the Fed’s balance sheet will ex- before it is able to fully normalize monetary purchases of mortgage securities. That is, pand by an additional more than $1 trillion. policy. In a well-functioning economy that is the Fed will continue its purchases until it The Fed’s balance sheet will ultimately top operating near full employment, the federal is clear that the job market has significantly more than $4 trillion; in a well-functioning funds rate target should be just over 4%. improved. Policymakers are expected to economy it should be closer to $1 trillion. become more explicit with regard to what The Fed’s extraordinary actions have sig- Fiscal policy this means, perhaps adopting something nificantly reduced long-term interest rates, The federal budget deficit was $1.1 tril- akin to a target for the unemployment rate, with 10-year Treasury yields near 1.75% and lion in the just-ended fiscal 2012; equal say 7%. This would allow them to end their fixed mortgage rates at a record low of 3.5% to almost 7% of GDP (see Chart 2). This is problematic date-dependent policy commit- (see Chart 1). The Fed expects the rock- down from the $1.3 trillion deficits in fiscal

Chart 1: Monetary Policy Chart 2: Fiscal Policy % Federal budget deficit 8 0 11

Federal funds rate 9 6 Prime rate -400 Discount rate Share of GDP (R) 7 4 -800 5

2 -1,200 3 $ bil (L) 0 -1,600 1 09 10 11 12 13 14 15 09 10 11 12 13 14 15 Sources: Federal Reserve, Moody’s Analytics Sources: BEA, Moody’s Analytics

4 MOODY’S ANALYTICS / Regional Financial Review / December 2012 EXECUTIVE SUMMARY �� Forecast Assumptions

2011 and 2010, and the record $1.4 trillion ing cuts. Fiscal policy will be a significant From a long-run perspective, the dollar in fiscal 2009. Tax revenues are increasing constraint on growth, subtracting 1.25 per- is currently appropriately valued against the at a mid-single digit pace and government centage points from 2013 real GDP growth. euro and a bit overvalued against the British spending is slowly declining. Policymakers will also agree to some pound. Despite this, given the prospects for The unprecedented deficits reflect both additional long-term deficit reduction. As- a stronger U.S. economy by this time next the Great Recession and the costs of the suming that the Bush-era tax cuts for those year and a continued weak Europe, the dol- government’s multifaceted response to it. making more than $250,000 annually ex- lar is expected to appreciate vis-à-vis these The total direct costs, including the Trouble pire and the $1 trillion in 10-year spending currencies through mid-decade. It will not Asset Relief Program, the fiscal stimulus, cuts agreed to as part of last year’s Treasury be until the end of the decade that the dollar and other efforts such as addressing the debt-ceiling deal are implemented, then and European currencies are back near their mortgage-related losses at Fannie Mae and $2 trillion more in 10-year spending cuts long-run fair value. The dollar is also expect- Freddie Mac, are expected to be more than or tax revenue increases will be needed to ed to appreciate against the yen through $1.8 trillion. Of this, approximately $1.4 tril- achieve long-term fiscal sustainability. That mid-decade as the Japanese central bank lion was paid for the fiscal stimulus, $200 is, budget deficits that are less than 3% of becomes even more aggressive in its effort billion covered Fannie and Freddie’s losses, GDP; this is small enough that the nation’s to lift that economy. The dollar is somewhat and the rest went to clean up the banks and debt-to-GDP ratio will stabilize. Most of undervalued against the yen on a long-term bail out the auto and housing industries. this additional deficit reduction is assumed basis (see Chart 3). Adding in nearly $750 billion in lost revenue to come from changes to the Medicare and The dollar is expected to depreciate and increased spending prompted by the Medicaid program and tax reform—a scaling slowly and unevenly against the currencies weaker economy, the total budgetary cost back of the deductions and credits in the tax of most emerging economies, especially the of the crisis is projected to top $2.5 trillion, code; particularly to the corporate tax code. Chinese yuan, against which it is still mean- more than 16% of GDP. For historical com- There are clearly many risks to this outlook, ingfully overvalued. The dollar will decline by parison, the savings-and-loan crisis of the but the key assumption is that policymak- 2% to 3% per annum vis-à-vis the Chinese early 1990s cost about $350 billion in to- ers are able to come sufficiently to terms currency over the next three to four years. day’s dollars: $275 billion in direct costs plus to achieve fiscal sustainability by the end of U.S. policymakers would like this revaluation $75 billion due to the associated recession. the decade. to occur much more quickly given the very This sum was equal to almost 6% of GDP at wide U.S. trade deficit with China, but the that time. U.S. dollar Chinese are unlikely to accommodate this The deficit is expected to narrow to be- The real broad trade-weighted U.S. dollar given their soft economy and the view that low $1 trillion in fiscal 2013. This reflects is stable despite the mounting U.S. fiscal is- this would be a problem for their export- the assumption that the Bush-era tax cuts sues. There is no obvious alternative curren- oriented manufacturers. will expire for those taxpayers making more cy for investors to flock to in uncertain times On a broad trade-weighted basis across than $250,000 annually, and the expiration and they are thus more or less staying put. all currencies and over the long run, the of the payroll tax holiday and emergency Indeed, global foreign exchange markets dollar is expected to depreciate modestly unemployment insurance program. It also have been surprisingly stable throughout the in value. Concerns that the dollar will ex- reflects some additional government spend- global financial crisis and recession. perience a rapid broad-based depreciation

Chart 3: U.S. Dollar Chart 4: Energy Prices

100 1.5 120 6

Oil, $ per barrel (L) 95 $/€ (R) 100 5 1.4 90 80 4 85 1.3 60 3 80 Natural gas, $ ¥/$ (L) per mmBTUs (R) 75 1.2 40 2 09 10 11 12 13 14 15 09 10 11 12 13 14 15 Sources: Federal Reserve, Moody’s Analytics Sources: Federal Reserve, EIA, Moody’s Analytics

MOODY’S ANALYTICS / Regional Financial Review / December 2012 5 EXECUTIVE SUMMARY �� Forecast Assumptions

at some point are overdone. The dollar clining, with the average nationwide cost of a from faster-growing, less energy-efficient accounts for nearly two-thirds of global gallon of regular unleaded below $3.50. emerging economies. This view is being chal- reserves, which is unlikely to change much It is assumed that WTI will remain below lenged by the recent substantive gains in anytime soon since the U.S. remains far $100 per barrel into next year (see Chart 4). technologies used to extract oil and natural and away the global economy’s largest Underlying this outlook is the assumption gas from shale. Given the large deposits of and most stable economy and predomi- that tensions with Iran will not boil over into shale in the U.S. and many other parts of the nant player in global trade. There are no an overt conflict and that Saudi Arabia will world, this could have a significant impact good alternatives. increase its oil production to fill the void left on long-term oil prices. by less Iranian oil exports due to the em- Natural gas prices will remain low, par- Energy prices bargo. Brent prices should also decline a bit ticularly compared with oil prices, during Oil prices have weakened considerably as relative to WTI next year given the reversal the next several years. A very substantial concerns over the Iranian oil embargo have in the Seaway oil pipeline, allowing WTI to glut of natural gas has developed as demand faded and global growth and demand for oil flow from the interior of the U.S.—where has not fully recovered from the recession remain tepid. A barrel of West Texas Inter- crude oil is plentiful given increased produc- and supply has increased substantially in re- mediate is going for less than $90 per barrel, tion in North Dakota—to the Gulf Coast. sponse to the very high prices that prevailed and Brent is trading near $110 per barrel. Oil Longer run, oil and gasoline prices are ex- prior to the recession. The glut will weigh on prices have been extraordinarily volatile in re- pected to trend steadily higher, increasing at natural gas prices well into next year. Prices cent years, ranging from $40 per barrel at the a pace that is just above the overall rate of are expected to eventually gain traction start of 2009 during the depths of the Great inflation. Driving this outlook is the difficulty later in the decade as the cheaper gas at- Recession to a record of almost $150 per bar- the supply side of the global oil market will tracts alternative uses and liquefied natural rel in summer 2008. Gasoline prices are de- have keeping pace with increasing demand gas exports increase.

6 MOODY’S ANALYTICS / Regional Financial Review / December 2012 EXECUTIVE SUMMARY �� Macro Summary Table

Units 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 2012 2013 2014 2015 2016 NIPA Gross domestic product %AR 1.2 1.2 2.2 3.3 3.8 4.1 4.3 4.4 2.2 2.0 3.9 4.2 3.5 Consumption %AR 1.7 1.4 2.0 3.2 3.6 4.0 4.1 4.3 1.8 1.9 3.8 3.9 3.3 Durables %AR 6.3 -3.5 -2.1 0.7 1.8 1.7 2.1 1.9 7.3 1.1 1.4 1.0 0.2 Motor vehicles %AR 13.6 -2.5 0.2 4.9 10.1 6.6 3.0 1.5 7.0 3.6 5.0 0.1 -1.9 Nondurables %AR 0.4 2.3 2.9 3.6 3.6 3.8 4.0 3.9 0.9 2.1 3.7 3.4 2.9 Services %AR 1.1 2.1 2.6 3.5 4.0 4.6 4.6 4.9 1.2 2.1 4.3 4.7 4.0 Fixed investment %AR 4.3 6.0 8.4 10.6 11.8 14.4 13.0 9.6 8.1 6.3 11.7 6.7 4.2 Nonresidential %AR 0.4 1.1 4.0 6.1 7.8 8.9 8.1 8.1 7.1 2.3 7.7 6.7 4.5 Structures %AR 2.7 1.0 4.2 5.7 6.3 6.5 5.7 7.6 9.7 2.5 6.3 8.2 6.4 Equipment %AR -0.3 1.2 3.9 6.2 8.2 9.5 8.7 8.2 6.1 2.2 8.0 6.2 3.8 Residential %AR 20.8 26.1 25.3 27.0 25.9 33.0 28.7 13.9 12.4 22.5 25.4 6.8 3.4 Single-family %AR 34.3 38.3 30.3 37.5 49.1 73.9 59.0 25.2 18.1 34.6 48.1 11.1 3.9 Multifamily %AR 52.0 33.1 39.5 43.9 24.7 22.5 20.4 4.6 41.5 41.5 21.8 5.7 2.4 Other %AR 11.3 18.9 21.6 19.4 12.0 8.9 8.0 5.4 7.7 14.4 10.4 2.9 3.0 Exports %AR 8.1 9.5 12.1 11.9 11.8 12.1 12.6 12.8 4.0 8.8 12.2 11.6 7.2 Merchandise %AR 8.6 9.5 13.1 12.9 12.8 13.3 14.1 14.5 5.0 9.3 13.5 13.4 8.3 Services %AR 6.9 9.6 9.9 9.4 9.1 9.3 8.7 8.7 1.6 7.8 9.0 7.0 4.2 Imports %AR 7.0 9.6 11.3 11.8 12.6 15.0 13.7 12.0 3.2 8.3 13.0 9.3 6.3 Merchandise %AR 8.1 11.4 13.1 13.4 13.9 16.6 14.9 12.7 2.9 9.4 14.3 9.5 5.9 Services %AR 1.5 1.1 2.6 4.1 5.8 6.6 7.3 8.0 5.1 2.8 6.3 8.5 8.3 Government %AR -1.4 -1.4 -0.2 0.0 0.6 0.8 0.9 1.3 -1.4 -0.2 0.7 1.9 3.2 Defense %AR -3.2 -0.9 -0.7 -1.0 -1.0 -1.9 -2.2 -1.9 -1.8 0.3 -1.6 -0.3 2.4 Nondefense %AR -0.9 -1.4 -1.4 -0.8 -0.8 -1.3 -1.4 -1.3 -0.4 -0.6 -1.2 -1.3 -0.3 State and local %AR -0.6 -1.7 0.3 0.7 1.8 2.6 2.9 3.5 -1.4 -0.4 2.3 3.7 4.3 Final sales %AR 1.9 1.2 2.3 3.4 3.8 4.1 4.4 4.4 2.0 2.1 4.0 4.2 3.4 Final domestic sales %AR 2.2 1.5 2.4 3.6 4.2 4.9 4.8 4.5 2.0 2.2 4.3 4.0 3.4 Consumers Personal saving rate % 3.3 1.8 1.8 1.7 1.7 1.8 1.9 2.0 3.6 1.8 2.0 2.5 3.1 Retail sales & food services $ tril 5.0 5.0 5.0 5.1 5.1 5.2 5.2 5.3 4.9 5.0 5.3 5.5 5.7 Change %AR 4.8 0.8 3.3 5.1 4.4 4.5 5.2 5.5 5.0 3.2 4.8 4.8 3.9 Total vehicle sales mil 14.9 14.8 15.1 15.7 16.4 16.7 16.8 16.9 14.4 15.5 16.9 16.4 15.6 Housing starts mil 0.9 1.0 1.1 1.2 1.4 1.7 1.8 1.9 0.8 1.2 1.9 2.0 2.0 Median house sales price $ ths 178.3 178.3 178.6 180.1 181.8 184.0 186.4 188.9 175.1 179.7 187.7 197.1 204.3 Change %AR 0.2 0.0 0.6 3.3 4.0 4.9 5.2 5.5 6.1 2.6 4.4 5.0 3.7 Producers Industrial production 2007=100 97.6 97.7 97.9 98.4 99.0 99.6 100.1 100.6 97.2 98.3 100.3 102.1 103.7 Change %AR 1.3 0.5 1.0 1.9 2.7 2.5 1.8 1.9 3.7 1.1 2.1 1.7 1.6 Capacity utilization % 77.5 77.3 77.2 77.2 77.4 77.5 77.4 77.3 77.8 77.3 77.4 77.2 77.8 Labor Markets Total employment mil 133.8 134.2 134.7 135.2 135.8 136.5 137.3 138.2 133.2 135.0 137.8 141.4 144.6 Change %AR 1.3 1.2 1.3 1.4 1.8 2.2 2.4 2.6 1.4 1.3 2.1 2.6 2.2 Average monthly change ths 130 135 154 170 222 257 279 301 145 170 286 300 219 Unemployment rate % 7.9 7.8 7.8 7.8 7.7 7.5 7.2 6.9 8.1 7.8 7.1 6.3 5.8 Prices Consumer price index 1982=100 231.3 232.5 233.9 235.5 236.9 238.4 239.9 241.5 229.6 234.7 240.7 246.9 252.9 Change %AR 2.1 2.2 2.4 2.7 2.5 2.5 2.6 2.7 2.1 2.2 2.6 2.6 2.4 Producer price index 1982=100 202.8 203.3 205.8 208.1 209.3 211.3 213.8 215.9 202.3 206.6 214.4 221.0 226.7 Change %AR 1.0 0.8 5.0 4.6 2.3 3.8 4.8 4.0 0.6 2.1 3.8 3.1 2.6 West Texas Intermediate $/Bbl 88.8 88.7 93.9 99.3 100.9 103.9 105.4 106.2 94.4 95.7 105.3 110.3 114.0 Financial Markets Federal funds % 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 1.9 3.9 Prime rate % 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 4.9 6.9 10-yr Treasury % 1.9 1.9 2.2 2.5 2.8 3.2 3.5 3.6 1.8 2.3 3.5 4.5 4.9 FRB 10-country index Jan97=100 100.4 99.2 98.8 98.7 98.8 98.9 99.0 99.0 100.1 98.9 99.0 98.9 98.6 Change %AR -0.9 -4.6 -1.6 -0.2 0.3 0.3 0.3 0.2 3.1 -1.2 0.1 -0.1 -0.3 Government Balance NIPA basis $ bil -1,083.3 -887.7 -845.9 -793.8 -771.3 -764.9 -753.6 -732.9 -1,082.7 -824.7 -738.6 -604.2 -513.3 Unified budget $ bil -380.2 -375.2 -41.3 -82.0 -339.1 -346.3 -26.9 -68.0 -1,147.8 -837.6 -758.5 -607.0 -521.5

MOODY’S ANALYTICS / Regional Financial Review / December 2012 7 EXECUTIVE SUMMARY �� State Summary Table

Nonfarm employment, annualized % change

12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 2013 2014 2015 2016 2017 New England Connecticut -0.1 0.8 1.0 1.0 1.1 1.8 2.0 2.5 0.5 1.7 2.5 2.0 0.9 Maine 0.5 0.3 0.6 0.8 1.6 1.9 2.0 2.1 0.4 1.7 2.2 1.8 0.9 Massachusetts 1.6 0.9 1.2 1.2 1.1 1.4 1.7 1.9 1.1 1.5 2.1 1.9 0.9 New Hampshire 1.7 1.5 1.3 1.4 1.7 1.9 2.2 2.3 1.1 1.9 2.5 2.0 1.1 Rhode Island 0.6 0.2 0.9 1.2 1.7 2.5 2.5 3.0 0.5 2.2 3.1 2.5 1.1 Vermont 1.4 -0.8 1.2 -1.0 1.3 1.7 2.1 2.4 0.6 1.5 2.2 1.7 0.9 Middle Atlantic New Jersey 1.4 1.1 1.3 1.4 0.9 1.8 2.2 2.4 1.1 1.8 2.4 2.0 0.9 New York 0.7 1.5 1.7 0.6 0.4 1.3 1.8 2.0 1.1 1.3 2.5 2.2 1.1 Pennsylvania 0.6 1.0 1.0 1.2 1.6 1.9 2.0 2.2 0.8 1.8 2.3 1.9 0.9 South Atlantic Delaware 1.4 1.1 1.5 1.7 2.2 2.5 2.5 2.9 0.8 2.3 2.9 2.5 1.5 District of Columbia 3.6 0.1 0.4 0.6 1.0 1.2 1.5 1.7 0.7 1.2 1.7 1.7 0.9 Florida 2.1 1.9 2.3 2.3 2.3 2.6 2.9 3.1 1.9 2.7 3.2 3.0 2.2 Georgia 1.2 1.2 0.9 1.1 2.0 2.0 2.6 2.7 1.2 2.1 3.0 2.8 2.0 Maryland 0.6 0.4 0.9 1.6 2.0 2.4 2.7 2.8 0.6 2.3 2.7 2.2 1.1 North Carolina 1.7 1.6 1.6 1.7 2.1 2.4 2.5 2.6 1.3 2.3 2.8 2.6 1.8 South Carolina 1.5 0.4 0.7 1.6 2.1 2.6 2.8 3.0 0.9 2.4 3.0 2.6 1.6 Virginia 1.1 1.3 1.5 1.7 2.0 2.3 2.4 2.6 1.2 2.2 2.7 2.3 1.4 West Virginia 1.5 1.3 1.4 1.5 1.8 2.2 2.3 2.5 0.5 2.0 2.4 2.0 1.0 East North Central Illinois 0.2 0.5 0.6 0.6 1.1 1.4 1.4 1.5 0.5 1.2 1.8 1.8 0.8 Indiana 1.0 0.9 1.1 1.1 1.4 1.9 2.0 2.3 1.3 1.7 2.3 1.9 0.8 Michigan 1.3 0.9 1.1 1.1 1.6 1.8 2.1 2.2 1.0 1.7 2.1 1.7 0.8 Ohio 0.4 0.6 0.8 1.2 1.6 2.1 2.3 2.3 1.0 1.9 2.6 2.2 1.0 Wisconsin 1.0 0.4 1.1 1.3 1.7 2.0 2.0 2.1 0.6 1.8 2.2 1.7 0.7 East South Central Alabama 1.2 1.6 1.7 1.8 2.0 2.6 2.8 3.0 1.4 2.4 3.0 2.5 1.4 Kentucky 1.7 1.5 1.5 1.5 1.8 2.0 2.4 2.6 1.6 2.1 2.5 2.0 1.1 Mississippi 0.9 1.1 1.2 1.5 2.0 2.4 2.4 2.4 0.7 2.1 2.4 2.0 1.1 Tennessee 1.5 1.2 1.4 1.3 1.6 2.0 1.9 2.1 1.0 1.8 2.3 1.9 0.9 West North Central Iowa 1.0 0.9 1.0 1.0 1.3 1.7 1.9 2.1 0.8 1.6 2.2 1.8 0.7 Kansas 1.2 0.8 1.0 1.2 1.6 2.0 2.1 2.3 0.9 1.8 2.3 1.7 0.8 Minnesota 0.6 0.4 1.3 1.3 1.6 2.3 2.4 2.5 0.9 2.0 2.4 2.2 1.4 Missouri 0.8 0.8 0.8 1.0 1.4 1.8 2.0 2.1 0.6 1.7 2.2 1.8 0.8 Nebraska 1.4 1.4 1.5 1.5 1.8 2.2 2.3 2.5 1.6 2.1 2.5 2.1 1.1 North Dakota 4.5 4.4 3.5 3.1 3.1 3.1 3.0 2.9 4.0 3.1 2.8 2.2 1.2 South Dakota 1.1 1.0 1.2 1.4 1.7 1.9 2.0 2.2 1.0 1.8 2.4 2.1 1.3 West South Central Arkansas 1.7 1.4 1.2 1.3 1.5 2.3 2.4 2.7 1.0 2.0 2.7 2.3 1.4 Louisiana 1.4 0.9 1.1 1.1 1.3 1.5 1.6 1.7 0.9 1.5 1.8 1.5 1.0 Oklahoma 1.2 0.9 1.0 1.4 1.8 2.2 2.4 2.6 1.4 2.1 2.7 2.2 1.1 Texas 2.2 2.4 2.3 2.4 2.7 3.1 3.3 3.4 2.3 3.0 3.6 3.4 2.4 Mountain Arizona 2.5 2.9 2.6 3.3 3.2 3.5 4.0 4.2 2.7 3.6 4.1 3.5 2.5 Colorado 1.1 1.5 1.9 2.0 2.3 2.9 3.1 3.1 1.5 2.7 3.1 2.7 1.7 Idaho 1.8 1.8 1.9 2.0 2.1 2.4 2.6 2.8 1.6 2.4 2.8 2.3 1.4 Montana 1.1 0.9 1.1 1.3 1.6 2.0 2.1 2.3 1.4 1.9 2.4 1.9 0.9 Nevada 0.1 1.0 1.3 2.4 2.7 3.1 3.5 3.8 1.1 3.0 3.9 3.6 2.8 New Mexico 0.8 1.3 1.6 1.5 1.8 2.1 2.1 2.4 0.4 2.0 2.4 2.2 1.8 Utah 2.1 1.8 1.7 1.7 2.0 2.3 2.4 2.5 1.8 2.2 2.6 2.3 1.5 Wyoming 0.8 0.7 0.7 1.0 1.3 1.8 1.9 2.1 1.1 1.6 2.2 1.8 0.9 Pacific Alaska 1.4 1.3 1.6 1.8 2.2 2.6 2.8 2.9 1.1 2.5 3.0 2.6 1.8 California 1.5 1.1 1.2 1.5 1.9 2.3 2.4 2.6 1.5 2.1 2.6 2.2 1.2 Hawaii 2.6 1.4 1.4 1.6 2.0 2.2 2.3 2.5 1.9 2.1 2.4 1.9 1.0 Oregon 1.1 1.6 1.6 1.7 2.1 2.5 2.7 3.0 1.6 2.4 3.0 2.6 1.6 Washington 1.7 2.0 1.8 1.8 2.0 2.3 2.6 2.7 1.9 2.3 2.7 2.5 1.6 United States 1.3 1.2 1.3 1.4 1.8 2.2 2.4 2.6 1.3 2.1 2.6 2.2 1.3

8 MOODY’S ANALYTICS / Regional Financial Review / December 2012 EXECUTIVE SUMMARY �� Metro Summary Table

Nonfarm employment, annualized % change

12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 2013 2014 2015 2016 2017 New England Boston 0.8 1.1 1.5 1.4 1.2 1.6 1.8 2.0 1.0 1.6 2.2 2.0 1.0 Bridgeport-Stamford-Norwalk -0.9 0.4 0.5 1.4 1.8 2.7 2.7 3.1 0.7 2.3 3.0 2.4 1.1 Cambridge 0.9 1.4 1.6 1.5 1.4 1.8 2.1 2.2 1.4 1.8 2.5 2.3 1.2 Hartford -0.6 -0.3 -0.6 0.5 1.1 1.9 2.2 2.7 -0.4 1.6 2.4 1.9 0.8 Middle Atlantic Albany 0.7 0.3 0.8 1.4 1.9 2.0 2.3 2.4 0.2 2.0 2.6 2.2 1.3 Camden 0.8 0.9 1.1 1.4 0.9 1.7 2.2 2.3 0.7 1.7 2.4 2.0 0.9 Edison 0.8 -0.1 0.4 1.7 1.3 2.1 2.5 2.7 0.3 2.0 2.7 2.2 1.1 Nassau-Suffolk 0.2 2.8 3.3 0.5 -1.9 0.5 1.9 2.0 1.3 0.8 2.3 1.9 1.0 New York -0.8 2.0 2.2 1.1 0.9 1.8 2.1 2.1 1.2 1.7 2.5 2.3 1.2 Newark 0.5 0.8 0.5 1.7 1.3 2.1 2.6 2.8 0.6 2.0 2.8 2.2 1.0 Philadelphia 0.1 0.8 0.9 1.3 1.7 2.1 2.2 2.6 0.5 2.0 2.8 2.4 1.2 Pittsburgh 0.4 0.8 1.1 1.7 1.8 2.1 2.3 2.7 1.0 2.1 2.8 2.3 1.2 Rochester -0.7 0.6 1.9 2.1 2.5 2.7 2.9 3.1 1.2 2.7 3.1 2.8 1.8 South Atlantic Atlanta 1.0 2.1 1.6 2.1 2.7 2.7 3.4 3.1 1.5 2.8 3.1 3.0 2.3 Baltimore 2.3 -0.1 0.3 1.7 2.1 2.6 2.9 3.1 0.4 2.4 3.0 2.4 1.1 Charlotte -0.4 1.3 1.3 2.1 2.4 2.8 2.8 2.9 1.1 2.6 3.2 3.1 2.1 Fort Lauderdale 0.1 0.7 1.4 1.9 2.0 2.3 2.6 3.0 0.8 2.3 3.0 2.7 1.6 Miami 0.4 1.1 1.5 1.6 1.6 2.0 2.2 2.5 0.8 2.0 2.6 2.3 1.3 Orlando 2.2 1.3 1.6 2.3 2.4 2.6 2.8 3.1 2.1 2.6 3.4 3.3 2.6 Raleigh 1.1 1.9 1.6 2.6 2.9 3.3 3.4 3.5 2.0 3.1 3.7 3.4 2.5 Tampa 0.7 0.5 1.4 1.8 2.0 2.1 2.5 2.8 1.1 2.2 2.8 2.4 1.4 Virginia Beach -1.8 0.5 0.8 1.2 1.5 1.9 2.0 2.2 0.4 1.7 2.2 1.9 0.9 Washington DC 0.8 0.1 0.3 1.1 1.5 1.8 1.8 2.1 0.6 1.6 2.3 2.0 1.2 East North Central Chicago -1.7 0.1 0.4 0.9 1.6 1.9 2.2 1.9 0.0 1.7 2.1 2.2 1.1 Cincinnati 1.3 0.1 0.3 1.3 1.7 2.2 2.3 2.4 1.2 1.9 2.7 2.3 1.1 Cleveland 1.8 0.1 0.3 1.0 1.4 1.8 2.0 2.1 0.9 1.6 2.6 2.2 0.9 Columbus 1.8 0.3 0.5 1.6 1.8 2.2 2.1 2.3 1.2 2.0 2.6 2.3 1.3 Detroit -0.7 -0.4 0.1 0.9 0.3 1.4 2.2 2.5 0.4 1.4 2.2 1.8 0.3 Indianapolis 2.0 0.4 0.6 1.4 1.8 2.3 2.5 2.7 1.1 2.1 2.8 2.5 1.3 Milwaukee -1.5 0.0 0.4 1.5 1.8 2.2 2.3 2.5 0.1 2.0 2.6 2.2 1.1 Warren 0.1 0.8 1.1 1.5 1.7 1.8 2.2 2.4 0.8 1.9 2.3 2.1 1.0 East South Central Memphis -1.5 1.1 1.1 1.3 1.5 2.0 1.9 2.3 0.4 1.8 2.7 2.1 0.8 Nashville -0.2 1.3 1.2 1.3 2.1 1.3 1.8 2.0 0.3 1.7 2.4 2.0 0.9 West North Central Kansas City -0.6 0.8 0.9 1.7 2.0 2.4 2.5 2.6 0.5 2.2 2.7 2.4 1.3 Minneapolis 0.5 0.9 1.9 2.3 2.2 2.6 3.1 3.2 1.4 2.6 2.7 2.0 1.5 St. Louis -1.7 0.3 0.2 1.0 1.3 1.8 2.0 2.2 0.2 1.6 2.3 2.0 1.0 West South Central Austin 2.5 3.8 3.1 3.2 3.7 4.1 4.1 4.2 3.2 3.9 4.3 3.9 3.0 Dallas 1.8 2.9 2.3 2.4 2.8 3.0 3.2 3.4 2.2 3.0 3.7 3.8 2.6 Ft. Worth 2.9 3.3 2.5 2.3 2.7 3.1 3.3 3.4 2.8 3.0 3.6 3.3 2.3 Houston 2.1 3.4 2.3 2.2 2.3 2.9 3.2 3.4 2.6 2.8 3.6 3.5 2.3 New Orleans -2.8 -0.8 -0.1 1.3 1.2 1.5 1.4 1.4 -1.4 1.3 1.9 1.5 1.0 Oklahoma City 2.8 0.5 0.5 1.4 1.7 2.2 2.4 2.7 1.7 2.0 2.8 2.3 1.4 San Antonio 3.3 3.2 2.4 2.8 2.8 3.5 3.6 3.7 2.7 3.3 3.8 3.6 2.6 Mountain Denver 0.2 0.9 1.3 2.1 2.2 2.7 3.0 3.1 1.3 2.6 3.1 2.6 1.6 Las Vegas 0.6 1.7 1.0 0.7 1.2 1.4 2.3 2.6 1.0 1.7 3.1 3.1 3.0 Phoenix 2.3 1.3 1.6 2.1 2.2 2.5 3.0 3.4 2.0 2.6 3.5 3.1 2.2 Salt Lake City 2.6 0.8 1.2 1.7 3.2 3.3 3.6 3.5 1.5 3.0 3.3 2.6 1.3 Pacific Los Angeles 2.2 0.4 0.9 1.3 1.8 2.1 2.3 2.6 1.3 2.0 2.8 2.5 1.3 Oakland 2.1 0.3 0.8 1.5 2.0 2.5 2.5 2.8 1.1 2.2 2.9 2.5 1.3 Portland 0.5 1.4 1.3 1.7 2.1 2.5 2.8 3.1 1.4 2.4 3.1 2.6 1.4 Riverside 0.9 1.0 1.5 1.9 2.4 2.7 2.9 2.9 1.2 2.5 2.9 2.4 1.3 Sacramento -1.6 0.4 0.9 1.6 2.3 2.6 2.7 2.9 0.9 2.4 3.0 2.5 1.4 San Diego 1.8 0.8 1.1 1.5 2.0 2.4 2.6 2.8 1.7 2.2 2.8 2.4 1.3 San Francisco 1.6 1.0 1.7 1.5 2.2 2.7 2.9 3.2 2.1 2.5 3.1 2.8 1.5 San Jose 3.9 1.0 1.2 1.7 2.0 2.4 2.6 2.9 1.8 2.3 3.0 2.5 1.3 Santa Ana-Anaheim 1.6 1.0 1.1 1.6 2.0 2.5 2.6 2.8 1.2 2.3 2.8 2.4 1.2 Seattle 2.1 1.4 1.7 2.0 2.5 2.2 2.6 2.9 2.1 2.4 3.0 2.6 1.6

MOODY’S ANALYTICS / Regional Financial Review / December 2012 9 EXECUTIVE SUMMARY �� International Summary Table

REAL GROSS DOMESTIC PRODUCT, % change YR AGO

12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 2011 2012 2013 2014 2015 Europe Austria 0.0 0.6 1.2 2.0 3.1 2.9 3.0 2.9 2.7 0.4 1.7 2.9 2.3 Belgium -0.7 -0.6 0.2 0.6 1.5 1.7 1.8 1.9 1.8 -0.2 0.4 1.8 1.7 Czech Republic -1.3 -0.7 0.1 0.8 1.1 1.7 1.8 1.8 1.9 -1.0 0.3 2.0 3.7 Denmark -0.4 -0.3 0.6 0.7 0.8 0.8 1.0 1.3 1.1 -0.5 0.5 1.1 1.0 Euro zone -0.5 -0.5 -0.2 0.2 1.0 1.3 1.6 1.7 1.5 -0.4 0.1 1.6 1.7 Finland -0.9 -1.0 0.4 1.3 2.6 3.4 3.9 3.6 2.7 -0.2 0.8 3.5 2.2 France 0.0 0.0 0.1 0.1 0.5 1.0 1.4 1.6 1.7 0.1 0.2 1.4 1.6 Germany 1.0 0.6 0.7 1.1 1.8 2.0 2.0 1.7 3.1 1.0 1.0 1.7 1.7 Greece -4.0 -5.8 -5.7 -5.7 -0.9 0.5 1.8 2.4 -7.2 -6.0 -4.6 1.8 2.6 Hungary -2.5 -2.8 -1.1 -1.1 0.2 1.6 2.1 2.1 1.7 -1.6 -1.2 2.0 2.4 Ireland -1.1 0.1 0.7 1.0 2.3 2.0 1.9 1.7 1.4 0.0 1.0 1.8 2.2 Italy -2.3 -1.5 -0.7 -0.3 0.4 0.7 1.0 1.4 0.6 -2.1 -0.5 1.2 1.6 Netherlands -0.1 -0.2 -0.2 1.3 1.5 2.2 2.8 2.7 1.1 -0.7 0.6 2.5 1.7 Norway 2.2 1.2 1.1 2.7 2.5 2.6 2.3 2.2 1.3 3.0 1.8 2.4 2.4 Poland 1.1 1.6 1.8 2.5 2.1 2.5 2.6 2.6 4.3 2.1 2.0 2.6 3.7 Portugal -3.6 -3.4 -2.4 -1.2 0.7 1.0 1.6 1.4 -1.6 -3.1 -1.6 1.3 1.3 Russian Federation 2.1 2.0 3.6 3.5 4.8 5.2 4.5 4.3 4.4 3.6 3.5 4.5 4.8 South Africa 2.4 2.5 2.8 3.5 3.9 4.0 4.2 4.5 3.5 2.6 3.2 4.3 4.0 Spain -2.1 -2.0 -1.8 -1.6 -0.7 -0.2 0.3 0.6 0.4 -1.4 -1.5 0.4 1.1 Sweden 1.7 1.3 1.1 1.4 2.3 3.0 3.4 3.4 3.8 1.3 1.5 3.3 2.4 Switzerland 1.1 0.6 1.0 1.2 1.4 1.6 1.8 1.4 1.9 1.0 1.0 1.5 1.9 Turkey 1.5 1.4 2.1 4.8 5.4 5.2 7.0 8.1 8.8 2.4 3.4 6.9 7.4 United Kingdom 0.4 0.8 1.4 0.7 1.1 1.4 1.6 2.0 0.9 -0.1 1.0 1.7 2.1

Latin America Argentina 2.4 2.8 3.9 3.9 3.6 4.0 5.1 5.1 8.9 2.4 3.5 4.9 5.3 Brazil 3.1 4.3 5.1 5.3 3.9 4.3 5.9 6.7 2.7 1.3 4.6 5.6 4.4 Chile 4.5 3.5 3.9 5.3 5.7 4.7 3.5 4.0 6.0 5.3 4.6 4.4 4.8 Colombia 4.6 4.3 4.6 5.1 4.7 5.6 4.8 4.6 5.9 4.6 4.7 4.9 5.5 Mexico 3.0 2.4 2.8 3.7 4.8 5.1 4.9 4.4 3.9 3.9 3.5 4.5 4.8 Peru 6.5 6.4 5.6 5.4 5.8 5.1 5.6 5.6 6.9 6.3 5.8 5.5 6.0 Venezuela 4.9 1.6 1.2 0.4 1.7 2.5 3.9 4.1 4.2 5.3 1.2 3.6 4.6

Asia/Pacific Australia 2.9 2.3 2.5 2.8 3.1 3.2 3.2 3.2 2.4 3.6 2.7 3.2 3.3 China 7.7 8.0 8.0 7.5 7.3 7.4 7.3 7.2 9.3 7.7 7.7 7.4 7.2 Hong Kong 2.8 2.8 3.0 3.6 3.8 3.9 3.6 3.5 4.9 1.4 3.3 3.6 3.4 India 7.0 6.2 6.3 8.3 3.9 5.5 7.5 7.7 7.9 4.8 6.2 7.2 7.2 Indonesia 6.2 7.3 6.6 6.4 5.7 5.2 6.3 6.9 6.5 6.3 6.5 6.5 6.4 Japan 0.2 -0.7 -0.1 1.3 2.3 2.0 1.7 1.4 -0.5 2.0 0.7 1.5 1.2 Malaysia 3.1 2.8 3.3 4.3 6.9 6.7 5.8 5.3 5.1 4.7 4.3 5.5 4.9 New Zealand 2.5 3.4 3.5 3.0 2.7 2.4 3.0 3.6 -0.6 2.1 3.2 3.1 2.8 Philippines 4.8 3.6 5.5 5.3 7.9 7.6 6.5 5.8 3.9 6.0 5.6 6.2 5.0 Singapore 1.7 0.6 1.4 4.1 4.2 3.5 3.4 3.4 4.9 1.5 2.6 3.4 3.3 South Korea 2.0 2.4 3.2 4.0 4.3 4.5 4.9 5.0 3.6 2.2 3.5 4.8 4.4 Taiwan 2.6 5.1 4.2 2.9 3.4 2.6 5.1 6.6 4.1 1.0 3.9 5.3 4.5 Thailand 17.7 6.5 4.6 4.2 3.3 3.9 4.3 4.9 0.1 6.1 4.6 4.6 4.7

North America United States 1.8 1.6 1.8 2.0 2.6 3.4 3.9 4.2 1.8 2.2 2.0 3.9 4.2 Canada 1.5 1.3 1.4 1.9 2.1 2.7 3.1 3.3 2.6 2.0 1.7 3.1 2.8

10 MOODY’S ANALYTICS / Regional Financial Review / December 2012 U.S. Macro Outlook 2013: Poised for Liftoff

ANALYSIS

U.S. Macro Outlook 2013: Poised for Liftoff

BY MARK ZANDI

he U.S. economy in 2013 will feel the contrasting drafts of a retrenching federal government and a reviving private sector. Stiff fiscal headwinds will prevail during the first half of the year and growth will be weak, T but by the second half, business investment will be rising, as will bank lending and household spending on cars and homes. The biggest threat to this outlook remains a failure by Washington to reasonably address the nation’s fiscal challenges. But assuming Congress and President Obama do roughly the right thing (and the political stars are aligned so that they should), the economy will be back to a healthy growth pace by 2014.

Intense fiscal drag making less than $250,000 a year, eliminate the consent of House Republicans, who in There are many ways the current tax and the spending cuts scheduled under the 2011 the summer of 2011 used the debt ceiling budget negotiations could play out, but the sequestration agreement, and extend the as a lever to cut $1 trillion of government most likely scenario has lawmakers agree- inflation adjustment to the alternative mini- spending over 10 years through discretion- ing on a comprehensive budget plan in early mum tax and Medicare’s reimbursement ary spending caps and another $1 trillion 2013. The plan Moody’s Analytics envisions schedule for doctors and hospitals. through sequestration. House Republicans would scale back the tax hikes and spending Together, these changes will produce fis- will happily jettison the sequestration deal cuts now set to take effect in January, raise cal drag equal to 1.25% of GDP in 2013 (see and the resulting cuts to the defense budget, the Treasury’s statutory debt ceiling, and lay Chart 1). The impediment to growth will be but they will insist on other spending cuts. out a credible path to fiscal sustainability. significant—particularly during the first half The scheduled tax hikes and spending cuts of next year—but manageable. Real GDP Reform in 2013 known collectively as the fiscal cliff will be will grow around 2%, roughly the pace since The resulting agreement will thus have to reduced enough to prevent a new recession. the recovery began. The level of fiscal drag include a broader program of deficit reduc- There are various ways for Congress to do this; will also be unchanged from 2012, a year in tion, including tax and entitlement reform. each would add some fiscal drag, holding back which federal, state economic growth over the year. The most likely and local govern- Chart 1: From Fiscal Stimulus to Fiscal Drag agreement would allow the 2011-2012 payroll ments cut spending. Fiscal policy contribution to real GDP growth, ppt tax holiday to expire (adding a fiscal drag equal There should be little 3.0 to 0.6% of GDP); phase out the emergency drag from state and 2.5 unemployment insurance program (fiscal drag local governments 2.0 equal to 0.35% of GDP); end the Bush-era tax in 2013. 1.5 rates for households with income of more than As part of the 1.0 $250,000 per year (0.24%); and allow taxes to fiscal cliff agree- 0.5 rise on higher-income households to help pay ment, the debt ceil- 0.0 for healthcare reform (0.06%). ing will be raised -0.5 high enough to last -1.0 Stable taxes, mostly past the 2014 elec- -1.5 This means lawmakers are likely to ex- tions. But this will 08 09 10 11 12 13F tend the Bush-era tax rates for households not happen without Source: Moody’s Analytics

MOODY’S ANALYTICS / Regional Financial Review / December 2012 11 ANALYSIS �� U.S. Macro Outlook 2013: Poised for Liftoff

Chart 2: Businesses at Record Profitability Chart 3: Banks Well-Capitalized, More Profitable After-tax corporate profit margin, % Commercial banks 18 9.25 1.6 1.4 16 8.75 1.2 14 8.25 1.0 12 7.75 0.8 0.6 10 7.25 Core capital ratio (L) 0.4 6.75 8 Return on assets (R) 0.2

6 6.25 0.0 45 50 55 60 65 70 75 80 85 90 95 00 05 10 90 92 94 96 98 00 02 04 06 08 10 12 Sources: BEA, Moody’s Analytics Sources: FDIC, Moody’s Analytics

Doing all this will be impossibly complex since the downturn. Profit margins thus refinancing. Lower-income households still in a short period; therefore, lawmakers will expanded and have never been wider. Strong struggle to make mortgage and student likely lay out a broad framework and let profits and low interest rates have allowed loan payments, but across all households, congressional committees hash out the de- firms to substantially lighten their debts and the debt service burden—the proportion of tails next year. generate a flood of cash. But businesses in- after-tax income needed to stay current on A plausible framework could include creasingly realize that to keep their earnings outstanding debt—will soon be at record $1.5 trillion in tax revenue increases over and stock values healthy, they need to seek lows. Households are not likely to ramp up the next decade, $750 billion from higher new growth opportunities. borrowing anytime soon (and lenders are tax rates, and the remaining $750 billion The U.S. financial system has arguably unlikely to give them the opportunity), but through tax reform. The framework will also never been sounder (see Chart 3). Deposi- most consumers no longer have to curtail include $2 trillion in spending cuts, including tory institutions have raised hundreds of spending to manage their debts. cuts to Social Security and Medicare. Includ- billions in new capital, putting important Optimism that a stronger private sec- ing the $1 trillion in spending cuts agreed benchmark ratios near all-time highs. tor will lift the economy by this time next to in the 2011 debt-ceiling deal, the ratio Tighter underwriting since the recession has year is tempered mainly by political risk. An of spending cuts to tax increases would be greatly improved credit conditions. The qual- agreement to tackle the nation’s fiscal issues 2-to-1. Assuming future lawmakers stick to ity of commercial and industrial loans, credit is clearly easier said than done. To generate this plan, deficits a decade from now will be cards, and auto loans is about as good as it the necessary political will, negotiations will small enough to allow the U.S. debt-to-GDP gets. Even among first mortgage loans, the likely need to extend into 2013. That is, the ratio to decline. number delinquent from one to two months nation will need to temporarily go over the is at a record low. The missing ingredient for fiscal cliff, experiencing the scheduled tax Fortress balance sheet stronger bank profits is more lending, and hikes and spending cuts at least temporarily. Despite the fiscal drag, the economy banks are steadily opening the credit spigot. The effect will not be catastrophic, particu- should gain traction by the second half of The picture 2013, powered by a reviving private sector. among household Chart 4: Households Rapidly Deleverage An excess of leverage led to the Great Re- balance sheets % of disposable income cession, but firms and households have rap- is less uniformly 14.5 19.0 Debt service (L) idly pared down their debts since then, and good, but they 14.0 18.5 Financial obligations (R) balance sheets now are strong. With some too are much im- 13.5 18.0 13.0 additional clarity from Washington on taxes proved (see Chart 17.5 and budgets, businesses, banks and house- 4). Higher-in- 12.5 17.0 holds should all become more aggressive in come households 12.0 16.5 investing, hiring, lending and spending. have shed debt, 11.5 U.S. companies are in especially good and most have 11.0 16.0 shape (see Chart 2). They significantly low- only fixed-rate 10.5 15.5 ered their cost structures during the reces- mortgages that 10.0 15.0 sion and have kept unit labor costs—com- have been made 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 pensation per unit of output—unchanged cheaper through Sources: Federal Reserve, BEA, Moody’s Analytics

12 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� U.S. Macro Outlook 2013: Poised for Liftoff

larly if the Treasury decides not to change tax and spending policy for a few months or This president and Congress do not have tax withholding schedules in anticipation of another year while raising the ceiling enough to be made of different stuff than their a deal being struck during the first few weeks to get past this period. predecessors; they just have to respond in of the new year. Government agencies could With less fiscal drag, the economy the usual ways to unusual circumstances. also delay their most draconian budget cuts will expand more quickly in 2013, but the If they do not act, tax rates are going up on for a time. long-term prospect would be much worse. everyone, which no legislator—particularly Kicking the can down the road would be a not House Republicans—wants. Neither Pressure will rise signal that policymakers had failed, and that do they want spending to be cut across the However, the economic damage will progress toward fiscal sustainability would board, with chaotic results to defense and mount with each passing day, as businesses, require a serious financial crisis. Businesses nondefense programs. The debt ceiling also investors and consumers begin to doubt would remain under a cloud, unsure of their gives House Republicans significant lever- policymakers can come to terms. By early taxes, the size of future government con- age that they have shown a willingness to February, as the Treasury runs out of options tracts, or the nation’s long-term fiscal situa- use. And both President Obama and House to avoid the debt ceiling, stock prices will tion. The economy would throttle back to a Speaker John Boehner are concerned about slump, bond and CDS spreads will widen, new normal, characterized by a much slower their legacies, giving them reasons to aim and business and consumer confidence will pace of growth. for a historic deal and put the U.S. economy slide. Political pressure will grow, which back on track. is precisely the stress needed to forge an Stars are aligned What Winston Churchill is reputed to agreement. The danger is that instead of But while the threat of political failure have said about Americans doing the right a comprehensive deal, lawmakers could cannot be dismissed, the times appear fa- thing—after they have exhausted all other choose to kick the can, extending current vorable for something out of the ordinary. possibilities—should still apply.

MOODY’S ANALYTICS / Regional Financial Review / December 2012 13 ANALYSIS

U.S. Regional Outlook 2013: A Broadening Expansion

BY STEVEN G. COCHRANE

s 2012 nears its end, the economies of each of the regions show evidence of strength and revival. Employ- ment is rising in each of the four broad regions of the country and in all but eight states. The Northeast A is arguably the weakest region at this time; while job growth is positive, the region includes four of the states with falling payroll employment—Connecticut, Delaware (officially in the South census region), Maine and Rhode Island. The West has the fastest-growing payroll employment, followed by the South and the Midwest. Further, each region will likely see an upward revision to its current job growth estimates when the payroll survey is benchmarked in March to the more accurate but less timely Quarterly Census of Employment and Wages; the Midwest may well have had the strongest job growth at midyear (see Chart 1).

Business cycles while Alaska’s economy has lost some of its job gains over the past six months. There are No state is in recession at the moment, momentum, it is one of the few state econo- just a few metro areas in California that are despite the softness in some labor markets. mies that are now expanding beyond their still in recession, and they are scattered about The strength of the West’s economy is evident prerecession peak. More importantly, Arizona, the state (see Chart 3). Elsewhere in the West, when taking into account the four factors California, Nevada, and all the western states recovery is quite broadly distributed. that make up the Moody’s Analytics business that were hit hard by the housing cycle are The Northeast’s weaker recovery is re- cycle index: job growth, industrial production, now recovering. Job growth in Arizona and flected in the business cycle indicators in Con- house prices and housing starts (see Chart 2). California has exceeded the U.S. average for necticut, Delaware, Maine, New Jersey, and The recovery is firm in every state in the much of this year; while California’s labor downstate New York. The pace of recovery region with the exception of New Mexico, market amounts to just more than 10% of is more stable in Boston, Philadelphia and where employment is declining sharply and the U.S. total, job growth in the state has ac- Washington DC, although even these metro house prices have not yet stabilized. And counted for more than 20% of nationwide areas are generally trailing national trends.

Chart 1: Midwest’s Hidden Vitality Chart 2: Economic Recovery Is Broad-Based Total payroll employment, % change yr ago, Mar 2012, NSA Status as of Oct 2012 data 2.0 CES QCEW 1.8

1.6

1.4

1.2 Recession 1.0 At risk Recovery 0.8 Expansion Northeast Midwest South West Sources: BLS, Moody’s Analytics Source: Moody’s Analytics

1 2 14 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� U.S. Regional Outlook 2013: A Broadening Expansion

Chart 3: Central Plains Are Expanding Chart 4: West Is Taking the Lead… Status as of Oct 2012 data Total employment, 3-mo MA, % change yr ago 2 1 0 -1 -2 -3 Northeast -4 Recession Midwest -5 At risk South Recovery -6 West Expansion -7 08 09 10 11 12 Source: Moody’s Analytics Sources: BLS, Moody’s Analytics

3 4 The Midwest’s recovery varies greatly not all about energy. Strong farm commod- the country’s for the past nine months, and across the region. The industrial heartland— ity prices and service-providing industries the gap has widened as the West’s larger Indiana, Michigan and Ohio—has benefited have brought a number of metro areas in coastal economies have taken the lead (see greatly from the turnaround in auto produc- South Dakota, Iowa and Nebraska back into Chart 4). Thus, the unemployment rate in tion, whereas the recoveries in Illinois, Mis- expansion as well. the West, admittedly still the highest of the souri and Wisconsin have been uneven. The Elsewhere in the South, the pace of recov- four broad regions, has been falling the most rest of the Plains and Upper Midwest are do- ery is mixed. Alabama, Mississippi and West consistently (see Chart 5). This trend is less ing well as high commodity prices have sup- Virginia show the least vitality for various compelling, however, when one realizes that plemented the turnaround in manufacturing and unique reasons that include lower coal the West’s labor force is shrinking at a pace and services; North Dakota’s oil exploration prices, oversupply of gaming venues, and about equal to that in the Midwest. Else- and production have made the state one of mixed performance of heavy manufacturing. where, a growing labor force has helped to the few that is expanding. In fact, North Da- While nearly all of the region’s larger metro keep jobless rates elevated. kota’s recession was barely measurable. areas are expanding at least at a modest The breadth of job growth across indus- In the South, much as in Alaska and North pace, the South has more small metro areas tries is a more compelling indicator of labor Dakota, Texas is the nation’s third state now struggling to emerge from recession because market vitality. The Moody’s Analytics job expanding because of the strength of its of long-term restructuring of manufacturing growth diffusion index illustrates broader energy industries. Its expansion is broaden- and a delayed turnaround in housing. growth across the industrial structure of the ing to include many of its large metro areas Mountain West as well as parts of the South- along the I-35 corridor, as well as those in Labor markets east (see Chart 6). the Permian Basin region of West Texas. But The current strength of the West’s recov- Most striking, however, is the narrow pat- the expansion of the Texas economy, and ex- ery is most evident in its employment trends. tern of job growth evident throughout much of tending well north into the Central Plains, is The region’s job growth has led the rest of the East Coast, ranging from Maine all the way

Chart 5: …Driving Its Jobless Rate Lower Chart 6: Narrow Pattern of Growth in Northeast Unemployment rate, % Employment growth diffusion index, 3-mo avg, 4-digit NAICS 12 Oct 2012 11 10 9

8 U.S.=59 7 Avg=48 Northeast 6 Midwest Less than 45 45 to 60 5 South West Greater than 60 4 08 09 10 11 12

Sources: BLS, Moody’s Analytics Sources: BLS, Moody’s Analytics

5 6 MOODY’S ANALYTICS / Regional Financial Review / December 2012 15 ANALYSIS �� U.S. Regional Outlook 2013: A Broadening Expansion

Chart 7: Workweek Lengthens in the West… Chart 8: …But Wage Growth Is Modest… Avg weekly hours worked, total private employment, 3-mo MA Wage and salary income by region, % change yr ago 36.0 6 Northeast Midwest South West 35.5 4 2 35.0 0 34.5 Northeast -2 Midwest 34.0 -4 South West 33.5 -6 CPI, % change yr ago 33.0 -8 08 09 10 11 12 08 09 10 11 12 Sources: BLS, Moody’s Analytics Sources: BLS, Moody’s Analytics

7 8 to North Carolina. With traditional economic economy expands in the coming year, there industrial Midwest, the Plains, and much of drivers such as financial services and govern- will be a greater imperative to hire in the the West (see Chart 9). ment flat or declining, there is much less to Midwest and West as the workforce is less The Midwest is the leader in terms of per generate new demand for the broader range of able to achieve further productivity gains. capita personal income growth (see Chart goods and services produced in the region. 10). This bodes well for consumer spending The malaise in the Northeast is also evi- Income throughout much of the Plains states but per- dent in the average length of the workweek, As with the broader business cycle indica- haps less so in the industrial Midwest because which has fallen back to where it was at the tors, income growth is positive across the of considerable near-term uncertainty for con- end of the recession at less than 33.5 hours country and fairly steady, although with labor tinued output and employment gains in manu- (see Chart 7). The structure of the Northeast markets still on the mend there is little pres- facturing. Risks are greater in Illinois: Along economy, with its concentration of services, sure on wage rates to drive income growth with Greater New York City, with its weak healthcare and education that accom- faster. Income growth, particularly wage financial services payrolls, consumer spending modates part-time work, always keeps the income, did exceed inflation through midyear in Illinois is likely to remain dampened. region’s average workweek shorter than else- in the Midwest, South and West (see Chart 8). Areas that depend on low-wage travel, where. But it is only in the Northeast where Again, the Northeast is the weakest region, tourism and hospitality such as Arizona, the workweek has not improved substantive- with wage income as well as total personal Florida and Nevada are also among the slow ly from the lowest point of the recession in income struggling to keep ahead of consumer income growth areas on a per capita basis. mid-2009; the difference between it and the price inflation. The Northeast’s slower job other regions is as wide as it has ever been. growth—and no job growth among higher- Manufacturing Further, the average workweek in the paying financial services—keeps income Some volatility in the regional economies, West is rising and in the Midwest it is stable growth muted in the region. The Southeast’s particularly in the industrial Midwest and and near its prerecession peak. Thus, as the income gains are modest, trailing those of the parts of the Southeast, is emerging as indus-

Chart 9: …Lagging Along the East Coast Chart 10: Midwest Leads on Per Capita Basis Wage and salary income growth, % change yr ago, 2012Q3 Per capita personal income, 2011, % change yr ago

U.S.=3 U.S.=4.5 <2.4 >5.1 2.4 to 3.5 4.1 to 5.1 >3.5 <4.1

Sources: BEA, Moody’s Analytics, preliminary estimate Dec 2012 Sources: BEA, Moody’s Analytics

9 10 16 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� U.S. Regional Outlook 2013: A Broadening Expansion

Chart 11: IP Is Falling Fastest in Midwest… Chart 12: …Putting Job Growth at Risk… Industrial production, Jan 2011=100 Manufacturing employment, % change yr ago, 3-mo MA 107 5 Northeast 106 Midwest 0 105 South 104 West -5 103 102 -10 Northeast 101 Midwest -15 South 100 West 99 -20 11 12 09 10 11 12 Sources: Federal Reserve, BLS, Moody’s Analytics Sources: Federal Reserve, BLS, Moody’s Analytics

11 12 tries are hit by slower export demand, tepid their somewhat elevated levels. Nationwide and domestic uncertainties weigh on de- domestic business investment spending, and industrial production did rise in November, mand for durable goods. The uncertainty of rising inventories. U.S. industrial production but remains below its July peak. federal fiscal policy could cut deeply into has fallen in two of the past three months The Midwest is likely to feel the effects both consumer and business demand for and is below its July peak. Cutbacks in auto of volatility in manufacturing the strongest durable goods for consumption, as well as for production have brought the Midwest’s because of the need to slow production to investment. As long as tax policy and federal industrial production down further than else- manage bulging inventories at some domestic spending plans remain unclear, consumers where, although some of this is because of automakers, and because no regional labor and businesses will spend with caution. The unusual seasonal factors as normal summer market has benefited as much from manufac- pace of global demand for high-tech indus- shutdowns were cancelled to keep produc- turing job growth (see Chart 12). The South- trial equipment, software and services also is tion lines running (see Chart 11). Manufac- east also will feel some volatility, particularly likely to be soft during the coming year. turing survey indexes nearly everywhere if transplant automakers also face inventory pointed downward in November. The new control problems. Both the Midwest and Trade orders component of these indexes provided South already have seen the average work- The global economy will weigh on all little relief for the near term, with upward week for manufacturing decline from midyear regions in 2013, with the effects expected trends evident only in the New York and peaks (see Chart 13). Gains in North American to be felt the greatest in the Northeast and Richmond Fed surveys. U.S. factory orders semiconductor billings in each of the past two the Midwest. The Northeast’s exports of were strong enough in September and Octo- months are a bit more positive for the tech- goods and commodities already are down by ber to keep shop floors humming in most in- producing industries that power some of the a strong 15% from a year ago, and this does dustries and regions, but there is bound to be West and Southwest economies. not include weakening linkages to the global some volatility as new orders slow, at least Such volatility is expected to continue at economy via financial and other business until inventories are managed down from least through the middle of 2013 as global services. Elsewhere, exports since mid-2012

Chart 13: …As Workweek Slows for Durables Chart 14: Exports Falter in the Northeast Avg weekly hours worked, manufacturing, 3-mo MA Exports of goods and commodities, nominal value, Jul 2008=100 42.0 130

41.5 120

41.0 110

40.5 100

40.0 90 Northeast Northeast 39.5 Midwest 80 Midwest South 39.0 70 South West West 38.5 60 08 09 10 11 12 08 09 10 11 12 Sources: BLS, Moody’s Analytics. Regions are weighted avg of state figures. Sources: Census Bureau, Moody’s Analytics

13 14 MOODY’S ANALYTICS / Regional Financial Review / December 2012 17 ANALYSIS �� U.S. Regional Outlook 2013: A Broadening Expansion

Chart 15: Northeast, Midwest Linked to Europe Chart 16: Midwest Most Export-Intensive Region Exports to European Union, goods and commodities, % of GMP Total exports, goods and commodities, % of GMP, 2011

2011

No data No data Less than 0.6 Less than 3.6 0.6 to 2.4 3.6 to 16.7 Greater than 16.7 Sum of metro areas=1.5 Greater than 2.4 Sum of metro areas=10.1

Sources: BEA, Census Bureau, ITA, Moody’s Analytics Sources: BEA, Census Bureau, ITA, Moody’s Analytics

15 16 have been level compared with a year earlier, which produce advanced industrial and turn six years ago. The pattern of the re- but they have not declined (see Chart 14). construction machinery. bound is a close reflection of homebuilding, The leveling off of Midwest exports por- with the strongest price appreciation in the tends impending volatility in that region’s Housing West, Florida, and the upper Midwest. Once economy; Cincinnati, Indianapolis and St. Housing is now a positive force for eco- again, the Northeast, as well as much of the Louis are among the metro areas with the nomic growth. Permit issuance has risen over industrial Midwest, lags (see Chart 17). highest exposure to trade with Europe (see the year by 40% to 50% in each of the four The West’s broad price appreciation is partly Chart 15). While the Midwest has the high- regions, albeit from record-low levels. Never- a result of the rather unfettered nonjudicial est exposure to international trade, its trade theless, half of the states have seen gains in method of foreclosure resolution in much of partners are diversified across the globe (see permit issuance of more than 40% this year. the region that allowed distress sales to appear Chart 16). The Northeast’s trade exposure is The South and West, particularly Florida, on the market earlier, creating a large supply smaller but more highly concentrated with Oklahoma, Nevada, Alaska and Arizona, have of affordable homes that has been attracting European partners. Exports from the South seen the greatest gains. But even the upper investor buyers, and more recently, individual and West, with greater linkages to Latin Midwest is seeing a surge in homebuild- buyers for their own occupancy (see Chart 18). America and Asia, are still rising modestly. ing. The Northeast is again lagging, with The rebound is aided by relatively strong popu- Rising industrial production in China only modest gains in much of New England lation growth that has built up demand over in November and December implies that and the Mid-Atlantic. Expect construction- the past several years for housing. the Chinese economy is beginning to re- related employment to pick up in the coming Prices are rising rapidly in Florida, al- bound, generating demand for intermedi- year, particularly in the South and West. though some of the improvement is in the ate goods and services from the U.S. and Similarly, house prices are on the rebound condominium market that caters to Latin elsewhere. The West and South will benefit, in much of the country, particularly for those American buyers. The single-family market is as will some midwestern metro areas, areas most hard-hit by the housing down- improving, but not quite as fast.

Chart 17: Housing Supports Nearly All Regions Chart 18: Rebound in Hardest-Hit Markets Single-family house price index, % change yr ago, Oct 2012 CoreLogic single-family house price, % change yr ago Mountain Oct 2012 South Atlantic Pacific U.S. West South Central West North Central Mid-Atlantic >6.5 East South Central 2.1 to 6.5 East North Central New England 0 to 2 U.S.=6.3 <0 0 2 4 6 8 10 12 14 16 Sources: CoreLogic, Moody’s Analytics Sources: CoreLogic, Moody’s Analytics

17 18 18 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� U.S. Regional Outlook 2013: A Broadening Expansion

Chart 19: Price Growth to Be Slow in Northeast Chart 20: Foreclosure Inventories Concentrated Case-Shiller® Home Price Index, avg annual growth, % Total foreclosure inventories per 1,000 households, Nov 2012

9 10 16 9 16 22 29 11 18 19 17 13 12 U.S.=13.1 U.S.=3.3 21 11 16 State avg=9.3 19 4.9 to 9.8 <9 3.6 to 4.8 40 9 to 18 2.7 to 3.5 >18 2012Q3-2017Q3 -0.3 to 2.6

Sources: Fiserv, Moody’s Analytics Sources: LPS, Moody’s Analytics

19 20 The strongest price improvements in the One exception will be South Florida, Further, the rate continues to fall only in Midwest are in southern Michigan, extend- where excess supply will keep price appre- the West and households are now willing to ing west from Detroit across the entire state. ciation at no better than inflation for some take on certain types of debt, particularly Here also, high affordability combined with time. Florida has the highest concentration auto loans and student loans, and banks are labor market improvements now supports of foreclosure inventory, particularly in its increasingly willing to lend. In the Northeast, the housing market. southern metro areas (see Chart 20). Illinois, the delinquency rate has risen slightly since The Northeast is the one region where Nevada, Arizona, Georgia and New Jersey are the beginning of this year. High delinquency nearly all metro areas lag behind the U.S. av- well above average. Chicago’s housing mar- rates are concentrated in the New York area, erage. New Jersey, southeastern Pennsylvania, ket, which now suffers under the weight of a the Southeast, and Nevada (see Chart 22). and southern New England comprise the larg- slow economy, will improve as employment Thus, the Northeast again faces some est single area that still suffered modest price and income growth gain ground. headwinds as the region enters 2013. With declines over the year. Prices in this area never its labor markets weaker, income growth fell to the extent that they did in many other Credit quality slower, and consumer delinquency rates places, and the labor market is not providing Improvement in household balance higher and rising, the Northeast will likely any additional demand for housing. Add to sheets is an important reason to be opti- get less of a boost from consumer spending that the area’s full and deep pipeline of dis- mistic about consumer spending during the than will other regions. tressed properties due to the slow and lengthy coming year. Increasingly, the household judicial process of resolving mortgage de- debt service burden is falling in most areas to Outlook faults. The upshot is a market that will remain the point where most households need not The outlook is improving for the West weak for some time. Price appreciation will cut back on spending to manage their debt, and depends to a large degree on the pace of be positive but modest in the Northeast. The and upper-income households are more able business investment spending, exports, con- region’s primary exception is New York City’s to spend freely. sumer spending, and the housing recovery. midpriced condo and co-op market, where The breadth of there is considerable upside price pressure. the improvement Chart 21: West’s Credit Quality Still Improving Reconstruction following Hurricane San- is evident in the Consumer credit delinquency rate, % of $ volume, all lines dy, now beginning in New York, New Jersey sharp downturn in 10 Northeast and southeastern Connecticut, does provide the delinquency 9 Midwest a timely way for construction to still add to rate for consumer 8 South the dynamics of economic growth in the re- loans across all re- West 7 gion this coming year. gions of the country 6 The outlook for house prices in coming (see Chart 21). The years follows a pattern similar to current Midwest’s rate has 5 trends (see Chart 19). Much-improved af- returned to where it 4 fordability, a growing labor market, and was at the start of 3 pent-up demand will drive the West Coast, the recession; the 2 Southwest and Southeast markets as they other regions are not 07 08 09 10 11 12 lead the nation. far above that point. Sources: Equifax, Moody’s Analytics

21 MOODY’S ANALYTICS / Regional Financial Review / December 2012 19 ANALYSIS �� U.S. Regional Outlook 2013: A Broadening Expansion

Chart 22: High Delinquencies Are Concentrated Chart 23: Employment Outlook 2013 Consumer credit delinquency rate, % of $ volume, all lines Payroll employment, 2013Q4, % change yr ago

Oct 2012

U.S.=5.76 U.S.=1.4 Less than 4.4 Greater than 1.6 4.4 to 6.1 1.1 to 1.6 Greater than 6.1 Less than 1.1

Sources: Equifax, Moody’s Analytics Sources: BLS, Moody’s Analytics

22 23 Given that a preponderance of indicators are improve at a slow pace, but the global econ- year progresses. The most immediate risk is turning increasingly positive for the West— omy is likely to be uncertain over the com- the possibility that federal fiscal policy does employment, income, credit quality and ing year. The Plains states, however, should not address the fiscal cliff in a timely fashion. foreclosures, and house prices, for example— remain steady as the outlook for commodity No state would escape from the weight of the region appears to be the best positioned prices is positive. the tumble over the cliff were it to happen. to lead the way in 2013 (see Chart 23). The Northeast will be the weakest. Finan- Policy negotiations in Washington are mak- Prospects for the South are stable, and cial services will be restructuring during the ing rapid progress toward a compromise that the region should not lag far behind the coming year. Northeast housing markets have would avert many of the tax increases and West. The South’s outlook is dependent the weakest prospects for a turnaround since spending cuts scheduled to take effect in upon commodities and technology in the there is an ample supply of distressed homes January, and a framework for longer-term fis- Southwest, manufacturing and housing in still coming onto the market. Improvements cal policy appears to be emerging. The base- the Southeast, and federal fiscal policy in the in consumer credit quality have stalled. Ex- line forecast assumes that an agreement will areas near Washington DC. port trade is falling for the region. And for the be reached by the middle of the first quarter The Midwest will likely be the most first time in more than 10 years, the federal of 2013. If the agreement comes sooner, the volatile region in the coming year and will government will provide little boost to the re- year could start on an even stronger note. depend upon manufacturing, which provides gional economy, which was bolstered so well If the negotiations break down, the the foundation for much of the region. Auto during the early years of recovery as policy impacts from direct federal spending cuts production and export goods face the most served to protect and rebuild financial services would hurt the Southeast the greatest (see uncertainty and will depend upon nation- following the crisis in 2008. Chart 24). It is there that many federal de- wide consumer confidence and job growth Overall, the pattern of recovery should fense facilities are located and where federal to keep demand steady while the industry broaden across the states and metro areas. antipoverty and other safety net programs manages inventories. Export goods should The dispersion of job growth is improving, are concentrated. and the factors still But if fiscal policy is not changed in a Chart 24: Federal Cuts Would Hurt South… holding back the significant way, the impacts would hit much Projected change, federal defense and nondefense expenditures economy such as more than just the Southeast (see Chart Fiscal cliff scenario remaining poor credit 25). The combined impact of direct federal quality or limited spending, reduced business investment house price gains spending, and reduced consumer spending are increasingly con- would likely hit the Northeast and the Mid- centrated in just a west harder than anywhere else. Financial 2013 few areas. services would falter with a downturn in % of gross product equity markets, a decline in durable goods 0.15 to 0.28 Risks production would hit the industrial Midwest, 0.28 to 0.43 The outlook for and a combination of weak investment 0.43 to 0.81 2013 is positive, with spending on new technology and declining U.S.= 0.31 an accelerating tra- consumer spending would hurt California. Sources: Census Bureau, Moody’s Analytics jectory likely as the Already the weakest region in the country,

24 20 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� U.S. Regional Outlook 2013: A Broadening Expansion

Chart 25: …But Fiscal Cliff Would Hit Broadly Chart 26: State Spending Beginning to Rise Total employment, % change from baseline forecast, 2014 Fiscal 2013 state general fund spending, fiscal yr, % change Fiscal cliff scenario

U.S.=2.2

-1.4 to <-1.9 >5 -1.9 to <-2.1 2 to 5 -2.1 to -2.6 <2 U.S.=-2

Source: Moody’s Analytics Sources: National Association of State Budget Officers, Moody’s Analytics

26 25 the Northeast can ill afford the impacts of pullback in consumer spending on travel, en- with inflation (see Chart 26). If revenue does the fiscal cliff scenario. tertainment and technology goods. not keep up with projections, spending plans The potential for federal policymakers to Related to the fiscal cliff is the risk would certainly be cut, removing any sup- not reach a compromise on the fiscal cliff that foreign trade could falter. Were U.S. port for the economy from state fiscal policy. creates a strong risk by the middle of next policymakers not to reach a reasonable States with planned increases of more than year that the sharp pullback in spending compromise on fiscal policy, both the U.S. 5% are scattered around the West, the Great would bring much of the Northeast and Mid- and Europe would be in recession at mid- Lakes, and the East Coast. But a number of west into recession again. Not only would year, risking a broader global recession that these, including California, Michigan and the Washington DC metro area be directly would pull down export trade much like the Massachusetts, have over-projected revenue hit by budget cuts, but a sharp pullback in nearly 30% decline during the 2008-2009 for a number of years, requiring subsequent business confidence would jar the Northeast. recession. The Central Plains states would cutbacks to planned spending. The Midwest manufacturing base would suffer the least, but even their job growth Some upside potential in the first half also be hit as falling consumer confidence would be significantly hindered in such arises in New York and New Jersey as insur- would limit durable goods purchases, nation- a scenario. ance payments and federal emergency relief wide homebuilding, and the appliances and There is also a risk that state finances funds begin to spur rebuilding and improve- equipment from the region that go into new could once again become a drag on the pace ments to infrastructure following Sandy’s homes. The Southeast would suffer from of economic growth. As it is, about one-third devastation. Building and repairs are likely to spending cuts at its many military bases. The of the states are planning spending increases accelerate leading up to the summer as the West, particularly California, would feel the for fiscal 2013 of 2% or less, just keeping up Jersey Shore readies itself for the season.

MOODY’S ANALYTICS / Regional Financial Review / December 2012 21 ANALYSIS �� U.S. Regional Outlook 2013: A Broadening Expansion

Table 1: Forecasts by State, % change Employment Population Personal Income 2012 2013 2014 2012 2013 2014 2012 2013 2014 New England 0.7 0.8 1.6 0.4 0.4 0.4 1.2 1.0 4.4 Connecticut 0.3 0.5 1.7 0.2 0.2 0.2 0.3 0.5 4.6 Massachusetts 1.1 1.1 1.5 0.6 0.5 0.5 2.0 1.7 4.8 Maine 0.1 0.4 1.7 0.2 0.3 0.3 1.1 -0.4 2.6 New Hampshire 0.3 1.1 1.9 0.8 0.7 0.6 0.5 0.3 4.8 Rhode Island -0.6 0.5 2.2 0.0 0.2 0.3 1.1 0.6 3.9 Vermont 1.1 0.6 1.5 0.3 0.3 0.3 1.1 -0.7 1.4

Middle Atlantic 1.1 1.0 1.6 0.3 0.3 0.3 0.8 1.0 4.1 New Jersey 1.2 1.1 1.8 0.4 0.4 0.4 1.1 1.2 3.9 New York 1.5 1.1 1.3 0.3 0.3 0.3 0.2 1.2 4.3 Pennsylvania 0.6 0.8 1.8 0.2 0.1 0.1 1.5 0.3 3.9

East North Central 1.1 0.9 1.7 0.3 0.3 0.4 1.4 0.5 4.4 Illinois 0.5 0.5 1.2 0.4 0.4 0.4 1.0 0.6 4.4 Indiana 2.0 1.3 1.7 0.8 0.7 0.6 2.2 1.1 5.0 Michigan 1.4 1.0 1.7 0.0 0.2 0.2 1.7 0.8 4.5 Ohio 1.6 1.0 1.9 0.1 0.2 0.2 1.5 -0.5 3.6 Wisconsin -0.3 0.6 1.8 0.4 0.4 0.4 0.8 1.4 5.2

West North Central 1.0 1.0 1.9 0.7 0.7 0.6 1.6 0.0 3.7 Iowa 1.0 0.8 1.6 0.5 0.4 0.3 1.5 0.4 3.4 Kansas 1.0 0.9 1.8 0.8 0.8 0.8 0.9 1.3 4.2 Minnesota 1.3 0.9 2.0 0.9 0.8 0.7 1.3 -2.2 2.0 Missouri 0.2 0.6 1.7 0.4 0.6 0.6 1.3 0.7 4.7 North Dakota 6.3 4.0 3.1 1.5 1.1 1.1 6.6 3.6 6.1 Nebraska 1.0 1.6 2.1 0.5 0.5 0.5 2.3 0.6 4.3 South Dakota 0.7 1.0 1.8 1.1 1.1 1.0 1.2 1.0 4.0

South Atlantic 1.0 1.3 2.3 1.2 1.4 1.6 1.4 1.0 4.9 District of Columbia 1.1 0.7 1.2 1.6 0.9 0.9 1.3 -0.1 3.2 Delaware 0.1 0.8 2.3 0.8 1.1 1.1 0.0 -0.1 4.7 Florida 0.9 1.9 2.7 1.4 1.9 2.1 1.3 1.9 5.7 Georgia 1.2 1.2 2.1 1.0 1.5 1.9 1.5 1.4 4.4 Maryland 1.2 0.6 2.3 0.6 0.5 0.5 1.6 0.2 4.6 North Carolina 0.9 1.3 2.3 1.6 1.8 1.8 1.7 1.2 4.9 South Carolina 1.2 0.9 2.4 1.2 1.2 1.2 1.3 -0.1 4.1 Virginia 1.1 1.2 2.2 0.9 1.0 1.0 1.2 0.4 4.6 West Virginia 0.3 0.5 2.0 0.2 0.2 0.1 0.7 -0.2 4.0

East South Central 1.0 1.2 2.1 0.8 0.9 0.8 1.5 0.6 4.6 Alabama 0.4 1.4 2.4 0.8 0.9 0.9 0.7 1.3 5.1 Kentucky 2.1 1.6 2.1 0.9 0.9 0.9 2.1 1.4 4.3 Mississippi -0.3 0.7 2.1 0.3 0.7 0.8 0.7 -0.2 3.2 Tennessee 1.3 1.0 1.8 0.9 0.9 0.8 2.0 -0.1 5.0

West South Central 2.2 1.9 2.6 1.4 1.4 1.4 1.8 0.5 4.2 Arkansas 0.7 1.0 2.0 0.7 0.7 0.6 0.7 0.2 3.2 Louisiana 2.0 0.9 1.5 0.6 0.5 0.5 0.3 1.0 3.3 Oklahoma 2.6 1.4 2.1 0.7 0.7 0.6 2.0 0.7 4.1 Texas 2.4 2.3 3.0 1.8 1.8 1.8 2.2 0.5 4.5

Mountain 1.5 1.7 2.8 1.5 1.8 2.0 1.3 1.3 5.2 Arizona 2.1 2.7 3.6 1.7 2.6 2.8 1.8 2.0 5.9 Colorado 1.7 1.5 2.7 1.5 1.4 1.3 1.5 1.7 5.9 Idaho 1.5 1.6 2.4 0.9 1.2 1.3 0.8 0.1 4.0 Montana 0.8 1.4 1.9 1.3 1.2 1.1 3.1 1.6 5.3 New Mexico -0.3 0.4 2.0 1.0 1.1 1.2 -0.5 -1.6 2.1 Nevada 0.5 1.1 3.0 1.6 2.4 2.7 0.3 0.4 5.3 Utah 2.1 1.8 2.2 1.7 1.7 1.7 2.3 2.1 4.8 Wyoming 1.1 1.1 1.6 1.0 0.9 0.8 0.6 0.2 3.6

Pacific 1.6 1.6 2.2 1.1 1.2 1.2 2.0 1.7 5.4 Alaska 0.4 1.1 2.5 1.2 1.2 1.1 1.8 1.1 4.5 California 1.7 1.5 2.1 1.1 1.2 1.1 2.0 1.8 5.5 Hawaii 1.4 1.9 2.1 0.6 0.8 0.9 1.3 0.9 4.4 Oregon 0.9 1.6 2.4 1.6 1.6 1.7 1.9 1.6 6.0 Washington 1.8 1.9 2.3 1.3 1.1 1.1 2.1 1.2 4.7

22 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� U.S. Regional Outlook 2013: A Broadening Expansion

Table 2: Forecasts for Largest Metropolitan Areas and Divisions, % change

Employment Population Personal Income 2012 2013 2014 2012 2013 2014 2012 2013 2014

New England 0.6 0.7 0.8 0.3 0.4 0.4 2.3 1.2 1.0 Bridgeport CT 0.0 1.0 2.3 0.3 0.3 0.3 -0.7 1.1 3.7 Hartford CT 0.4 -0.2 1.7 0.3 0.3 0.3 1.0 2.6 4.1 New Haven CT 0.8 0.0 1.4 0.2 0.3 0.3 2.2 2.1 3.9 Boston 1.1 0.8 1.6 0.6 0.6 0.5 2.2 2.5 4.7 Springfield MA 0.0 0.8 1.3 0.2 0.3 0.5 1.5 1.5 4.6 Portland ME 0.0 0.4 1.3 0.7 0.7 0.6 2.1 2.1 4.1 Manchester NH -0.2 0.3 1.8 0.2 0.2 0.2 1.2 1.1 4.5 Providence RI -0.5 0.4 1.7 -0.2 0.3 0.4 1.9 0.5 3.9

Middle Atlantic 1.0 1.1 1.0 0.3 0.3 0.3 2.0 0.8 1.0 Camden NJ 1.0 0.5 1.9 0.3 0.4 0.4 -0.2 0.7 3.4 Edison NJ 0.4 0.2 2.1 0.4 0.7 0.7 0.8 1.0 4.0 Newark NJ 1.0 0.4 2.2 0.3 0.3 0.3 1.0 1.0 4.1 Trenton NJ 0.4 0.1 2.2 0.1 0.4 0.5 0.0 0.3 3.9 Albany NY 1.2 0.1 2.1 0.0 0.1 0.2 -0.7 0.9 4.7 Buffalo 0.5 -0.1 1.5 -0.2 -0.1 -0.1 0.9 1.3 4.3 Nassau NY 0.8 0.5 1.6 0.1 0.1 0.2 1.5 1.3 3.8 New York 1.7 1.0 2.0 0.7 0.6 0.4 0.7 1.7 3.9 Rochester NY 1.6 -0.3 1.3 0.0 0.1 0.2 0.4 1.2 4.6 Syracuse NY 0.4 -0.2 1.5 -0.1 0.0 0.0 0.5 0.4 3.0 Harrisburg PA 0.4 1.1 2.1 0.5 0.5 0.5 1.1 1.1 3.7 Philadelphia 0.2 0.5 2.0 0.4 0.3 0.3 1.1 1.3 4.1 Pittsburgh 1.1 1.0 2.1 0.0 -0.1 -0.1 2.1 1.4 4.6

East North Central 1.1 1.1 0.9 0.2 0.3 0.3 2.5 1.4 0.5 Chicago 0.8 0.0 1.5 0.5 0.5 0.5 0.9 0.8 3.9 Peoria IL 1.7 -0.4 1.3 0.2 0.3 0.3 5.2 0.7 3.6 Fort Wayne IN 4.7 1.0 1.9 0.7 0.7 0.7 4.0 2.2 4.9 Gary IN 0.3 0.5 1.0 0.4 0.4 0.3 4.3 1.8 4.0 Indianapolis 1.6 1.1 2.1 1.4 1.4 1.3 1.4 1.9 4.5 Ann Arbor MI 2.3 1.2 2.3 0.6 0.7 0.6 0.0 1.3 4.5 Detroit 0.4 0.3 1.3 -0.6 -0.5 -0.5 1.1 0.0 3.5 Grand Rapids MI 1.5 0.2 1.7 0.5 0.6 0.6 1.9 0.7 3.2 Lansing MI 0.5 0.4 1.7 0.3 0.2 0.2 -0.1 0.6 3.5 Akron OH 0.9 1.4 1.7 -0.1 0.0 0.1 1.8 0.4 3.0 Cincinnati 2.3 1.2 1.9 0.3 0.5 0.5 1.4 0.2 3.0 Cleveland 0.7 0.9 1.6 -0.4 -0.3 -0.3 1.6 0.4 3.2 Columbus OH 2.1 1.2 2.0 0.7 0.8 0.8 2.4 1.1 3.6 Dayton OH 0.5 0.2 1.6 0.0 0.1 0.1 2.2 0.4 3.1 Toledo OH 0.4 0.2 1.9 0.0 0.1 0.1 0.9 0.2 3.1 Madison WI -0.3 0.9 1.8 0.7 0.7 0.7 1.9 1.4 4.1 Milwaukee -0.3 0.1 2.0 0.4 0.3 0.4 -0.1 1.0 4.5

West North Central 0.8 1.0 1.0 0.5 0.7 0.7 4.2 1.6 0.0 Des Moines IA 1.1 0.7 2.8 0.9 0.9 0.9 2.2 3.2 5.6 Wichita KS 1.4 0.6 2.4 0.6 0.7 0.7 3.2 2.7 5.6 Minneapolis 1.2 1.3 2.6 1.2 1.1 1.0 2.1 0.4 3.3 Kansas City MO 0.6 0.4 2.2 0.8 1.0 1.0 1.7 1.2 4.8 St. Louis 0.1 0.1 1.6 0.1 0.3 0.3 0.0 0.7 4.2 Fargo ND 4.2 3.5 3.7 -0.1 0.2 0.1 5.2 8.2 7.8 Omaha NE 1.6 1.2 2.5 1.1 1.1 1.1 2.5 2.0 4.8 Sioux Falls SD 1.6 1.4 2.6 2.7 2.8 2.8 3.4 3.0 3.2

South Atlantic 1.2 1.0 1.3 1.0 1.2 1.4 2.5 1.4 1.0 Wilmington DE 0.8 0.0 2.2 0.6 0.5 0.6 -0.4 -0.2 4.8 Fort Lauderdale FL 0.3 0.6 2.1 1.2 1.4 1.8 1.0 2.2 5.1 Jacksonville FL 0.4 0.8 1.9 0.9 1.3 1.6 0.6 2.0 4.1 Miami 0.9 0.4 1.7 1.4 1.0 1.3 2.8 2.0 3.7

MOODY’S ANALYTICS / Regional Financial Review / December 2012 23 ANALYSIS �� U.S. Regional Outlook 2013: A Broadening Expansion

Table 2: Forecasts for Largest Metropolitan Areas and Divisions, % change, cont’d.

Employment Population Personal Income 2012 2013 2014 2012 2013 2014 2012 2013 2014 Orlando FL 1.1 1.9 2.5 1.7 2.2 2.6 2.2 2.4 4.4 Tampa FL 1.4 0.9 2.0 1.2 1.3 1.4 2.3 2.5 4.6 West Palm Beach FL 0.3 1.1 2.5 1.0 1.6 2.2 1.6 2.9 5.0 Atlanta 1.4 1.6 2.8 1.1 1.4 1.9 2.2 1.9 4.0 Baltimore 0.8 0.4 2.4 0.6 0.6 0.5 1.8 0.8 3.7 Bethesda MD 1.1 0.8 2.3 1.1 1.0 1.0 2.4 1.2 4.3 Charlotte NC 1.1 1.0 2.6 2.1 2.3 2.3 2.8 2.9 5.5 Greensboro NC 1.6 -0.1 1.4 0.8 1.0 1.0 2.7 1.9 4.7 Raleigh NC 2.3 2.0 3.1 3.3 3.4 3.4 2.2 3.1 6.2 Greenville SC -0.2 -0.2 2.0 1.2 1.2 1.2 1.0 0.6 4.3 Richmond VA 1.1 0.9 1.9 0.8 0.9 0.9 1.7 1.0 4.5 Virginia Beach VA 0.5 0.4 1.7 0.2 0.5 0.6 1.9 1.0 4.2 Washington DC 1.2 0.5 1.6 1.7 1.3 1.2 1.0 1.5 4.2

East South Central 0.8 1.0 1.2 0.5 0.8 0.9 2.1 1.5 0.6 Birmingham AL -0.2 0.7 2.5 0.8 0.9 0.9 0.9 1.1 4.6 Louisville KY 3.0 1.5 2.2 1.0 1.0 1.0 3.0 2.4 4.2 Memphis TN 1.2 0.4 1.8 0.8 0.8 0.8 1.2 0.9 3.5 Nashville 0.8 0.2 1.7 1.7 1.4 1.1 2.3 2.1 4.2

West South Central 1.7 2.2 1.9 1.4 1.4 1.4 3.9 1.8 0.5 Little Rock 0.1 0.8 2.7 1.1 1.1 1.1 0.1 0.7 3.7 New Orleans -0.1 -1.3 1.3 0.5 0.5 0.5 -1.1 0.1 2.3 Oklahoma City 2.7 1.6 2.0 1.0 1.2 1.1 2.0 2.8 4.6 Austin TX 3.1 3.2 3.9 2.8 2.7 2.6 4.9 2.2 3.4 Dallas 2.0 2.2 3.0 2.1 2.0 2.1 1.2 1.7 3.7 Fort Worth TX 2.4 2.7 3.0 2.1 2.1 2.1 2.4 2.6 3.7 Houston 3.4 2.5 2.9 2.0 2.0 1.9 3.8 1.8 3.5 San Antonio TX 2.0 2.7 3.3 2.1 2.0 2.0 2.8 2.0 3.5

Mountain 1.1 1.5 1.7 1.1 1.5 1.8 2.8 1.3 1.3 Phoenix 2.5 1.6 2.6 1.0 2.7 2.7 2.1 2.5 4.9 Tucson AZ 0.4 1.4 3.6 0.8 2.2 2.8 0.9 2.9 5.8 Boulder CO 2.8 2.2 2.8 1.6 1.7 1.6 2.6 2.2 5.3 Colorado Springs CO -0.6 -0.6 2.4 1.6 1.6 1.5 2.4 2.1 5.2 Denver 2.4 1.3 2.6 1.3 1.2 1.2 0.8 2.2 5.0 Boise City ID 1.8 1.4 2.7 1.8 1.7 1.7 1.6 2.0 4.4 Albuquerque NM -0.4 0.5 1.9 0.9 1.1 1.2 -1.4 -0.5 3.4 Las Vegas 0.6 1.5 2.0 1.7 2.5 2.9 0.5 1.9 4.4 Provo UT 2.4 1.9 2.4 2.5 2.6 2.6 3.8 3.3 4.3 Salt Lake City 2.9 1.6 3.0 1.5 1.5 1.5 2.1 3.0 5.0

Pacific 1.0 1.6 1.6 1.0 1.1 1.2 2.8 2.0 1.7 Los Angeles 1.2 1.2 2.0 1.1 1.0 1.0 2.1 1.4 4.6 Oakland CA 1.5 0.9 2.2 1.0 1.0 1.0 1.9 0.8 4.3 Oxnard CA 0.2 0.9 2.7 1.2 1.1 1.1 -0.6 1.2 5.1 Riverside CA 1.5 1.4 2.5 1.1 1.2 1.1 -0.6 1.2 4.4 Sacramento CA 1.1 1.3 2.4 1.2 1.3 1.2 1.5 1.3 4.7 San Diego 1.5 1.7 2.2 1.3 1.4 1.4 2.2 1.5 4.6 San Francisco 3.1 2.1 2.5 0.7 0.7 0.8 3.7 1.1 4.1 San Jose CA 3.0 1.2 2.3 0.9 0.9 0.8 1.9 2.3 5.0 Santa Ana CA 1.6 1.2 2.3 1.1 1.1 1.0 -0.3 1.2 5.0 Honolulu 1.1 1.9 1.8 0.6 0.7 0.6 1.2 1.5 4.3 Eugene OR 0.1 0.9 2.1 1.3 1.3 1.3 1.6 2.2 5.8 Portland OR 1.6 1.2 2.4 1.8 1.8 1.8 2.2 2.2 5.6 Seattle 2.7 2.1 2.4 1.4 1.3 1.2 3.5 2.8 4.8 Spokane WA 0.4 0.9 1.3 1.1 1.0 1.0 1.7 1.1 3.9 Tacoma WA 2.1 1.6 2.1 1.1 1.0 0.9 0.1 2.5 5.1

24 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS

Global Outlook 2013: Another Slow Year Ahead

BY ALFREDO COUTINO, GLENN LEVINE, RUTH STROPPIANA AND PETR ZEMCIK

he global economy fell short of expectations in 2012 as all major regions performed below potential. The U.S., Japan, and major emerging economies in the Asia-Pacific region and Latin America’s Southern Cone T shed substantial momentum as Europe sank back into recession (see Charts 1 and 2). The downturn in Europe did not derail This article explores the key near-term unemployment insurance program, among global growth, but contagion effects sapped challenges facing the global economy, other fiscal policies, all expire on schedule momentum. Europe’s woes have dragged including U.S. fiscal cliff uncertainty and just as government spending drops accord- on the global economy primarily through potential impact of a partial breakup of ing to the terms of last summer’s deal to capital flows and financial markets, and the euro area. It also analyzes the growth raise the Treasury debt ceiling. particularly on nations with existing mac- prospects for major regions and countries in The U.S. government is expected to ne- roeconomic imbalances. The slowdown in 2013 and concludes with a discussion of the gotiate a moderate path around its 2013 international trade has also taken a heavy global outlook and forecast risks. fiscal cliff, yet uncertainty will continue to toll on global economic activity. color investor perceptions until a clear path Forward-looking economic surveys sug- U.S.: Fiscal uncertainty to fiscal sustainability is laid out. A political gest the struggles in advanced economies The U.S. fiscal cliff is the most immediate compromise is still expected in early 2013, are not over and the global economy will global risk. The U.S. economy finished 2012 on but the longer a deal takes, the larger the continue to grow below potential in 2013. a soft footing in part because of cautious hir- toll on confidence and thus investment and Slowly growing advanced economies will ing and investment brought on by fiscal policy job creation. Without any agreement on cap global demand. Furthermore, risks uncertainty and a sluggish global economy. changes to federal fiscal policy, the economy remain firmly weighted to the downside, Nerves will be tested in early 2013 as lawmak- will go over the fiscal cliff and into reces- largely because of headwinds stemming ers attempt to reach a deal on the fiscal cliff. sion by spring 2013, dragging down the from the U.S. fiscal cliff and the euro zone The fiscal cliff describes what will happen global economy. sovereign debt crisis. if the Bush-era tax cuts and the emergency The baseline outlook assumes the presi-

Chart 1: Global Economy Soft Start to 2013 Chart 2: Most of Europe Still in Recession Current business cycle status Current business cycle status

Expansion Recovery At risk In recession

Source: Moody’s Analytics Source: Moody’s Analytics

MOODY’S ANALYTICS / Regional Financial Review / December 2012 25 ANALYSIS �� Global Outlook 2013: Another Slow Year Ahead

Chart 3: World Would Suffer From a Greek Exit Chart 4: Spanish Spreads Still High Real GDP, 2013, % change yr ago Spreads between actual and fair 10-yr bond yields, % 10 Global Baseline Greece Portugal Greek exit scenario 8 U.S. Ireland Spain 6 Japan Germany 4 U.K. 2 Euro zone 0 Germany -2 France -4 Spain -6 -6 -5 -4 -3 -2 -1 0 1 2 3 06 07 08 09 10 11 12 Source: Moody’s Analytics Sources: National statistical offices, Bloomberg, Moody’s Analytics

3 4 dent and Congress will come together. The Europe still does not have a firewall have committed themselves to keeping the inevitable political brinkmanship will raise strong enough to prevent contagion, despite currency union together. A rough political uncertainty and cause U.S. GDP growth the introduction of the permanent European consensus is growing that fiscal consolida- to stall in the first quarter of 2013, but the Stability Mechanism, and the European tion requires that austerity be imposed more economy will quickly regain its footing once Central Bank’s willingness to purchase sov- gradually over time. a deal is struck, helping to support global de- ereign debt, using a process it calls “outright Elections in Italy and Germany in 2013 mand. By late 2013, the U.S. recovery should monetary transactions” or OMT. The euro should show if policymakers’ recent initia- be back on track. Real GDP growth of around zone would need additional support from in- tives have sufficient popular support to go 2% in 2013 will almost double in 2014 and ternational partners and organizations, such forward. If German voters show they ap- stay near 4% in 2015. However, if lawmak- as the IMF. prove of how Chancellor Angela Merkel has ers in Washington fail to address the nation’s A disorderly Greek exit would aggravate handled the euro area’s troubles, German daunting fiscal challenges, the U.S. and global the debt crisis, putting Europe’s banking officials might be willing to support propos- economy will sink back into recession. system at risk, generating a severe regional als for a regional banking union, involving recession and a sharp contraction in finan- common deposit insurance, bank supervi- Euro zone: Breakup threat cial and trade flows. A spike in risk aversion sion, and resolution authority. European and global policymakers made would severely restrain the availability of Over the past year, the ECB has become meaningful progress in 2012, taking ag- credit and push up financial costs, conse- the euro zone’s committed guardian. The gressive steps to ease tensions in financial quently affecting consumption and invest- central bank’s willingness to buy govern- markets and reduce pressure on Europe’s ment decisions. If the financial contagion ment bonds on the open market is the banking system. Major policy initiatives by were not swiftly contained, euro zone out- long-promised bazooka in the ECB’s arsenal. the International Monetary Fund and euro put would likely decline by even more than Just the possibility of such purchases has zone finance ministers also saved Greece the 5.7% peak-to-trough fall during the fi- eased pressure on governments and reduced from defaulting on its massive debt burden nancial crisis in 2008-2009. Major advanced their borrowing costs, although such costs but have yet to secure a clear path to long- economies battling their own imbalances, remain elevated for many countries. Yields term fiscal substantiality. such as the U.S., Japan and the U.K. would for countries whose securities are considered As the euro crisis drags on, the potential also suffer sharp declines in GDP (see Chart safe havens are below levels implied by fun- for a severe downside event, such as a par- 3). As policymakers in these nations have lit- damentals such as nominal GDP, monetary tial breakup of the single-currency zone, will tle ammunition left to stimulate economies, policy and fiscal position. The opposite is remain prominent. Despite policymakers’ the downturn would likely be prolonged. true for fiscally troubled countries, except clear commitment to keep the common cur- for Portugal, where the market now under- rency bloc intact, the odds of Greece exiting Europe: Cautious optimism estimates the level of risk (see Chart 4). the euro are still uncomfortably high. If that The euro zone’s sovereign debt crisis will The spread between market interest were to happen in 2013, economic activity determine the outlook for Europe. While the rates and the estimated fair rate is par- across Europe and rest of the world would euro area is in recession and likely to see ticularly high in Spain. It is still uncertain be severely undercut. The shock would be little or no growth through most of 2013, whether Spain’s government will seek its transmitted around the globe through finan- reasons for cautious optimism are emerg- own bailout, a move that would clear the cial markets, the banking sector and trade. ing. Policymakers from the EU and ECB way for the ECB to buy Spanish bonds under

26 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� Global Outlook 2013: Another Slow Year Ahead

Chart 5: Periphery Competitiveness Improves Chart 6: U.K. Credit Conditions Set to Improve Current account, % of GDP 12 8 Netherlands Nominal mortgage lending, % change yr ago (L) BoE policy rate, % (R) 7 Germany 10 Weighted effective avg mortgage rate, % (R) Austria 6 Ireland 8 5 Euro area France 6 4 Italy 3 U.K. 4 2011 2 Spain 2012E 2 Portugal 1 2013F Greece 0 0 -10 -8 -6 -4 -2 0 2 4 6 8 10 07 08 09 10 11 12 13F 14F 15F 16F 17F Sources: IMF, Moody’s Analytics Sources: BoE, Moody’s Analytics

6 5 the OMT program. Spain has so far refused contract 1.5%, while Greece shrinks 4.6%. until the second half of the year, leaving full- to address the insolvency of its banking sec- Modest growth in the euro zone is likely to year 2013 growth slightly below trend (see tor in a meaningful way. resume by the end of 2013. Growth in the Chart 7). National policymakers also appear in- smaller countries of Central and Eastern Policy settings are generally favorable creasingly committed to addressing the Europe will be largely determined by the with accommodative monetary policy region’s crisis. While austerity has reduced pace of growth in the euro zone, although across the region. There is no sign of fiscal output more than was expected, it has given domestic demand will boost Poland. Rus- drag, except in Australia and New Zealand. some countries additional fiscal space— sian output will also find support from solid Perhaps most important, governments room for debt to rise before it reaches levels domestic demand. Low unemployment, the around the region are stable, with business- that require drastic changes in fiscal policy. government’s expansionary fiscal policy and friendly policies in place, especially in Countries such as Greece and Italy ran out elevated global oil prices will help Russia’s Southeast Asia. Improving infrastructure and of fiscal space some time ago, but Ireland, economy grow by around 3.5%. steady reform in these economies will drive which began fiscal tightening early, has re- European politicians are likely to keep on an upturn in foreign and domestic invest- cently seen its fiscal space turn positive. muddling through without a major disrup- ment in 2013. Structural reforms across the euro zone tion that destabilizes the single currency Central banks will shift into neutral ter- have begun to lower labor costs in periph- area, but the sovereign debt crisis will drag ritory around midyear as growth recovers; eral countries, while greater domestic de- on the region and is the biggest risk to the some central banks will start to unwind mand and wage growth have risen in core European outlook. ultra-accommodative policies later in the economies, especially in Germany. The com- second half (see Table 1). bination has helped reduce current account Asia-Pacific region: A steady upturn China is the largest economy in the imbalances across the region (see Chart 5). Asia’s economies have weathered the region and the biggest trading partner for Close financial and trade links leave global downturn and are entering 2013 in most Asian economies, providing the major Britain vulnerable to euro zone market un- comparatively good certainty. In 2013, the U.K. economy will shape. Risk levels Chart 7: Asia-Pacific Below Potential in 2013 also be affected by new austerity measures, appear manageable GDP growth, % such as benefit cuts and upper-income tax and domestic policy Australia hikes. Fiscal austerity and a slowdown in settings remain China Hong Kong consumption will be mitigated by rising highly accommoda- India investment. Further, the Bank of England’s tive. After a solid Indonesia Japan monetary policy is expected to remain fourth quarter of Malaysia expansionary until 2015 (see Chart 6). Its 2012, a steady up- New Zealand “funding for lending” scheme is beginning to turn is expected for Philippines Singapore 2012E unblock credit channels, as secured lending most economies as South Korea 2013F shows signs of a pickup. export manufactur- Taiwan Potential Thailand The euro zone is projected to expand ing accelerates. Yet only 0.1% in 2013. Germany will be the GDP growth will not 0 2 4 6 8 10 main driver of euro zone growth. Spain will reach potential rates Source: Moody’s Analytics estimates

MOODY’S ANALYTICS / Regional Financial Review / December 2012 27 ANALYSIS �� Global Outlook 2013: Another Slow Year Ahead

Table 1: Accommodative Monetary Policy Table 2: China Is a Key Trading Partner in Asia Benchmark policy rate, yr end 2012, % % of total exports

Share of exports to: 2012F 2013F Neutral rate From: U.S. Euro zone China Australia 3.00 3.25 4.50 Australia 4 4 27 China 6.00 6.00 7.25 China 17 14 na India 7.75 7.50 7.50 Hong Kong 10 8 52 Indonesia 5.75 6.25 10.00 India 11 14 6 Japan 0.05 0.05 na Indonesia 8 9 11 Malaysia 3.00 3.25 3.50 Japan 15 9 20 New Zealand 2.50 3.00 5.50 Malaysia 8 8 13 Philippines 3.50 4.00 7.00 New Zealand 8 7 12 South Korea 2.75 3.25 4.50 Philippines 15 10 13 Taiwan 1.90 2.25 2.50 Singapore 5 7 10 Thailand 2.75 3.50 4.50 South Korea 10 7 24 Taiwan 12 1 27 Thailand 10 7 12

Source: Moody’s Analytics Sources: Moody’s Analytics, IMF, Taiwan Ministry of Finance, U.S. Census Bureau market for capital machinery from Korea lift the rest of the region towards trend rates India should also enjoy a better 2013, and Japan, hard commodities from Australia of growth. Taiwan and South Korea, big ex- though for different reasons. Policy mis- and Indonesia, and electronic components porters closely tied to China, will be expand- steps and political paralysis crushed business and circuits from Taiwan and Singapore (see ing at potential by the end of 2013. confidence and investment through 2012, Table 2). China’s new leaders will continue on though this has lately begun to improve with China’s economic forecast broadly mirrors the path set by their recent predecessors. a new finance minister, the withdrawal of that of Asia in 2013, with a steady improve- Headline GDP growth will be lower but more an obstinate coalition partner, and a flurry ment in demand, supported by fiscal and balanced; the government will put greater of pro-business reforms designed to lift the monetary policy. Chinese GDP may top 8% emphasis on combating corruption and, to economy from its funk. annualized growth by midyear, partly be- a lesser extent, protecting the environment. These moves are working. Near-term cause of a weak 2012 base, but it will finish The shift towards consumer demand, a long- risks around India’s fiscal and external defi- 2013 below the 8% benchmark, which now time government goal, will continue at a cits have receded and business groups are marks China’s trend growth rate. China will slow pace (see Chart 8). more upbeat. This will translate into better

Chart 8: More Balanced Growth in China Chart 9: India’s Reforms Shore Up Long View GDP components, % share of GDP % change yr ago 50 16 GDP CPI 14 45 12 40 10 35 8

30 6 4 25 2 Consumption Investment Exports 20 0 00 02 04 06 08 10 12 14F 16F 18F 20F 05 07 09 11 13F 15F 17F 19F Sources: Chinese National Bureau of Statistics, Moody’s Analytics Sources: Ministry of Statistics and Programme Implementation, Moody’s Analytics

8 9

28 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� Global Outlook 2013: Another Slow Year Ahead

Chart 10: Moderation in Latin America Chart 11: External Imbalance Real GDP, % change yr ago Latin America current account balance, $ bil, 4-qtr MA 10 0 2011Q1 2011Q2 2011Q3 8 -4 2011Q4 2012Q1 2012Q2 6 -8 4 -12 2

-16 0 09 10 11 12 ARG CHL PER COL VEN MEX BRA LATAM Sources: Government statistics offices, Moody’s Analytics Sources: ECLAC, Moody’s Analytics

11 10 investment and GDP growth, but not until competing free-trade agreements, and flexibility, the focus should be on deepening well into 2013. These moves help to sup- preferential treatment for trade and invest- structural reforms to reinforce the sources of port the longer-term outlook (see Chart 9). ment. The changing positions of the global permanent growth. Looser monetary policy will provide some giants create both risks and opportunities, After decelerating for a second consecu- support to India’s growth in the first half, but which governments can exploit if they are tive year, Latin America started to improve at stubbornly high inflation and a large fiscal clever. The game is fraught, however, with the end of 2012, mainly as a result of Brazil’s deficit limit the scope for further fiscal and the threat of an armed conflict in a worst- incipient post-stagnation recovery. The re- monetary easing. case scenario. gion’s growth averaged around 3.2% in 2012, While most of Asia will accelerate, signs However, the key risks to Asia’s near-term following 4.3% in 2011 and 6% in 2010. from Japan are worrying. The government outlook are located mostly outside of Asia. Latin America will go back to functioning announced several modest stimulus pack- Asian economies would be badly affected according to its potential capacity in 2013 ages in recent months targeted at small by a worsening U.S. or European fiscal crisis (around 4%), thus remaining the second- businesses, but this has not prevented the through weaker exports, foreign direct in- best world performer after Asia. economy from entering recession for the vestment and export financing, and worsen- Most economies reported slower annual fifth time in 15 years. Aside from recon- ing domestic sentiment. growth in 2012 except for Venezuela, which struction work on areas damaged by the Closer to home, risks around the Chinese benefited from favorable oil prices (see Chart 2011 earthquake and tsunami, the Japanese economy appear manageable. The country’s 10). The heavy drag for the region was Bra- economy is weak. Export manufacturers leadership handover proceeded smoothly. zil. Policy mistakes, currency misalignment, have been hit by the downturn in domestic New President Xi Jingping’s team is still and lack of structural changes led to Brazil’s and global demand, and over several years unknown, but current policy is likely to con- poor performance. by rising Chinese and Korean competition. tinue alongside steady reforms in the finan- The economic slowdown has a positive Japanese firms cannot compete on price and cial sector and capital account. This is by no side, however, since the region will have the have all but lost their technology edge. means assured, of course, and risks continue opportunity to adjust and correct imbalances ASEAN economies will continue to out- around China’s property market, shadow generated by the post-recession rebound perform as favorable policy settings, low banking, and subnational government debt. and the prolonged expansion propelled by risks, and robust domestic demand help stimulative policies (see Chart 11). Even offset the global slowdown. Malaysia, the Latin America: At potential though fiscal policies have adjusted, govern- Philippines and Indonesia are all growing The region will perform at its potential ment accounts remain flexible thanks to still- near potential, with a virtuous cycle of better rate in 2013. The healthy deceleration in favorable commodity revenues. Meanwhile, growth and better policymaking in place. 2012 has greatly reduced the risk of over- monetary policies remain expansionary, even Southeast Asia is also the focus of a heating and the development of imbal- though conditions moved closer to neutral- growing geopolitical struggle. As in the ances. Domestic demand will continue to ity. As a result, some economies have been past from the colonial era through the Cold be the main engine of growth, thus partly performing around capacity, a few above po- War, the region is affected by global shifts compensating for external weakness. The tential, and only Brazil and Argentina remain of power—in this case between the U.S., reduced fiscal space imposes limitations on below trend rates. Excess demand generated Japan and China. This is playing out through the use of countercyclical measures. Given by flexible policies has been imposing pres- territorial disputes in the South China Sea, the slow global recovery and reduced policy sures on imports and prices in economies

MOODY’S ANALYTICS / Regional Financial Review / December 2012 29 ANALYSIS �� Global Outlook 2013: Another Slow Year Ahead

Chart 12: Recovering Capacity Chart 13: Performing at Potential Latin America GDP growth and fixed investment as % of GDP Real GDP, % change yr ago 28 8 7 Investment (L) GDP (R) 2013Q1 2013Q2 24 6 6 2013Q3 2013Q4 20 5 4 16 4 2 12 3 0 8 2

4 -2 1

0 -4 0 91 94 97 00 03 06 09 12 LATAM VEN ARG MEX CHL COL BRA PER Sources: ECLAC, Moody’s Analytics Source: Moody’s Analytics

12 13 running faster than potential, such as Chile, resilience to external shocks and to reinforce unions and structural changes are being Colombia and Mexico. its permanent sources of growth is through implemented across the region. Yet a more After suffering some loss of production deepening structural changes. By imple- fundamental approach is needed, including capacity as a result of the global recession of menting reforms that increase investment, large-scale controlled debt restructuring, 2009, Latin America has recovered its precri- productivity and technological change, the more aggressive monetization of bad debt, sis potential to grow (see Chart 12). Thanks region will be able to expand its productive the introduction of euro bonds and regional to structural reforms, discipline, and favor- capacity and consequently perform at higher deposit insurance, and a euro area bank reso- able commodity revenue, governments have and more sustained rates of growth in the lution mechanism. A key assumption under- been generating some countercyclical power medium and long term. lying our baseline outlook is that the policy through public savings and investment. By responses in Washington and Brussels are 2011, the region had recovered the level of Global outlook adequate to stabilize soaring debt-to-GDP investment relative to output that existed The global economy will continue to grow ratios and ease fears of financial sector insta- in 2008. In 2012, the investment ratio re- below trend in 2013 at around 2.3% before bility. This will support consumer and busi- mained at around 23.5%, similar to the ratio accelerating in 2014 as pent-up demand and ness confidence, helping the world economy prior to the 2009 contraction. Therefore, easing concerns about the U.S. fiscal cliff and gain some steam by the second half of 2013. Latin America is in the position of performing the euro crisis drive investment and hiring Emerging economies with large domestic at its potential growth rate of around 4% in (see Table 3). Growth in Europe, the U.S. and markets and ample savings will outperform 2013, assuming there is no further deteriora- Japan will be weak in early 2013, as policy- global averages. Asia’s emerging markets, in tion elsewhere in the global economy (see makers continue to address daunting fiscal particular, will take advantage of their high Chart 13). South America will continue to be issues. Tight fiscal policy will continue to run national savings and low debt levels. China the locomotive with growth around 5%; Peru counter to loose monetary policy in most will remain a major driver of global growth. will be the front-runner followed by Brazil, advanced countries. Urbanization in China and the developing Colombia and Chile, while Mexico and Ar- The outlook for the euro area is particu- world will require further development of gentina will report growth below 4%. larly weak. The euro zone managed to avoid infrastructure systems, supporting global de- The region continues to save, but also is a renewed financial crisis in 2012 but starts mand for energy and industrial metals. Capi- using savings to support the domestic mar- the new year mired in austerity-driven reces- tal inflows into emerging markets are also ket. A recent correction in global commodity sion. Assuming the euro zone can avoid a expected to buoy economic activity in 2013. prices will not prevent the region from using Greek exit, it will grow just 0.2% next year. countercyclical policies in the event of an- Germany will be among the few countries Downside risks predominate other crisis, but such policies will be limited in the currency union to post positive GDP The downside risks are still much greater given the smaller fiscal space. growth, but the pace will be about half the than any upside potential as fundamental Since the global recovery is expected to U.S. rate. problems, such as daunting fiscal challenges be slow and gradual, Latin America should The ECB remains committed to fighting in advanced nations that weighed on eco- base its future performance less on its exter- the crisis, but its actions have so far only nomic activity in 2012, will remain promi- nal engine and more on domestic sources, cushioned the impact, not resolved the un- nent throughout 2013. through healthy and more balanced policies. derlying problems. Euro zone leaders have Despite recent progress, key short-term However, the only way to strengthen its made progress toward fiscal and banking risks still include a Greek exit from the single-

30 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� Global Outlook 2013: Another Slow Year Ahead

currency area and further deterioration in The euro zone sovereign crisis and the U.S. fiscal cliff and the potential for policy Spain’s insolvent banks. A fresh bout of risk U.S. fiscal cliff highlight the importance missteps among the euro group or Japan’s aversion in capital markets, particularly in the of political risks to the near-term out- newly elected heavily indebted govern- fiscally stressed sovereigns, could take the sov- look. Unpopular public spending cuts and ment pose substantial downside risks to the ereign crisis to new lows. Global consumer and economic reforms will test political and world economy. business sentiment is still fragile and could eas- social stability and could destabilize some On the upside, quick definitive action by ily reverse if the debt crisis reignites. Further- economies further. Geopolitical events, such Washington and Brussels to resolve fiscal more, credit lines to European businesses and as further escalation of tensions in energy- challenges and stabilize rising debt-to-GDP consumers remain restricted and deleveraging producing countries, leading to a spike in metrics could provide a considerable boost by banks in the periphery continues unabated. oil prices, would also raise the chance of to the global economy. Furthermore, policy- Tight credit conditions are a key threat to small global recession. makers in most emerging markets still have and medium-size enterprises, which rely on Policymakers will need to remain fully en- substantial levers, such as ample fiscal space national banks for loans. Large multinational gaged and committed to balancing the need and room to maneuver with monetary policy corporations have an easier time raising money for austerity and long-run fiscal sustainabil- that could be used to provide further support in the international market. ity with support for near-term growth. The to domestic demand.

Table 3: Moody’s Analytics Global Outlook Real GDP, % change yr ago

2010 2011 2012F 2013F 2014F 2015F World 4.0 2.7 2.1 2.3 3.6 3.7 North America 2.6 2.0 2.3 2.1 3.9 4.1 Canada 3.2 2.6 2.0 1.7 3.1 2.8 U.S. 2.4 1.8 2.2 2.0 3.9 4.2 Mexico 5.3 3.9 3.9 3.5 4.5 4.8 South America 6.5 4.5 2.7 4.2 5.1 4.8 Argentina 9.2 8.9 2.4 3.5 4.9 5.3 Brazil 7.5 2.7 1.3 4.6 5.6 4.4 Chile 6.1 6.0 5.3 4.6 4.4 4.8 Colombia 4.0 5.9 4.6 4.7 4.9 5.5 Peru 8.8 6.9 6.3 5.8 5.5 6.0 Venezuela -1.6 4.2 5.3 1.2 3.6 4.6 Euro zone 2.0 1.5 -0.4 0.1 1.6 1.7 Austria 2.2 2.7 0.4 1.7 2.9 2.3 Belgium 2.4 1.8 -0.2 0.4 1.8 1.7 Finland 3.3 2.7 -0.2 0.8 3.5 2.2 France 1.6 1.7 0.1 0.2 1.4 1.6 Germany 4.0 3.1 1.0 1.0 1.7 1.7 Greece -4.8 -7.2 -6.0 -4.6 1.8 2.6 Ireland -0.8 1.4 0.0 1.0 1.8 2.2 Italy 1.8 0.6 -2.1 -0.5 1.2 1.6 Netherlands 1.6 1.1 -0.7 0.6 2.5 1.7 Portugal 1.9 -1.6 -3.1 -1.6 1.3 1.3 Spain -0.3 0.4 -1.4 -1.5 0.4 1.1

MOODY’S ANALYTICS / Regional Financial Review / December 2012 31 ANALYSIS �� Global Outlook 2013: Another Slow Year Ahead

Table 3: Moody’s Analytics Global Outlook, Cont’d. Real GDP, % change yr ago

2010 2011 2012F 2013F 2014F 2015F Other Europe 2.2 1.4 0.4 1.1 1.9 2.1 Denmark 1.6 1.1 -0.5 0.5 1.1 1.0 Norway 0.2 1.3 3.0 1.8 2.4 2.4 Sweden 6.3 3.8 1.3 1.5 3.3 2.4 Switzerland 3.0 1.9 1.0 1.0 1.5 1.9 U.K. 1.8 0.9 -0.1 1.0 1.7 2.1 Eastern Europe 5.0 5.1 2.3 2.7 4.5 5.1 Czech Republic 2.3 1.9 -1.0 0.3 2.0 3.7 Hungary 1.3 1.7 -1.6 -1.2 2.0 2.4 Poland 3.8 4.3 2.1 2.0 2.6 3.7 Russian Federation 4.3 4.4 3.6 3.5 4.5 4.8 Turkey 9.2 8.8 2.4 3.4 6.9 7.4 Oceania 2.5 2.1 3.4 2.7 3.2 3.3 Australia 2.6 2.4 3.6 2.7 3.2 3.3 New Zealand 1.7 -0.6 2.1 3.2 3.1 2.8 Asia 7.6 4.3 4.3 4.3 4.8 4.7 China 10.4 9.3 7.7 7.7 7.4 7.2 Hong Kong 6.8 4.9 1.4 3.3 3.6 3.4 India 10.3 7.9 4.8 6.2 7.2 7.2 Indonesia 6.2 6.5 6.3 6.5 6.5 6.4 Japan 4.7 -0.5 2.0 0.7 1.5 1.2 Malaysia 7.2 5.1 4.7 4.3 5.5 4.9 Philippines 7.7 3.9 6.0 5.6 6.2 5.0 Singapore 14.8 4.9 1.5 2.6 3.4 3.3 South Korea 6.3 3.6 2.2 3.5 4.8 4.4 Taiwan 10.8 4.1 1.0 3.9 5.3 4.5 Thailand 7.8 0.1 6.1 4.6 4.6 4.7

Source: Moody’s Analytics

32 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS

Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

BY EDWARD FRIEDMAN AND THE EUROPEAN RESEARCH STAFF

he weaker global economy in 2012 hindered many but not all metropolitan areas around the world, and in 2013 cyclical factors will again be the most important determinants of performance. The outlook for govern- Tment, both national and subnational, will be the most critical determinant of local economic performance, as a result of fiscal tightening at all levels. The contraction of financial services will also have an influence, especially in banking centers. So will the performance of auto manufacturing in those metro areas with a high concentration. Demographics will continue to have their customary influence, helping to determine the time paths for recovery, as well as differences in trend rates of growth longer term. Taken together, these factors will establish the profiles of current economic performance across global metropolitan areas and shed light on their prospects in coming years.

Recent national performance In North America, the U.S. fared better was enough to cause resource-exporting The global economy has hit rough wa- than most of Europe, but unresolved fiscal Australia to slow to below-trend growth. ters. Trends in broad regions of the world policy issues held back private-sector hiring Likewise, Korea also slowed significantly have diverged and the risks of further weak- and exposed the nation to a possible second on reduced Chinese demand for its exports. ening have risen. downturn. In contrast, Canada’s fiscal house Japan’s deceleration was much more pro- The biggest problems are in Europe. After remained in order and its resource-based nounced, leading to recession by the end of a course of slow recovery following the deep industries also provided support. However, 2012—its fifth recession in 15 years. The high 2009 recession, the euro zone descended just as the rest of Europe has begun to pull value of the yen versus the dollar and other into recession again in early 2012, driven by Germany down, Canada faces the problem currencies contributes to Japan’s weakness. severe fiscal consolidation in many nations that lower energy prices and a possible U.S. In Latin America, Brazil has also slowed to address their large national government recession would hurt its own prospects. substantially, with currency misalignment, deficits (see Chart 1). Moreover, conditions Countries in the Asia-Pacific region also rising production costs, import penetration worsened toward year’s end as even Germa- decelerated in 2012, ny, the growth driver of the region, faltered though the pace of Chart 1: Most of Europe Still in Recession when the declines in the rest of the euro growth remains bet- Current business cycle status zone weighed on its performance. However, ter than the global Eastern Europe continued to grow as Poland average. In China Expansion and Russia pushed ahead on the strength of monetary policy has Recovery lower costs of doing business and rising de- once again become At risk In recession mand associated with growing incomes. more accommoda- By the end of 2012 investor confidence tive following a peri- had improved in Europe as the risk of a euro od of tightening that zone breakup seemed to diminish following began in 2011 that the announcement by the European Central successfully reined in Bank that it would engage in outright pur- inflation and house chases of sovereign debt, even of the more prices. However, the fiscally troubled nations. Chinese slowdown Source: Moody’s Analytics

MOODY’S ANALYTICS / Regional Financial Review / December 2012 33 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

Chart 2: Southern Metro Areas Sag Most… Chart 3: …But Many More Are Also in Decline Employment in largest metro areas, % change yr ago, 2012Q3 Business cycle indicator Athens Madrid Oct 2012

Barcelona tr o be tam Naples r hau mj dr os o tur he Rome a l l gre frs stp sta st o Paris kri go Lisbon t ejt m ed co new al Stuttgart gl i p a ki e Kiev lee mo ga du ma s l b n br lim wa bi a utr ru e Milan co t r ha ms bi ha car h lei r lo g rot l br an du e ch dr n erf i t s co e br lie e Ruhrgebiet lil l bo fra pr x nu os ro n pil a r t u sa kar br pa Birmingham a st au n ko r str fre mun s re u g br a n ba gy Hamburg nan s zu sz bu o d gl r e a br ly Berlin m ve v bo ve o tur il n r r bu Core Europe ex Southern Tier ge c bol London mon ni n mar c as fir bil Munich t Southern Tier ba za Expansion r ro r m Moscow na ma th p d va s Istanbul Central and Eastern Europe l lis Recovery

se pal at v St. Petersburg cat h m al At risk -7.5 -5.0 -2.5 0.0 2.5 In recession Sources: National statistical agencies, Moody’s Analytics Source: Moody’s Analytics

2 3 and reduced competitiveness causing more Employment in the major metro areas of spending (see Chart 5). Likewise, employment problems than global weakness. In contrast, distressed southern-tier European countries, in the largest Central and Eastern European politics have been the driver of the Mexican such as Greece, Portugal, Spain and Italy, countries has continued to lead the pack. slowdown, as the expansionary effects of has fallen furthest (see Chart 2). In the core In contrast, most Asian metro areas con- pre-election spending disappeared on sched- area of Europe—France, Germany, the U.K., tinue to advance. Overall growth in China ule following the national vote in July. and some of their smaller neighbors—overall decelerated significantly as a result of the economic activity has fallen less, and conse- 2011 policy efforts to lower inflation and Recent metro area performance quently employment in London and Berlin, house prices and the 2012 global slowdown. Nowhere has national economic activity for example, has held up somewhat better. As a result, the newest industrial leaders influenced the performance of metropolitan Still, the downturn has thrown many such as Tianjin and Chongqing decelerated areas more than in Europe. The recessions in areas into recession, and many more are at significantly. Still, national policies to de- Greece, Portugal, Spain and Ireland have led risk (see Chart 3). Even German metro areas, velop the western part of the country drove to declining employment in Athens, Lisbon, such as the Ruhr, Stuttgart and Hamburg solid, albeit slower, gains (see Chart 6). Barcelona, Madrid and Dublin. At the other that have high concentrations of manu- In recent months a soft landing appears end of the spectrum, payrolls have increased facturing and distribution industries, have to have been achieved. Beijing benefits from the most in Warsaw, Moscow and Istanbul slowed (see Chart 4). national economic development policies and as their national macroeconomies continue The situation is similar in Northern Euro- in-migration to the capital city. However, to grow, albeit more slowly than earlier in pean metro areas. However, because Nordic Shanghai has had a slower acceleration be- the recovery. These metro areas are sup- national fiscal and monetary policies lie out- cause of its greater dependence on external ported by government fiscal policy as they side the constraints of the euro zone, national trade. In addition, construction slumped sub- attempt to catch up to economic standards governments have been able to provide some stantially in 2010 and 2011, although it has in Western Europe. support to their metro areas via hiring and finally begun to level off.

Chart 4: Recession Even Affects German Areas Chart 5: Most Nordic Capitals Less Affected Employment, % change yr ago Employment, % change yr ago Dresden Frankfurt Stockholm Berlin 2011Q3 Hamburg 2012Q3 Oslo Bonn Ruhrgebiet Munich Helsinki Stuttgart 2011Q3 Düsseldorf Copenhagen 2012Q3 Cologne -0.5 0.0 0.5 1.0 1.5 2.0 2.5 -1 0 1 2 3 4 Sources: National statistical agencies, Moody’s Analytics Sources: National statistical agencies, Moody’s Analytics

4 5

34 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

Chart 6: Speedy Chinese Areas Slowed Some… Chart 7: …And Other Asian Areas Have Paused Industrial production, % change yr ago Employment, % change yr ago Sichuan Tianjin Singapore Chongqing China Jiangsu Oct 2011 Hong Kong Shandong Oct 2012 Guangdong Zhejiang Shanghai Tokyo 2011Q4 Beijing 2012Q4 0 5 10 15 20 25 0 1 2 3 4 5 6 7 8 Sources: Chinese National Statistical Bureau, Moody’s Analytics Sources: National statistical agencies, Moody’s Analytics

6 7 Not all Asian metro areas are growing Fiscal cutbacks severe tightening will occur. Consequently, as fast as China’s. Growth in Hong Kong European nations made major cuts in a return to measurable job growth in these and Singapore paused over the past year national government budgets in 2011 to ad- metropolitan areas over the coming year is as a result of the weakness in global tech- dress their deficits (see Chart 8). However, highly unlikely. nology-producing industries and softer some nations still face further fiscal tighten- In Spain, the government announced in demand from China (see Chart 7). Further, ing to get their deficits down closer to a sus- September a crisis budget that cut a further 9% Tokyo weakened in the latter part of 2012, tainable 3% of GDP. Thus, not only has fiscal from national public expenditure, mostly in the consistent with the national decline. Pre- austerity flowed down to the subnational form of public sector layoffs and reduced pay- viously, the Tokyo metro area had been level in 2012, but it will continue to do so in ments to regional governments. As the capital, lifted by the national recovery supported 2013, creating the primary drag on overall Madrid has a high concentration of public by the rebuilding effort following the performance for many metropolitan areas. employment—nearly 10% of the total—which March 2011 tsunami, but that driver has This effect has several channels. First, implies that it will feel the largest direct impact largely ended. More recently the high value much of the funding for local government (see Chart 9). The reduced flow of funds to of the yen has hurt tourism, distribution in Europe comes from national budgets, so regional governments will impede their own and manufacturing. fiscal austerity results in direct local cuts. efforts to tap capital markets to support infra- In Latin America, Brazil’s slowdown has Second, national fiscal contraction has structure development. Since large planned caused manufacturing-intensive Sao Paolo contributed to recession in many nations, theme parks EuroVegas in Madrid and Barce- to pause. So has the Rio de Janeiro metro lowering incomes and property values, and lona World are likely to require at least some area, whose economy depends more heav- therefore local revenue sources. Third, wid- public funding, their development is uncertain. ily on the energy industry, which has slowed ening national and local deficits have led to Further, although the effect of fiscal policy on because of lower oil prices since mid-2012. higher borrowing costs and fewer sources Barcelona will be proportionately smaller, the However, infrastructure spending ahead of of credit for cur- the 2014 World Cup and the 2016 Olympics rent operations and is still providing support. capital improvements. Chart 8: Better Than 2010, but More Cuts Needed As the economic and political center of As has been the Fiscal balance, % of GDP, 2011 the country, expansion of Mexico City’s core case for several years, Surplus professional and financial services industries the most troubled 0 to -3.7 has slowed because of lower federal spend- metro areas are Ath- -3.7 to -7 ing following the national election. ens, Lisbon, and a -7 or more The remainder of this article will dis- number of areas in cuss factors that will shape the pattern of Spain including Ma- growth in 2013 and thereafter in major drid and Barcelona. In metro areas of Europe. These include fiscal the case of Athens and austerity, the plight of the banking industry, Lisbon, their national motor vehicle and other manufacturing, debt and budget real estate markets, demographics, and deficit issues are so educational attainment. great that further Sources: Eurostat, OECD, Moody’s Analytics

MOODY’S ANALYTICS / Regional Financial Review / December 2012 35 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

Chart 9: Large Direct Impact on Madrid Coming Chart 10: Risks Higher Outside London Employment, public administration, % of total employment Employment, public administration, % of total employment Barcelona London Valencia Birmingham Bilbao Manchester Asturias Edinburgh Zaragoza Leeds Las Palmas Bristol Madrid Glasgow Malaga Cardiff Sevilla Newcastle

4 5 6 7 8 9 10 11 4 5 6 7 8 9 10 Sources: National statistical agencies, Moody’s Analytics Sources: National statistical agencies, Moody’s Analytics

9 10 recent call for political separation of Catalonia nearly 10% of Newcastle employment is in In sharp contrast with the U.K. experi- from Spain has hard-to-predict implications for the public sector because of the presence of ence, the 2013 French budget proposed in the Barcelona metro area. national Revenue and Customs functions. September calls for very small public sector Public sector employment cutbacks will Likewise, Cardiff is home to the U.K. Office job cuts, seeking instead to reduce the na- also continue in the U.K., where the national of National Statistics as well as the Welsh tional deficit more with tax increases. There budget deficit is down from nearly 10% in parliament. In contrast with other U.K. metro are two reasons for this approach. First, 2010 but still runs in the high single digits. areas and with other European national capi- France has a deficit of no more than around By the end of 2011, 270,000 public sector tals, London’s relatively low share of public 5% of GDP, which is above the EU target jobs had already been cut, and the aim at administration in total employment will help of 3% but below that of the U.K. Second, that time was to have a cumulative reduc- to limit the impact of the contraction in gov- President Francois Hollande won election tion in the total of 500,000 or 8% by 2017. ernment on the metro area overall. in May by promising to boost rather than By March 2012, that target had grown to In 2011, the hope was that the outlook shrink some areas of public employment, 730,000, and by December to upwards of 1 for Dublin, another metro area in a highly such as education. Consequently, public sec- million. The effects will be felt everywhere, indebted country, would be better in 2012 tor spending cuts will have only a modest but Newcastle, Cardiff and Glasgow are and 2013 because of early, proactive cuts in direct effect on metro areas. Further, data especially at risk because of the large con- public payrolls going back to March 2010. on public sector wages by metro area show centration of public employment in those However, even though total reductions an even distribution across metro areas areas (see Chart 10). Well before the current nationally since 2008 amount to 38,000 in France, implying that no area would be business cycle, policymakers had exported or 12% of public sector payrolls, the govern- unusually affected. various government functions from London ment announced in early October 2012 that Among the large countries in Western Eu- to those and other areas to boost growth it was seeking further cuts because Ireland’s rope, Germany faces low risk of contraction and employment around the country. Today, deficit remains more than 10% of GDP and in government because of better economic its debt-to-GDP performance and a lower deficit. Not only Chart 11: German Rates Help Public Sector ratio remains espe- will metro areas avoid significant direct ef- Yield, 10-yr sovereign debt, % cially high. Although fects, but lower sovereign bond rates will 8 Dublin’s public sec- make local infrastructure investment less Germany Italy Spain tor concentration is costly (see Chart 11). 6 lower than in a num- In Italy, public sector job cuts of 10% ber of other capital proposed by Prime Minister Mario Monti in cities, the metro early November led to the recent withdrawal 4 area is an above- of support from former Prime Minister Silvio average share of the Berlusconi’s party and in turn to Monti’s sub- 2 national economy. sequent announcement that he would soon Consequently, the resign. Consequently, the course of fiscal 0 further contrac- austerity for Italy and its potential to weigh 08 09 10 11 12 tion in payrolls will on metro area performance is uncertain. Sources: Bloomberg, Moody’s Analytics delay recovery. But any cutbacks will hurt southern metro

36 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

areas such as Naples where the proportion ment, with both Chart 12: London, Zurich Feel Bank Squeeze of public sector employment is twice as high measures the high- Financial services employment, % of total, 2011 as in the north. Northern metro areas, such est of any European Switzerland U.K. as Milan, will be able to rely on the greater emerging economy. Belgium diversity of their economies. In the centre, In 2012, 7,000 public Ireland Rome—the capital of the nation and the employees were laid Austria Denmark Lazio region—will also face pressure. off, less than the Sweden In Belgium, Brussels will be under pres- 30,000 previously France Italy sure from public sector contraction for a dif- announced, but the Netherlands ferent reason. Several EU member countries pressure to cut more Greece have demanded shared sacrifice during this remains. As the seat Poland Portugal era of fiscal austerity in the form of pay cuts of national govern- 0 1 2 3 4 5 on the order of 10% for EU staff, more than ment with nearly 20,000 of whom reside and work in Brussels. 20% of total popula- Sources: National statistical agencies, Moody’s Analytics Further, as the Belgian capital, the metro tion, Budapest will 12 area is at some risk of national government be hit hard. concentrations of financial services. Further, budget cuts, although the deficit is a moder- In sum, further public sector retrench- some of the biggest retrenchments will occur ate 4% of GDP. ment will occur across much of Europe in in London and Zurich (see Chart 12). In Octo- Through 2011, better economic perfor- 2013, except in Germany, Norway, Sweden, ber UBS announced that it will cut its global mance in the Nordic countries prevented and some CEE countries. Large metro areas workforce by 15% by 2015, implying up to public sector downsizing. Sweden’s previous in Greece, Portugal, Spain, and Hungary will 5,000 in London, and about 2,500 in Zurich. fiscal diligence now allows it to consider ex- be hit especially hard, and Dublin, Brussels Likewise, RBS shed about 3,000 in the U.K. pansionary policies in 2013 to offset the ex- and Copenhagen will also feel the effects. in 2012 with an additional 1,000 to go by the ternal drag on the Stockholm economy and Though the sharpest declines in U.K. metro end of 2013. Similarly, HSBC laid off about Sweden’s other metro areas. Likewise, Nor- areas are now in the past, fiscal consolida- 8% of its workforce in 2012, and more lay- way’s large fiscal surplus and steady growth tion will continue there as well over the next offs are expected in 2013. Since 2008, each will mean clear sailing for Oslo. However, the several years. of these banks has reduced its global head- euro zone recession has weakened Denmark, count by 20% or more. whose deficit has increased. In August the Bank layoffs hurt financial centers Layoffs are also hitting Paris, but the Danish government announced job cuts of Large European financial centers will effect on the metro area will be milder for 5%, the largest since 1920, with much of the continue to feel the contraction in banking, several reasons. First, its economy is not as impact on Copenhagen, which accounts for though those whose main exposure is to highly concentrated in banking as London about one-fourth of the national economy. assets outside Western Europe will be less or New York. Second, political and legal Metro areas in Central and Eastern Eu- affected. In the euro zone, despite aggressive considerations tend to limit the numbers. rope countries will face fewer problems for policies to stem the euro zone crisis, such as For example, layoffs at Credit Agricole as two reasons. First, government is typically the ECB’s Outright Monetary Transactions a percentage of total workforce have been a smaller share of total employment than program, industry profitability has continued less than half those of the U.K. and Swiss in Western Europe. Second, infrastructure to decline. On the borrowing side, the reces- banks, and the percentages for BNP Paribas investment in Warsaw, Moscow and other sion has reduced demand for loans and un- and Societé Générale were even smaller. In large metro areas in the region is enabled derwriting deals, and in addition has shrunk contrast, Frankfurt is under little pressure, by the economic expansion within Poland revenue and profitability for trading desks. as far fewer layoffs are anticipated by large and Russia. On the supply side, large banks have had to German banks such as Deutche Bank, in part However, the Czech Republic and Hun- write down sovereign debt holdings of the because of the relatively better performance gary are exceptions, as both are in recession. most troubled nations and to raise additional of the German economy. The Czech government’s response to rising capital to meet Basel III requirements. Among euro zone financial centers with budget deficits in November included in- Thus, while substantial layoffs occurred more of a regional focus, Madrid and Bar- creases in sales tax rates and income taxes in 2012 the trend will continue in 2013 with celona will experience the largest fallout. for high-income earners, policies that will consequences for both overall metro area Because of the crash in property markets hurt retail and tourism spending in Prague. employment and compensation, especially in Spain over the past five years, four major The situation in Hungary is worse: Its debt- since these jobs are typically high-paying. banks will need to be restructured: Bankia, to-GDP ratio is 80% and public sector The U.K and Switzerland are among the Novagalicia Banco, Catalunya Banc, and employment is nearly 20% of total employ- European labor markets with the highest Banco de Valencia. Bankia has already an-

MOODY’S ANALYTICS / Regional Financial Review / December 2012 37 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

Chart 13: French Auto Jobs Shrink Chart 14: Nonurban South Most at Risk in Italy Employment in auto manufacturing, ths Share of auto employment in total manufacturing, % 180 550 Lille (L) Lyon (L) Nonurban South Strasbourg (L) Rouen-Le Havre (L) 160 Paris (R) 500 Turin 140 450 120 Naples 2009 400 2008 100 Nonurban North 2007 80 350 Rome 60 300 94 96 98 00 02 04 06 08 10E 0 10 20 30 40 50 60 70 Sources: French Statistical Office, Moody’s Analytics Sources: Eurostat, Moody’s Analytics

13 14 nounced layoffs of 6,000, or about 25% of Now, in 2012 and 2013, Peugeot Citroën better position to weather the storm. As its workforce. Milan will be somewhat less is engaging in further layoffs and downsiz- the fourth largest vehicle producer after the affected, though Unicredit did announce that ing. Paris, which has the largest number of U.S., China and Japan, its companies have it will lay off a total of about 6,000 by 2015. auto workers in France, will have the deepest been engines of growth for the economies While the Nordic and Central and Eastern cuts following Peugeot’s announcement of of Munich, Stuttgart, Saarbrücken, Chem- European financial centers are not completely layoffs of 8,000 in July and the closure of nitz and Karlsruhe (see Chart 15). Munich insulated from the euro zone recession and its Aulnay plant by 2014. The Rennes plant has outperformed other regions because its financial problems, they are much less affected. will lay off 1,400. Much of the demand for BMW plant, which employs about 18,000 These banks focus more on the economic the company’s products comes from the workers, produces luxury vehicles whose de- activity in their regions, which are performing hardest-hit countries such as Spain, Portugal mand has held up relatively well. The factory relatively better; and on average banks in the and Italy. Adding to the problem is the fact also benefits from good transport links and region have much larger capital buffers that employment in the auto industry had proximity to Austria, a traditional market for been declining in most French metro areas luxury autos. Similarly, auto manufacturing Declining auto manufacturing for more than a decade because production employment has been relatively stable in the The euro zone recession has exacerbated has been shifted to lower-cost locations in Stuttgart metro area because of its Daimler- the problem of overcapacity in car manufac- the CEE region (see Chart 13). Mercedes-Benz and Porsche assembly plants turing in Western Europe. According to esti- In Italy, where Fiat accounts for 90% of and its location near established markets in mates of various EU automakers, oversupply car manufacturing, the company has vowed France, Switzerland and Austria. Saarbrücken, stands at 20%, or 3 million cars. Even before not to lay off Italian workers. The majority where Ford’s plant produces the Focus, could the downturn, Fiat closed its Sicilian plant in of the jobs are in Naples, nonmetropolitan come under more pressure. late 2011, and General Motors Opel-Vauxhall southern Italy, and Turin (see Chart 14). The Surprisingly, Spain, whose local auto shut its plant in Antwerp in 2010. company’s plan is to have the plants make industry is much smaller and whose reces- more premium cars sion is among the worst in Europe, will fare Chart 15: Munich Holds Lead in Germany for export, though better. Following a deal with unions in No- % share of auto employment in total manufacturing, by metro area the duration and vember, Renault will hire 1,300 at its plants depth of the ongoing in Valladolid and Palencia, about 100 miles Karlsruhe 2007 euro zone recession north of Madrid. Further, Ford will move pro- 2008 imply downside risks duction from Gent, Belgium to Valencia in Chemnitz 2009 to this strategy. In- 2014. Declining wage costs and increasingly Saarbrücken stead, the company flexible work rules help to explain the moves. has laid off 1,500 in Longer term, the clear direction for what Stuttgart Tychy, Poland, in the remains of European auto production is Krakow metro area. east. Currently, production in Central Europe Munich Germany has amounts to only one-third that of Western begun to feel the Europe (see Chart 16). However, the gap is 14 16 18 20 22 24 26 28 30 32 contraction as well, narrowing (see Chart 17). Production has Sources: Eurostat, Moody’s Analytics but is in relatively jumped 15% on average during the last de-

38 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

Chart 16: Still a Wide Production Gap Chart 17: But Auto Jobs in CE Gain Ground Cars produced, mil, EU newer members=CZ, HU, PL, RO, SK, SI Share of employment in total auto manufacturing, % 14 EU-15 EU newer members Slovakia 12 Germany 10 Czech R. 8 Hungary 2009 6 2004 U.K. 4 Italy 2 *The latest data available from France* Eurostat for France is 2007. 0 08 09 10 3 4 5 6 7 8 9 10 11 12 13 14 Sources: European Automobile Manufacturers Association, Moody’s Analytics Sources: Eurostat, Moody’s Analytics

16 17 cade in Slovakia, 10% in the Czech Republic, Still, times are changing. Daimler- Istanbul will continue to be the growth and 6% in Hungary. CEE countries offer good Mercedes-Benz has decided to open a leader, as it has for the past decade (see infrastructure, a large base of local suppliers, plant in Kecskemet, in the Budapest area, Chart 18). Job opportunities generated by a labor cost advantage, and a well educated to manufacture a new generation of mod- government policies to promote the metro workforce. The labor cost advantage is the els. Rising demand for premium cars and area’s development will keep the trend of most important factor. According to Eurostat, rising labor costs in Western Europe may rural-to-urban migration in place. the average hourly labor cost per employee accelerate this trickle to the East of higher- Elsewhere, growth will be slow at best, was around €15 in 2007 in Slovakia, the Czech value auto production into a torrent over with declines in some cases. In this current Republic and Hungary, compared with €54 in the long term. cycle, the political tide has moved against France, €47 in the U.K., and €66 in Germany. immigration as a result of elevated unem- However, these figures overstate the Demographics ployment in most of Western Europe, keep- advantage to some extent. In Germany and Demographics will remain the overriding ing immigration and population growth France, 60% of employees work in the manu- factor in determining long-term regional especially slow. Such areas as Barcelona, Ma- facture of higher-value-added finished vehi- growth potential. Population growth drives drid, Lisbon, Athens, and Dublin are extreme cles. In contrast, more than two-thirds of em- demand for housing as well as for a variety examples. During the early 2000s, rapidly ployment in Slovakia, the Czech Republic, and of services such as education, medical care, growing job opportunities led to strong in- Hungary is in the production of parts and ac- retailing and hospitality. For the past 20 migration. The deep reversal of fortunes af- cessories. Moreover, Western European parent years, natural growth, defined as the excess terwards abruptly shifted the pattern to one companies are reluctant to take new technol- of births over deaths, has been minimal in of out-migration and far slower population ogy and premium car production out of their much of Europe. Consequently, the decline in growth, especially in Spain and Portugal (see home countries to ensure that their products birth rates in most nations has increased the Chart 19). Relatively better economic condi- remain perceived as high-value models. importance of net migration. tions in Latin America have attracted the

Chart 18: Istanbul to Remain European Leader Chart 19: Abrupt Slowing in Irish, Spanish Areas Population*, avg annual % change Population*, avg annual % change, 2007-2010 minus 2000-2007 Istanbul Istanbul Malaga Dublin Waterford Malaga 2000 to 2007 Barcelona Dublin Valencia Las Palmas 2007 to 2010 Las Palmas Rome Madrid Galway Rome Cork Madrid Galway Cork Limerick Valencia * Fastest-growing Zaragoza Stavanger Munich Limerick European metro Bilbao Verona * Metro areas with Barcelona areas, 2000-2010 Cologne Oslo Dresden biggest deceleration Toulouse Chemnitz 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 -2.0 -1.8 -1.6 -1.4 -1.2 -1.0 -0.8 -0.6 -0.4 -0.2 0.0 Sources: National statistical agencies, Moody’s Analytics Sources: National statistical agencies, Moody’s Analytics

18 19

MOODY’S ANALYTICS / Regional Financial Review / December 2012 39 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

Chart 20: Nordics and Some CEE Accelerate Chart 21: CEE Education Rushes to Catch Up Population, avg annual % change, 2007-2010 minus 2000-2007 Tertiary pupils per 1,000 inhabitants, metro area avg, 2009 Prague Slovakia Copenhagen Poland Stockholm Estonia Pilsen Finland Oslo Ireland Newcastle Portugal St. Petersburg Italy Brno Czech Republic Hungary European Rotterdam France Edinburgh U.K. metro area avg London * Metro areas with Germany Székesfehérvár biggest acceleration Sweden Helsinki Greece Western European Amsterdam Norway CEE Cardiff Cyprus 0.0 0.2 0.4 0.6 0.8 1.0 0 20 40 60 80 100 120 140 160 180 200 Sources: National statistics agencies, Moody’s Analytics Sources: Eurostat, Moody’s Analytics

20 21 return of in-migrants from the Spanish and Educational attainment in student-to-population ratios in recent Portuguese metro areas. A better-educated labour force is more years as high levels of youth unemployment Some CEE and Nordic metro areas will be productive, and CEE metro areas are continu- and government investment in re-education the longer-term exceptions to these trends ing a catch-up process toward Western Euro- and training programmes have bolstered en- (see Chart 20). One example is Prague, pean levels of education (see Chart 21). Their rollment. The persistence of high unemploy- whose population growth has doubled as shares of population in tertiary education ment in the euro zone over the coming years new residents arrived to take advantage of have trended up significantly over the past will contribute to this trend. job opportunities. An example in the Nordic decade. For the 46 CEE metro areas with full countries is Stockholm, where the govern- data from 1989 to 2009, the number of ter- Outlook ment has provided economic incentives to tiary students per 1,000 inhabitants increased Metropolitan areas in the distressed encourage family size to grow. by 115. This gain was more than four times Southern Tier that have seen deep declines in Economic size will continue to matter. Of the average reported for Western European 2012 will continue to contract in 2013 as the the top 20 European metro area economies metro areas. Polish metro areas accounted euro zone recession persists into the early in terms of gross value added, 14 have had for four of the top five gains. The process has part of the year (see Chart 22). However, significant population growth since 2000. slowed during the current economic cycle, but northern core areas will bottom out and be- At the other end of the spectrum, of the 20 is expected to recover as governments push to gin to recover as the global economy starts smallest economies, 12 had few gains or achieve a ratio of 40% of individuals aged 30 to revive. outright declines. The more numerous and to 35 with a higher education. The ongoing need to cut national bud- diverse economic opportunities found in Higher levels of enrollment are broadly get deficits in some countries will hit many large metro areas will increasingly draw job correlated with higher levels of educational metro areas hard because local government seekers away from smaller locales. attainment, which in turn contribute to financing is closely connected to the national higher metro area economic growth. Polish government for many countries. The most metro areas appear strained metro areas—Athens, Lisbon, Dublin Chart 22: Recession to End Gradually in 2013 to have benefited and Spanish metro areas—are in the most Employment, % change annual rate from their large troubled countries (see Table 1). Further, Athens Madrid population of tertiary the depth of the recession will contribute to Barcelona Naples education students, the risk of political separation in Barcelona. Marseille Copenhagen reporting average Further, U.K. government cuts will persist Paris Dublin annual GDP growth because of the high national deficit. Within Milan Berlin over the past decade the U.K., smaller metro areas will feel more Munich Warsaw of more than 4.4%, of the pain because their concentration of Zurich London compared with 2.3% government employment is higher than Lon- Stockholm Helsinki 2012Q4 for European metro don’s. In Germany and the Nordic nations, Istanbul Moscow 2013Q4 forecast areas in general. more benign fiscal conditions will prevent St. Petersburg Some western the need for local austerity measures in such -5 -4 -3 -2 -1 0 1 2 3 metro areas have places as Berlin, Frankfurt and Stockholm. In Sources: National statistical agencies, Moody’s Analytics also had an increase Warsaw and Moscow, national governments

40 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

will still be in a position to support metro Areas with a high concentration of auto rising fastest, will lead the way as urbaniza- area infrastructure expansion. manufacturing such as Paris, Naples and tion proceeds. Metro areas such as London Large financial centers such as London Turin will be affected by the recession in and Moscow that are already large and diver- and Zurich will be affected as banks cut pay- Western Europe. However, strong demand sified will nonetheless expand further as eco- rolls in the face of declining revenues and a for luxury vehicles will buffer some German nomic opportunity generates in-migration. more stringent regulatory climate. However, auto production centers, such as Munich, In contrast, smaller areas, with few economic the impact on other large banking centers, the Ruhr Valley, and Stuttgart. Longer term, drivers will have accelerating declines as such as Paris and Milan, will be somewhat di- metro areas in the CEE region will gain, lifted their populations exit in search of jobs else- luted by their high degree of economic diver- by below-average costs of doing business where. Madrid, Barcelona, Lisbon, Dublin and sity. Still others, such as Stockholm, Warsaw and better demographic trends. Athens will not return to solid population and Moscow, will be protected by their more In the long run, demographics will be gains until their economies recover and once regional orientation and relatively better na- the largest factor in the growth of European again generate significant job opportunities, tional economic performance. metro areas. Istanbul, whose population is a process that will take several years.

Table 1: Forecasts of Global Metropolitan Areas, % change

Employment Population Output 2012 2013 2014 2012 2013 2014 2012 2013 2014 Europe

Austria 1.0 -0.9 -0.9 0.0 0.0 0.0 0.6 1.6 2.9 Graz 1.7 -0.5 -0.7 0.1 0.2 0.3 0.7 2.1 3.3 Linz 1.8 -0.5 -0.6 0.1 0.2 0.3 0.7 2.3 3.8 Wien 1.4 -0.8 -0.9 0.4 0.4 0.6 -0.1 1.5 2.5

Belgium 0.2 0.4 0.0 0.1 0.1 0.0 -0.2 0.5 1.8 Antwerp 0.6 0.8 0.5 0.1 0.1 0.1 0.7 0.4 1.2 Brussels 0.6 0.8 0.5 0.1 0.1 0.1 1.5 0.7 1.7 Liege 0.9 1.1 0.8 0.1 0.1 0.1 1.1 1.0 1.7

Czech Republic 0.4 0.4 0.9 -0.1 -0.1 -0.2 -1.0 0.4 2.6 Brno -0.6 0.3 1.1 0.3 0.4 0.5 -0.5 1.2 3.5 Ostrava -0.6 -0.3 0.4 -0.2 -0.1 0.0 -2.2 -0.7 1.5 Pilsen -0.3 0.0 0.7 0.3 0.4 0.5 -1.2 0.3 2.5 Prague 0.3 0.7 1.4 0.8 0.9 0.9 0.4 1.9 4.0

Denmark -0.5 0.8 0.8 0.2 0.2 0.2 0.4 0.9 0.8 Aarhus -0.4 0.3 0.8 0.5 0.5 0.5 1.2 2.4 2.6 Copenhagen -0.3 0.3 0.8 0.3 0.3 0.3 1.5 2.3 2.6

Finland 0.6 0.6 0.8 0.1 0.1 0.1 0.6 1.2 3.6 Helsinki 1.4 1.2 1.4 0.2 0.2 0.2 1.0 1.3 4.1 Oulu -0.6 0.9 1.3 0.0 0.0 0.0 0.9 1.3 4.0 Tampere 0.2 1.1 1.3 0.2 0.2 0.2 1.0 0.5 3.8 Turku 0.3 1.5 1.5 0.2 0.2 0.2 1.1 0.9 3.8

MOODY’S ANALYTICS / Regional Financial Review / December 2012 41 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

Table 1: Forecasts of Global Metropolitan Areas, % change, cont’d.

Employment Population Output 2012 2013 2014 2012 2013 2014 2012 2013 2014 France 0.1 0.4 1.6 0.5 0.5 0.4 0.1 0.4 1.5 Bordeaux -0.7 0.2 0.8 0.9 1.0 1.1 0.5 0.4 1.9 Lille -0.1 0.4 1.6 0.1 0.1 0.1 0.2 0.8 1.3 Lyon -0.8 0.2 1.3 0.6 0.6 0.5 0.3 0.8 1.4 Marseille -0.8 -0.3 1.0 0.6 0.6 0.6 0.3 0.9 1.4 Montpellier -0.9 -0.3 1.3 1.4 1.3 1.3 0.7 1.3 2.4 Nantes -0.5 0.5 1.4 1.0 0.9 0.9 1.1 1.7 2.4 Nice -0.9 -0.2 1.0 0.6 0.5 0.5 0.7 1.0 1.3 Paris -0.7 0.6 1.8 0.5 0.5 0.7 0.0 0.2 1.4 Rennes -0.9 0.5 1.8 1.0 1.0 1.0 0.4 0.8 1.4 Rouen & Le Havre -0.8 -0.4 0.3 0.1 0.1 0.1 -0.3 0.4 0.9 Strasbourg -0.7 -0.4 0.4 0.7 0.7 0.7 -0.1 0.4 1.0 Toulouse -0.6 -0.2 1.3 1.5 1.5 1.5 1.3 1.7 2.4

Germany 1.0 -0.1 0.2 -0.2 -0.2 -0.2 0.9 1.2 1.9 Augsburg 0.7 0.3 0.5 0.1 0.1 0.1 0.4 1.8 2.0 Berlin 0.7 0.1 0.6 0.1 0.1 0.1 1.2 1.1 2.1 Bielefeld 0.6 0.0 0.2 0.0 0.1 0.1 0.7 -0.2 1.3 Bonn 0.9 0.3 0.5 0.2 0.2 0.2 0.7 0.5 2.0 Bremen 0.8 0.3 0.5 -0.1 -0.1 -0.1 1.6 1.5 2.0 Chemnitz -0.5 -1.2 -1.0 -0.1 -0.1 -0.1 -0.9 1.6 1.5 Cologne 0.6 0.1 0.3 0.0 0.1 0.1 1.0 0.9 1.4 Dresden 0.2 -0.4 -0.2 0.0 0.0 0.0 -0.8 0.8 1.5 Dusseldorf 0.3 -0.4 -0.1 0.0 0.0 0.0 0.2 0.8 2.3 Erfurt 0.1 -0.2 0.1 -0.1 -0.1 -0.1 0.3 -0.1 1.5 Frankfurt 0.8 0.1 0.5 0.1 0.1 0.1 1.0 1.1 2.0 Freiberg 1.2 0.5 0.7 0.5 0.5 0.5 0.5 0.6 2.1 Halle 0.1 -1.0 -0.8 -0.4 -0.4 -0.4 1.2 1.3 0.6 Hamburg 0.6 0.0 0.6 0.3 0.3 0.3 2.1 1.7 3.0 Karlsruhe 1.0 0.3 0.6 0.2 0.2 0.2 -0.9 2.8 2.0 Kiel 0.5 0.0 0.2 0.0 0.0 0.0 1.0 0.4 1.9 Leipzig 0.2 -0.5 -0.3 -0.1 -0.1 -0.1 0.3 0.1 1.7 Munich 0.5 0.3 0.5 0.5 0.5 0.5 0.8 0.2 1.7 Nuremberg 0.4 0.0 0.2 0.1 0.1 0.1 1.0 0.4 2.0 Ruhrgebeit 0.4 -0.2 0.0 -0.1 -0.1 -0.1 0.7 1.3 2.0 Saarbrucken 1.0 0.0 0.2 -0.2 -0.2 -0.2 1.5 1.6 1.5 Stuttgart 0.2 0.0 1.1 0.1 0.1 0.1 1.7 0.7 2.8

Greece -7.9 -2.7 1.3 0.1 0.0 0.0 -7.0 -4.2 2.1 Athens -7.3 -0.9 -0.2 0.6 0.5 0.5 -6.6 -9.4 -3.7 Thessaloniki -8.0 -1.6 -0.1 0.7 0.6 0.6 -11.0 -11.7 0.9

42 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

Table 1: Forecasts of Global Metropolitan Areas, % change, cont’d.

Employment Population Output 2012 2013 2014 2012 2013 2014 2012 2013 2014 Hungary 1.8 0.4 0.4 -0.2 -0.2 -0.2 -1.7 0.3 2.0 Budapest 0.2 -0.2 0.2 0.3 0.3 0.2 2.3 2.7 4.4 Gyor 0.8 0.7 0.8 0.3 0.3 0.3 0.3 3.2 3.7 Szekesfehervar 0.7 0.3 0.3 0.3 0.3 0.2 2.9 3.2 3.4

Ireland -1.2 -0.6 0.4 1.1 1.1 1.2 0.0 1.3 2.1 Cork 0.2 0.2 0.4 1.3 1.3 1.4 -0.1 0.4 1.5 Dublin -0.4 0.3 0.7 1.9 2.0 2.0 0.4 0.9 1.6 Galway -0.3 -0.3 0.1 1.9 2.0 2.0 -0.4 0.1 1.0 Limerick -0.5 -0.6 0.1 1.6 1.6 1.7 -1.5 -0.3 1.2 Waterford -0.5 -0.5 0.2 2.0 2.1 2.1 -1.3 -0.9 0.5

Italy 0.3 0.1 2.5 0.4 0.4 0.3 -2.2 -0.6 1.8 Bologna 0.2 0.1 1.7 0.2 0.3 0.6 -3.7 -1.9 1.5 Catania -0.5 -0.6 1.0 0.1 0.2 0.5 -3.0 -1.2 2.3 Florence 0.2 0.1 1.7 0.2 0.3 0.6 -3.2 -1.4 2.1 Genoa 0.4 0.3 1.9 0.3 0.4 0.7 -3.4 -1.6 1.9 Milan 0.2 0.1 1.7 0.2 0.3 0.6 -4.1 -2.4 1.1 Naples -1.8 -0.9 0.7 0.0 0.1 0.4 -4.2 -2.4 1.0 Palermo -1.1 -0.8 1.4 0.2 0.3 0.6 -2.9 -1.1 2.4 Rome -0.6 -0.1 2.2 0.4 0.5 0.8 -4.2 -2.5 1.0 Turin -1.2 -0.9 1.4 0.2 0.3 0.5 -4.0 -2.2 1.3 Venice -1.0 -0.6 1.8 0.3 0.4 0.6 -3.6 -1.8 1.7 Verona 0.7 0.6 2.2 0.4 0.5 0.7 -3.8 -2.1 1.4

Netherlands 0.0 0.7 0.8 0.5 0.4 0.4 -0.7 0.4 2.0 Amsterdam 0.0 -0.8 0.8 0.8 0.8 0.9 -0.7 0.5 2.1 The Hague -0.7 0.5 0.6 1.0 1.0 1.0 -0.5 0.5 1.8 Rotterdam -1.0 0.2 0.6 0.5 0.5 0.6 -1.0 -0.2 1.4 Utrecht -0.7 0.5 0.6 0.8 0.8 0.8 -0.5 0.6 2.1

Norway 2.0 1.3 1.1 0.3 0.3 0.3 4.1 2.4 2.3 Bergen 2.8 2.3 2.0 0.0 0.0 0.0 3.6 2.5 2.9 Drammen 3.2 2.5 2.2 1.2 1.3 1.1 3.9 2.8 2.4 Fredrikstad_Sarpsborg 1.7 1.2 0.8 0.9 0.9 0.8 4.2 3.1 2.7 Grenland 1.4 0.9 0.6 0.3 0.4 0.2 5.3 4.3 3.9 Haugesund 2.6 2.1 1.7 1.0 1.1 1.0 7.0 3.8 5.2 Kristiansand 2.4 1.9 1.5 1.2 1.3 1.1 8.5 7.7 7.5 Mjosa 1.1 0.7 0.3 0.4 0.5 0.4 3.2 2.2 1.8 Oslo 3.5 2.4 2.1 1.7 1.7 1.6 4.7 3.3 3.1 Stavanger 3.0 2.5 2.2 1.9 2.0 1.9 6.8 5.6 4.9 Trondheim 2.4 1.9 1.6 1.5 1.5 1.6 6.3 5.2 4.8

MOODY’S ANALYTICS / Regional Financial Review / December 2012 43 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

Table 1: Forecasts of Global Metropolitan Areas, % change, cont’d.

Employment Population Output 2012 2013 2014 2012 2013 2014 2012 2013 2014 Poland 0.5 0.3 0.7 -0.1 -0.1 -0.1 2.4 2.7 4.2 Krakow -0.3 -0.1 1.2 0.1 0.0 0.0 3.1 -0.4 2.7 Poznan 0.7 -0.4 1.9 -0.4 -0.2 -0.2 1.3 -0.4 2.9 Warsaw 1.2 0.9 1.7 0.2 0.2 0.2 2.3 1.1 4.6 Wroclaw 2.4 1.2 1.6 0.0 0.0 0.0 1.2 -0.4 2.9

Portugal -3.7 0.5 1.9 0.2 0.2 0.1 -3.6 -2.0 1.3 Lisbon 0.9 -0.3 -0.5 0.2 0.1 -0.1 -0.2 1.8 2.3

Russia 0.7 -0.3 0.4 -0.5 -0.5 -0.5 3.6 3.7 4.2 Moscow 0.6 1.4 1.4 0.9 0.9 0.9 3.4 5.1 5.6 St. Petersburg 0.7 0.4 0.5 -0.1 0.3 0.4 4.6 4.5 5.2

Slovenia -1.4 -0.9 1.6 -0.2 -0.2 -0.2 -2.2 -1.2 1.0 Ljubljana 0.5 0.4 0.6 -2.3 -1.1 0.1 -0.7 -4.3 -0.2

Spain -4.3 -1.4 2.8 0.6 0.7 0.8 -1.4 -1.5 0.2 Oviedo -3.4 -1.9 1.8 -0.2 -0.1 -0.1 -2.3 -2.8 -0.7 Barcelona -3.9 -0.6 1.9 0.0 0.3 0.4 -1.9 -2.3 -0.1 Bilbao -3.3 -1.7 1.2 0.0 0.1 0.1 -2.0 -2.4 -0.2 Madrid -5.1 -1.9 1.8 0.1 0.6 0.8 -0.7 -1.2 0.8 Malaga -2.1 -2.3 1.6 0.8 0.8 0.8 -0.1 -0.5 1.3 Palma de Mallorca -3.0 -1.8 1.9 0.8 1.4 1.6 -1.1 -1.6 0.3 Sevilla -4.5 -1.9 1.8 0.6 0.6 0.6 -1.6 -2.1 0.0 Valencia -3.3 -1.9 1.8 0.0 0.0 1.0 -1.9 -2.5 -0.3 Zaragoza -0.6 -1.9 1.8 0.8 1.4 1.6 -1.7 -2.4 -0.2

Sweden 0.6 0.6 1.1 0.2 0.2 0.2 1.2 1.5 3.3 Goteborg 1.1 1.0 1.4 0.8 0.8 0.9 2.5 2.8 4.3 Malmo 1.2 1.1 1.5 1.0 1.0 1.0 1.9 2.2 3.7 Stockholm 1.2 1.0 1.4 1.0 1.0 1.1 2.6 2.9 4.3

Switzerland 0.7 0.9 1.1 0.2 0.2 0.2 0.9 0.7 1.4 Basel -0.3 1.0 0.9 0.1 0.1 0.1 1.1 1.1 1.4 Geneva 0.3 1.5 1.6 1.0 1.0 0.9 1.9 1.8 1.6 Zurich -0.9 1.0 1.0 1.3 1.2 1.2 1.9 1.4 1.3

Turkey 3.0 2.6 3.1 1.2 1.2 1.1 2.7 3.9 6.8 Istanbul 1.6 1.3 2.4 1.6 1.6 1.6 5.7 6.8 9.7

44 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

Table 1: Forecasts of Global Metropolitan Areas, % change, cont’d.

Employment Population Output 2012 2013 2014 2012 2013 2014 2012 2013 2014 U.K. 0.8 0.0 0.6 0.6 0.6 0.5 -0.1 1.2 1.7 Birmingham 0.1 0.2 1.0 0.3 0.3 0.3 -0.2 0.5 1.1 Bristol 0.4 0.1 0.9 0.9 0.9 1.0 -0.3 0.5 1.7 Cardiff 0.0 -0.2 0.6 0.9 1.1 1.2 -0.9 0.3 0.9 Edinburgh 0.4 0.3 1.0 0.8 0.8 0.9 0.1 1.1 1.6 Glasgow 0.2 -0.1 0.7 0.3 0.3 0.3 -0.4 0.8 1.4 Leeds 0.2 0.0 0.7 0.7 0.7 0.7 -0.4 0.8 1.4 London 0.6 0.2 1.0 0.9 0.9 0.9 0.8 1.4 1.9 Manchester 0.0 -0.2 0.6 0.3 0.3 0.3 -1.1 0.2 1.0 Newcastle -0.2 -0.1 0.6 1.2 0.7 0.8 -0.3 0.7 1.7

Africa

South Africa 2.5 2.1 2.4 -0.4 -0.4 -0.5 2.6 3.3 4.3 Cape Town 2.1 2.6 3.5 3.2 3.2 3.2 3.3 3.9 5.3 Johannesburg 1.9 3.1 3.7 3.3 3.3 3.3 2.0 2.4 4.2

MOODY’S ANALYTICS / Regional Financial Review / December 2012 45 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

Table 1: Forecasts of Global Metropolitan Areas, % change, cont’d.

Employment Population Output 2012 2013 2014 2012 2013 2014 2012 2013 2014 North America

Canada 1.1 0.8 1.1 1.1 1.1 1.1 2.3 1.7 3.3 Abbotsford 4.5 4.4 4.9 1.4 1.4 1.4 3.3 3.2 4.4 Barrie 0.7 3.0 3.5 2.1 2.0 2.0 2.9 2.7 4.1 Brantford -0.8 3.1 3.4 0.9 0.8 0.8 3.3 3.1 4.8 Calgary 4.2 3.3 4.3 2.8 2.8 2.8 3.6 3.4 4.7 Edmonton 2.7 3.7 3.6 2.0 2.0 2.0 3.2 3.0 4.2 Guelph 3.0 1.2 2.8 1.5 1.5 1.5 2.5 2.3 3.7 Halifax 0.1 1.1 2.4 1.0 0.9 0.9 2.6 2.4 3.4 Hamilton 0.4 0.5 2.6 1.1 1.0 1.0 2.2 2.0 3.4 Kelowna -1.2 2.9 3.9 1.7 1.6 1.6 3.9 3.7 4.9 Kingston 4.1 2.0 3.4 0.6 0.6 0.6 2.8 2.7 4.0 Kitchener 2.3 1.5 3.0 1.6 1.5 1.5 2.2 2.0 3.4 London 2.4 1.4 1.7 0.9 0.8 0.8 1.5 1.3 2.5 Moncton 1.1 1.5 1.7 0.9 0.8 0.8 1.4 1.3 2.5 Montreal 5.5 1.1 2.0 1.1 1.0 1.0 2.9 2.7 3.9 Oshawa 3.1 1.4 2.3 1.3 1.3 1.3 2.5 2.4 3.3 Ottawa 1.5 1.2 3.4 1.9 1.9 1.9 2.9 2.7 3.9 Peterborough 12.5 1.9 2.6 0.6 0.6 0.5 2.1 1.9 3.0 Quebec 1.7 1.6 2.7 0.7 0.6 0.6 3.1 3.0 4.1 Regina 2.0 0.3 1.3 0.5 0.4 0.4 1.7 1.5 2.6 Saguenay 4.0 1.7 2.4 1.0 1.0 1.0 2.6 2.4 3.7 Saint John 3.0 1.7 2.3 0.2 0.2 0.2 4.8 4.9 6.4 Saint Catharines 0.7 3.2 2.5 -0.1 -0.1 -0.1 2.7 2.5 3.8 Saskatoon 2.8 1.6 2.0 0.5 0.4 0.4 1.6 1.5 2.9 Sherbrooke -1.6 0.2 2.7 0.9 0.9 0.9 2.4 2.1 3.6 Sudbury -0.5 0.7 1.3 -0.2 -0.3 -0.3 1.1 0.9 2.1 Thunder Bay 2.9 -1.0 0.9 -0.4 -0.5 -0.5 1.4 1.2 2.3 Toronto 0.5 1.5 2.2 1.9 1.9 1.8 2.0 2.0 3.0 Trois-Rivieres 1.7 0.4 2.2 0.2 0.1 0.1 3.2 3.0 4.5 Vancouver 2.5 1.7 2.3 1.6 1.6 1.6 2.4 2.3 3.4 Victoria 3.0 1.2 2.8 0.9 0.8 0.8 2.5 2.4 3.4 Windsor 1.6 0.6 1.4 0.6 0.5 0.5 2.8 2.9 4.0 Winnipeg 2.7 0.8 1.7 0.7 0.6 0.6 2.0 1.8 3.0

46 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

Table 1: Forecasts of Global Metropolitan Areas, % change, cont’d.

Employment Population Output 2012 2013 2014 2012 2013 2014 2012 2013 2014 Mexico 2.7 0.2 2.2 1.1 1.1 1.1 4.0 3.5 4.5 Guadalajara 3.5 3.3 2.1 1.4 1.3 1.6 3.9 2.2 4.6 Leon 3.3 4.2 2.9 2.0 1.8 2.0 4.4 2.3 4.4 Mexico City 3.3 0.4 3.0 1.2 0.9 1.1 4.5 3.5 4.5 Monterrey 4.1 0.6 3.3 1.9 1.5 1.9 4.4 2.5 4.0 Puebla 6.0 7.2 2.2 2.2 2.1 2.4 4.8 3.3 4.4 San Luis Potosi 5.8 6.9 2.1 2.2 1.8 2.1 4.6 1.8 4.0 Tijuana 2.4 -5.7 2.2 3.0 2.6 3.1 3.5 2.0 2.6 Toluca 4.5 -0.3 3.0 2.3 1.9 2.4 2.3 1.0 4.4

South America

Brazil 1.9 2.2 2.1 1.1 1.1 1.1 2.2 5.4 5.8 Rio de Janeiro 1.1 1.5 2.1 -0.5 -0.2 0.5 3.0 7.2 6.7 Sao Paolo 2.2 1.5 2.4 1.2 1.2 1.3 3.3 7.1 7.0

Chile 2.1 1.6 1.9 0.8 0.8 0.8 5.0 4.6 4.4 Santiago 2.4 1.7 2.0 1.0 0.9 0.9 6.1 5.1 5.1

Oceania

Australia 0.6 1.4 1.7 1.1 1.1 1.1 3.8 3.1 3.1 Adelaide -0.8 0.1 1.1 0.6 0.6 0.6 0.9 2.2 3.3 Brisbane 1.0 2.1 2.8 2.2 2.2 2.2 3.0 4.9 4.1 Canberra 2.5 2.0 1.7 1.3 1.3 1.2 2.8 4.6 2.9 Darwin 1.9 2.7 1.7 1.7 1.6 1.6 2.0 3.8 3.7 Gold Coast 0.1 2.9 3.8 3.7 3.7 3.6 -8.4 2.7 5.8 Hobart -0.5 0.2 1.0 0.6 0.5 0.5 2.3 4.7 3.1 Melbourne 0.0 1.2 1.7 1.3 1.3 1.3 1.0 3.7 3.3 Perth 4.7 2.9 2.6 1.9 1.9 1.9 7.1 6.0 5.8 Sydney 0.9 0.9 1.5 1.1 1.0 1.0 1.5 3.5 3.1

New Zealand 0.5 2.2 3.4 0.9 0.9 0.8 2.1 3.1 3.1 Auckland 2.4 1.7 2.4 1.5 1.7 1.7 2.4 3.0 3.1 Christchurch -2.1 0.5 3.0 0.8 1.0 1.0 0.5 3.1 3.2 Wellington 0.8 2.2 2.5 0.6 0.7 0.7 1.4 2.0 2.2

MOODY’S ANALYTICS / Regional Financial Review / December 2012 47 ANALYSIS �� Global Metro Area Outlook 2013: Persistent Recession for Most of Europe

Table 1: Forecasts of Global Metropolitan Areas, % change, cont’d.

Employment Population Output 2012 2013 2014 2012 2013 2014 2012 2013 2014 Asia

China 0.8 0.7 0.7 0.5 0.5 0.5 7.7 7.7 7.4 Beijing -0.7 0.1 0.0 -0.2 0.7 0.2 7.7 9.5 9.5 Chongqing -0.7 0.1 0.0 -0.2 0.7 0.2 7.7 15.8 15.7 Shanghai -0.7 0.1 0.1 -0.2 0.5 0.8 9.2 7.3 6.4 Tianjin -0.7 0.1 0.0 -0.2 0.7 0.2 9.2 9.5 9.3

Japan 0.3 -0.1 -0.1 -0.2 -0.1 -0.1 1.8 0.6 1.4 Chukyo 1.0 0.2 0.0 0.1 0.2 0.1 1.9 0.8 1.8 Fukuoka 1.6 0.3 0.2 -0.1 -0.1 -0.1 1.6 0.7 1.4 Hiroshima 0.9 -0.2 -0.3 -0.4 -0.3 -0.3 1.9 0.8 1.8 Kyoto 0.9 -0.3 -0.5 -0.2 -0.2 -0.2 1.2 0.1 1.0 Sapporo 0.8 -0.1 -0.3 -0.5 -0.5 -0.5 0.6 -0.2 0.4 Sendai 1.2 0.1 -0.1 -0.3 -0.2 -0.2 1.6 0.6 1.4 Tokyo 1.8 0.6 0.5 0.2 0.3 0.3 1.6 0.7 1.7

Korea 2.0 1.4 1.4 0.2 0.2 0.2 2.2 3.5 4.8 Busan 0.6 1.6 1.0 0.3 0.0 0.0 1.7 2.9 4.4 Daegu 2.1 1.6 1.7 0.5 0.2 0.2 0.9 1.9 2.9 Seoul 2.8 2.3 2.5 0.9 0.7 0.7 0.9 2.5 4.9

Taiwan 1.4 1.1 1.2 0.2 0.2 0.1 0.9 3.9 5.6 Chiayi 1.7 1.1 1.5 0.3 0.1 0.1 0.8 1.4 4.3 Hsinchu 2.0 1.9 2.2 0.5 0.5 0.4 2.1 2.8 5.1 Tainan 1.5 1.0 1.3 0.2 0.2 0.2 1.9 1.2 4.3 Taipei 1.7 1.7 2.3 0.4 0.4 0.4 2.7 2.6 4.7

48 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS

A New Measure of Country Risk BY MARK HOPKINS AND BODHI GANGULI

nvesting abroad can expose a business to new challenges as well as new opportunities. An effective global business strategy requires that a company be cognizant of the potential hazards associated with operat- I ing overseas, plan contingencies, and factor the likelihood of such adverse events into calculations weighing the expected costs and benefits. To aid such decision-making, Moody’s Analytics has developed quantitative metrics to measure and compare risk along six distinct dimensions of economic, social and political risk across 188 countries.

Knowns and unknowns or holding assets overseas also increase their try risk. However, a unique feature of the Companies choose to invest abroad for exposure to risk from an array of unknowns. MACRI is its ability to allow users to create several reasons. As a company’s domestic These risks can vary widely from nation to their own risk assessments and rankings, market penetration approaches a satura- nation, in both their nature and their sig- through the choice of weights across differ- tion point, it often must rely on expansion nificance. A sudden and unexpected change ent risk categories. into new markets overseas to sustain target in a country’s exchange rate, for example, Conceptually, there is no single correct growth in sales. In other cases, outsourcing can hurt the company’s balance sheet, sales way to define or measure the total risk as- links in its supply chain can help a company and profitability calculations. Similar com- sociated with investment in a country, since to reduce costs by leveraging cross-country plications arise when a foreign government there are many different types of invest- differences in comparative advantage. For expropriates the assets of private companies, ments and sundry ways that investors may both corporate and individual investors, add- or if domestic markets and foreign trade are be exposed to risk. As a result, most current ing foreign assets to a portfolio often can in- disrupted as a result of war or other violent methods for assessing and comparing coun- crease diversification while at the same time social conflict. try risk focus narrowly on a specific dimen- raising average returns. sion of risk. Those risk measures that at- In corporate decision-making, these ex- Measuring country risk tempt to quantify risk more broadly confront pected benefits must be weighed against To properly manage these risks, corpo- numerous methodological challenges. the expected costs of doing business in that rate managers should be able to assess their Statistical theory provides some guide country.1 Often, for example, the potential likelihood and account fully for them in their for how to extract information from a broad benefit from selling to high-income house- strategic planning. The Moody’s Analytics range of data on specific types of risk such holds in a rich country is outweighed by Country Risk Indicator (MACRI) was created as the risk of recession or regime change but the higher wage, rent and other costs from to facilitate investor risk assessments by pro- is silent on how to average across such con- operating in that market. Similarly, in poor viding a means for assessing and comparing ceptually distinct risk categories. The value countries, U.S. firms sometimes find the cost investment risk across 188 countries. A com- of a risk indicator depends on its ability to savings they expected from offshoring pro- plete list of countries and their associated condense data of high dimensionality into a duction to lower-wage workers were lost as a risk scores are presented in Appendix A. specific ranking, and to do so in a way that result of the commensurately low productiv- The MACRI draws on a wide array of preserves transparency and does not conflate ity of those workers. economic, social, political, demographic different types of risk into just one or two Beyond these known benefits and costs, and survey data and combines these with vaguely defined categories. however, businesses expanding operations economic forecasts and subjective assess- To strike a balance between the costs ments of economic, policy and institutional of too little and too much aggregation, the risks. In this respect, the MACRI is similar MACRI provides risk assessments across six 1 See, for example, Ganguli and Packard, “Global Cost of Doing Business,” Regional Financial Review, February 2010. to a number of existing measures of coun- categories, each associated with a distinct

MOODY’S ANALYTICS / Regional Financial Review / December 2012 49 ANALYSIS �� A New Measure of Country Risk

Chart 1: Country Risk Has Many Dimensions Chart 2: Aggregating Risks, Guided by Theory

Macroeconomic risk

Macroeconomic risk Microeconomic risk Economic risk Microeconomic (business) risk

Financial risk Country risk Monetary Fiscal Regulatory Economic Inter- indicator policy policy Operational and uncertainty market national Social risk uncertainty uncertainty risks risks uncertainty Sociopolitical Political and policy risk risk Metrics Metrics Metrics Metrics Metrics Metrics National security risk

dimension of economic or sociopolitical risk tainty, risks related to1 monetary policy, and clude a wide array of factors that affect 2 (see Chart 1). These categories are risks related to fiscal policy. The two most day-to-day running of operations, as well »» Macroeconomic risk, related to the important metrics determining economic as potential longer-run threats such as the natural cyclicality of the economy and uncertainty are the country’s level of devel- emigration of educated workers (brain drain). quality of monetary and fiscal policy; opment and institutional capacity, which to- Although some elements of business risk »» Microeconomic (or business) risk, re- gether are measured by real per capita GDP, are related to the cost of doing business, the flecting operational uncertainty from and its historical cyclicality, measured by the concepts are not equivalent (see Chart 4). local conditions facing businesses on a standard deviation of the country’s growth For example, high tax rates and cumber- daily basis; rate less its mean. some bureaucracy represent a significant but »» Financial (or balance sheet) risk, Monetary policy risks are measured by generally known cost of doing business in related to the possibility of shifts in the historical variation in price inflation, the many countries. Tax and regulatory policies asset and liability valuations due to in- velocity of money, and the central bank’s that change frequently, or are inconsistently terest rate and exchange rate shocks; real policy rate. or preferentially applied, however, represent »» Social risk, related to the probability Fiscal risks are a function of both a coun- a risk. In many cases, this is a difficult dis- of either large-scale social upheaval or try’s current debt load and its ability to ser- tinction. Regular power outages represent a individual-level risks such as crime and vice those debts, measured by the share of known cost of doing business yet introduce a disease that affect human resources; tax revenues used for interest payments. great deal of uncertainty in business opera- »» Political risk, reflecting policy uncer- Both the economic uncertainty and tions in much the same way that hyperinfla- tainty and/or the possibility of large monetary policy risk components are largely tion simultaneously raises both costs and shifts in political conditions; and backward-looking, reflecting the country’s risks for businesses. »» Security risk, reflecting the risk to historical macroeconomic performance. By Business risk could very well be high in human life and property from war, ter- contrast, fiscal policy risk is largely forward- a country where the directly quantifiable rorism, geopolitical instability, natural looking, providing leading indicators of pos- monetary cost of running operations is low. disasters and climate change. sible trouble ahead. Interestingly, however, Chart 3: Fiscal Risks Loom Larger Dimensions of country risk current fiscal troubles Macro risk: economic uncertainty (x-axis), policy risk (y-axis) Each of the six risk subscores of the MAC- are highly correlated 100 RI are constructed by computing and then with past volatility Monetary policy risk aggregating a vector of country characteris- of the economy, to a 80 Fiscal policy risk tics, which is either theoretically or statisti- much higher degree 60 cally associated with some specific risk con- than unstable monetary cept (see Chart 2). These risk categories, and policy (see Chart 3). 40 the risk concepts upon which they are based, Business risk can be summarized as follows (see Appendix captures elements of 20 B for a complete description of the data used microeconomic risk at in construction of the MACRI). the firm level, control- 0 Macroeconomic risk is composed of ling for macroeconomic 0 20 40 60 80 100 three main components: economic uncer- conditions. These in- Source: Moody’s Analytics

3 50 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� A New Measure of Country Risk

Chart 4: Business Costs and Risks Can Differ Chart 5: Some Risks Go Hand in Hand Ranks, global cost of doing business (x-axis), MACRI (y-axis) Risk subscores, social (x-axis), political (y-axis) 160 100 Venezuela 140 80 120 Greece 100 60 80 Belgium 60 40 Hong Kong Switzerland 40 Taiwan 20 20 Singapore 0 0 0 10 20 30 40 50 0 20 40 60 80 100

Source: Moody’s Analytics Source: Moody’s Analytics

4 5 For example, a high rate of power outages market-derived perceptions of risk, and mea- litical environment of the country. However, in a month signals that foreign firms oper- sures of institutional protection for investors. political stability by itself does not neces- ating in that country must be prepared for Social risk captures aspects of society sarily imply low political risk or high politi- disruptions in production, which could lead with the potential to affect the value of hu- cal freedom. Some of the most historically to delays in meeting shipping deadlines and man and social capital, or that signal the stable governments in the world are also other contractual obligations that eventu- potential for major social change. In some some of the most authoritarian ones. Far ally impact revenue. Extended periods of cases, metrics proxy for direct risks such as more countries move from authoritarian to outage also expose factories to the added exposure to malaria and infectious diseases democratic regimes then vice versa, however. risk of theft, which is a problem if the risk of including HIV. Hunger and low literacy rates Hence, Moody’s Analytics includes voice and theft—also included in business risk—is high present complications from the perspective political accountability as one of the ele- to begin with. of human resources. ments of the political risk subindex. Thus, just knowing that electricity is In other cases, social risk metrics are used Security risk, the final risk category, mea- cheap in a country is not adequate. The low to assess social conditions that may affect sures the risk posed to life and property from price of electricity might also come with the businesses such as low rates of schooling disasters, both of natural and human origin. risk that power distribution infrastructure among females. A high prevalence of mal- As a result, this indicator represents some- is old and prone to frequent failures. A far- nourishment and a lack of access to clean thing of an amalgam of different risks, from sighted business manager would then need water often signals larger problems with the geopolitical threats such as war and terror- to add the cost of procuring and maintaining implementation of public policy. High levels ism to environmental threats such as floods, backup generators and arranging for extra of poverty, inequality and unemployment storms, earthquakes, and rising sea levels. security given the law-and-order situa- are often precursors to social and political Human threats are assessed through pre- tion. India, a major emerging destination of unrest (see Chart 5). dictive indicators such as a highly militarized foreign capital in the past decade, faced its Political risk encompasses a range of is- society and past experience such as the in- worst power outage in August this year when sues from policy uncertainty to risks from cidence and impact of past terrorist attacks. an aging power grid broke down as power corruption, weak rule of law, or ineffective The risk of terrorist attacks was estimated by demand skyrocketed in the sweltering heat governance. Poor political risk scores are as- dividing the total number of terrorist incidents of peak summer, bringing businesses to a sociated with political instability, raising the since 2000 by land area. The impact of terror- halt for nearly two days. risk of sudden, unexpected regime changes. In ism was estimated by calculating the human Financial risk is intended to measure risk this event, corporations relocating to a coun- cost per attack, and a metric for the threat from large movements in the exchange rate, try ruled by a pro-business government could from terrorism was estimated by dividing hu- which would have potential implications for find a new government coming to power that man cost by the size of the population.2 input costs, export prices, and balance sheet opposes foreign investment. In the best case, Geopolitical threats are measured by valuations. Financial risk is composed of four this would impact the broader operating envi- two metrics, reflecting geopolitical risk (the main components: the historical volatility of ronment for businesses; in the most extreme threat of external conflict) and state insecu- the exchange rate, leading indicators of cur- case, a new government might expel all for- rity (the risk to life and property from inter- rency crises such as the ratio of short-term eign businesses or nationalize their assets. foreign currency liabilities to foreign currency Businesses need to know the risk to their 2 The human cost is defined as the number killed plus one- reserves, interest rate spreads and other investment from abrupt changes in the po- half the number wounded.

MOODY’S ANALYTICS / Regional Financial Review / December 2012 51 ANALYSIS �� A New Measure of Country Risk

Chart 6: Strengths Often Balance Weaknesses rankings measuring Chart 6). In some cases, there is a structural Frequency distribution of country risk scores, default weighting the relative risks reason for these offsetting risks. For example, 50 100 among countries. every central bank faces a choice in setting # of countries (L) As a result, each a monetary policy target. Minimizing busi- 40 Cumulative % (R) 80 of the six MACRI risk ness cycle fluctuations is easiest with an subscores measures independent, discretionary monetary policy. 30 60 freedom from risk, However, this is generally inconsistent with with a theoretical maintaining a stable exchange rate, which 20 40 range from 0 (most would minimize balance sheet risks for

10 20 risk) to 100 (least international investors. risk). These scores are Countries with risk scores higher than 68, 0 0 intended as ordinal more than one standard deviation above the 0 10 20 30 40 50 60 70 80 90 100 rankings only, but are median, are relatively “low-risk” countries. Source: Moody’s Analytics expressed in terms of Similarly, those with scores below 32 can be

6 percentiles in a theo- considered particularly “high risk.” Under the nal conflict). retical distribution so the absolute values can default weighting in Appendix A, 35 coun- Environmental threats are assessed by also be easily interpreted. For example, a risk tries (19% of the total) fall into the low-risk two metrics: one reflecting a ranking of score of 61 implies a country that is less risky category and 28 (15%) into the high-risk countries by total damage from climate- than the median and that is, specifically, at category. The remaining two-thirds of the related disasters from 1990 to 2010, and the the 61st percentile along the theoretical dis- countries in the world thus fall into a third other an index of vulnerability to climate tribution of possible country risk scores. category of “moderate risk.” Thus, the MACRI change, derived from two values, absolute It should be stressed that these per- measures not only how much risk a country distance from the equator and the ratio of centiles refer to the underlying theoretical has, but the distribution of those risks. coastline to total area. Countries centered distribution of country risk scores, not the As a point of reference, the U.S. has an closer to the equator are predicted to suffer empirical distribution (summarized in Table overall country risk score of 75, less than more from drought and erratic weather as 1). Thus, it is possible for three countries that of Canada (87) but greater than that the climate warms. Countries with a larger to share a score of 61, while having no of Japan (70) and comparable to the ag- coastal exposure will be more exposed to countries in the sample appearing at the gregate risk scores of France, Germany, the rising sea levels and more violent tropi- 60th or 62nd percentile. Similarly, while a United Kingdom, Korea, and Taiwan. All of cal storms and monsoons. As a result, the handful of countries have risk scores that these can be considered relatively low-risk climate vulnerability indicator also includes place them below the 10th percentile or countries for investors, however. Thus, the an interaction term between latitude and above the 90th percentile in the theoretical real value of the MACRI lies in showing how coastal exposure. distribution, this is rare and suggests that these risks break down across different cat- these countries are close to the theoretical egories. The U.S. scores above 50 in all six Interpreting the risk scores maximum or minimum risk a country could risk subscores—and is thus “safer” than most Risk is intrinsically an absolute con- conceivably have. countries in all respects. But the greatest risk cept—the probability that a given event will Moreover, because most countries tend is in the dimension of macroeconomic stabil- occur—but measures such as the MACRI to have more risk in some categories and ity (69), while the least risk is that associated that aggregate different risks have no in- less in others, aggregate country risk scores with political stability and rule of law (90). trinsic units. Risk scores represent ordinal tend to converge toward the mean (see By contrast, the distribution of risks in Korea

Table 1: Summary Statistics of the MACRI Index

Default weights: 20% 15% 15% 15% 15% 20% Avg risk Macro Business Financial Social Political Security Minimum score 11 3 1 3 5 4 13 Median score 50 51 52 50 57 47 51 Maximum score 88 88 96 90 87 97 92

Mean 51 50 53 50 51 50 51 Standard deviation 18 18 21 20 22 27 19

52 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� A New Measure of Country Risk

Chart 7: Similar Risks, Different Reasons extreme macroeco- tions, the use of ad hoc thresholds or scoring Selected country risk scores, by category nomic and financial systems in quantifying risk, or a lack of trans- 3 Macro volatility, resulting in parency altogether. One motivation behind 100 relatively low scores the creation of the MACRI was to address for macroeconomic some of these methodological concerns. Security Business Canada risk despite more Six basic principles guided the choice of Germany recent reforms. Con- risk categories, the objective risk metrics, and 50 versely, Bahrain, a the risk scoring rubric that are used in the Taiwan small but important construction of the MACRI:

Political Financial U.S. banking hub, scores »» A risk indicator should measure ac- South Korea poorly for financial tual risk, not simply be a proxy for risk because of its a difficult business climate or poor Social huge external liabili- economic performance. Source: Moody’s Analytics ties, despite appear- »» All risks are relative, but where nu-

7 ing safe historically meric values are used to quantify risk, is much different, with fewer economic risks and with no imminent financial crisis on the units should have a meaningful but more political and security risks (see the horizon. economic interpretation.4 Chart 7). In each case, the level of risk suggested »» Risk scores should balance quantita- by objective, data-based metrics conflict tive and qualitative assessment of Using the MACRI risk rankings with subjective perceptions of actual risk. risk, to avoid the pitfalls associated A risk index like the MACRI can be use- The MACRI scores are constructed in a way with both purely data-driven objec- ful in two respects. First, it can be used by a that allows qualitative, contextual infor- tive metrics and purely subjective business to risk-adjust expected investment mation to modify the “raw” objective risk “expert” judgments. returns in different countries. Second, it can scores in a systematic way. But relying too »» Risk scores should account for po- be employed as an early warning indicator: a heavily on subjective judgments introduces tential statistical problems arising means of establishing broadly the probability potential confirmation bias. In a sense, the from the lack of accurate, timely or of some adverse event(s) outside the norms value of the MACRI is the greatest in exactly reliable data for many smaller and of recent experience. For example, countries those instances where the risks suggested poorer countries. with high macroeconomic risk scores tend by the data appear at odds with subjective »» Risk aggregation should balance bene- to be those that either have historically had perceptions of risk, by acting as a check on fits and costs, providing value by reduc- more volatile growth and inflation rates, conventional wisdom. ing the dimensionality of the data for or where monetary and fiscal conditions users without creating undo confusion presage instability. Methodological challenges from “adding apples and oranges.” Similarly, countries rated higher for finan- Any attempt to quantify, compare and »» The choice of which, and how many, cial risk are those more prone to exchange aggregate across a large and disparate set of variables to incorporate in the cal- rate volatility, or where conditions suggest risks necessarily requires a host of assump- culation of risk scores should weigh a vulnerability to an unexpected change in tions. These include, but are not limited to the benefits of parsimony against the dollar-denominated asset values. Countries the following steps: desirable statistical advantages of av- with high levels of social and political risk »» Selecting a set of indicators from eraging over a range of indicators, to are those countries in which conditions are among the universe of data to include avoid influence from outliers, mismea- judged to be more ripe for sudden social, po- as objective metrics of risk; surement and idiosyncrasies present in litical or institutional changes such as those »» Transforming these indica- small samples. witnessed during the Arab Spring. tors into standardized units to The MACRI is not intended to act as a allow aggregation; 3 Some existing measures of aggregate country risk assign scores to broad concepts such as “political risk” that may forecast of events. Because the risk scores »» Weighting various risk indicators to encompass conceptually different ideas. A country with a rely mostly on historical data rather than obtain an aggregate risk score; poor political risk score, for example, could be one with an authoritarian regime with capricious rule of law, or an inef- subjective judgments, the index weighs »» Translating the computed country fective democracy, a country with a risk of domestic social historical performance more heavily than score into an economically meaningful revolution, or a country with a high likelihood of an external armed conflict. While aggregating across risks is unavoidable, expected performance. This has both advan- “risk premium.” care must be taken to define categories of risk that are inher- tages and disadvantages. Unfortunately, existing measures of ag- ently meaningful, linked to specific concepts. For instance, many Latin American gregate country risk typically suffer from 4 Some alternative country risk scores are presented using arbitrary scales (e.g. from 1 to 7, or from 20 to 130) that can countries have historically been subject to several deficiencies, including vague defini- be confusing and difficult to interpret.

MOODY’S ANALYTICS / Regional Financial Review / December 2012 53 ANALYSIS �� A New Measure of Country Risk

In pursuit of these goals, methodological are most common. The first is to use a point- were handled simultaneously. Where data problems intrinsic to the exercise were ad- scoring system for each variable, combining are missing, there are two choices: ignore dressed as follows. standardization of units with an implicit those metrics for the country in question, Missing data. The largest constraint in weighting. This approach was rejected both or impute values. The problem with the first building a set of risk indicators for nearly as being somewhat ad hoc and eliminating approach is that it implicitly overweights the every sovereign entity in the world is the lack some of the distributional information of the values of the remaining metrics. In extreme of complete and consistent data. Small and underlying data. cases, this could lead to a country’s risk score poor countries—which often are also those The second approach, which is used for for a subindex being based on just one or with the highest investment risk—typically the MACRI, is the application of a consistent two indicators, which may have scores that lack the resources to finance the cost of transformation rule to the data. In particu- are not fully representative of all risk. In the maintaining a large national statistical office. lar, all data values are standardized relative worst cases, if these are extreme outliers, a As a result, these countries invariably have to the distribution of the variables across spurious value for the risk score could result. less data, less timely data, or data of poorer countries, so that every variable has a mean Therefore, the MACRI adopts the second ap- quality. To address these issues, where possi- of zero and a standard deviation of one. In proach, imputing values and scores by using ble, economic and social data were compiled most cases, the distribution of the underlying third-party data on risk and other associated from secondary sources such as the Interna- data is fairly symmetric—in other words, the data. In this manner, Moody’s Analytics was tional Monetary Fund and World Bank, which data have little skew with a roughly normal able to formalize qualitative prior judgments each expend resources to ensure data quality distribution. In some cases, however, the dis- regarding risk. Where data for a country are and consistency. Most values were taken ei- tribution of the data was extremely skewed: widely available, prior assessment of risk ther from a specific period, or from the most for example, the historic standard deviation plays a small role. Where data for a country recent available year. In the latter case, that of the inflation rate, which is low in almost are particularly sparse, the role of subjective year sometimes differs by country. all but a handful of countries that have expe- priors grows commensurately larger, balanc- Disaggregation. To have value, a risk rienced hyperinflation. In these cases, a log ing out the inaccuracy introduced by poten- score should summarize as much informa- transformation was used to reduce skew and tially larger outlier bias. tion as possible. At the same time, it should thus minimize the impact of extreme outliers avoid becoming a black box. Some existing on the resulting risk score. Alternative measures of risk measures of aggregate country risk assign Once transformed and standardized, the Currently, a number of alternative means scores to broad concepts such as “political resulting set of variables, having comparable of assessing country risk exist. Each has risk” that may encompass conceptually dif- units and distributions, is averaged into a value, but also significant limitations. For ferent ideas. A country with a poor political single risk score. These risk scores are then example, credit rating agencies provide a risk score, for example, could be one with an converted into the associated percentile val- judgment on country risk by evaluating the authoritarian regime with capricious rule of ues ranging from 0 to 100 under the assump- default risk on debt by foreign bond issuers, law or, an ineffective democracy, a country tion the underlying data are normal.5 both private and public.6 The agencies assign with a risk of domestic social revolution, or a Subjective judgments. Relying only on borrowers an ordinal risk ranking (Aaa, Aa2, country with a high likelihood of an external quantitative metrics and a fixed set of rules etc.) according to subjective judgments of armed conflict. While aggregating across provides the most objective measure of risk risk, based on both current economic data risks is unavoidable, care must be taken to possible, but this approach occasionally can and the agency’s outlook for future income define categories of risk that are inherently also lead to surprising and potentially mis- and political and policy changes. meaningful, linked to specific concepts. leading results. This happens because purely Although not every bond issuer in a coun- To address these concerns, aggregation objective indicators may ignore a huge try will receive the same credit rating, as a was performed hierarchically, employing a amount of qualitative information about rule, no foreign issuer of debt will be rated nested approach. Data were aggregated to countries that is difficult to quantify but may more favorably than the sovereign debt of generate measures of specific risk concepts, provide important context. its national government. As a result, sover- which were in turn aggregated into the six In theory, these subjective prior judg- eign debt scores provide one clear metric broad risk scores. Three of these can be used ments about risk should carry the most for country risk. Credit ratings are tied over- to compute economic risk, and the other weight when objective data are poor or whelmingly to the fiscal conditions, however, three sociopolitical risk. scarce and the least when objective evi- and thus provide an incomplete measure Data transformations. Aggregating dif- dence is clear and prevalent. For this reason, ferent types of data requires converting raw qualitative judgments and missing data 6 A credit rating is the rating agency’s opinion of the expected values to a standardized set of units that loss to the holder of a debt security in the event of a sov- allows apples-to-apples comparisons. There ereign default. In other words, it conveys to investors two 5 In the case of skewed distributions, the data are assumed to pieces of information: the probability of default and the loss, are several ways this can be done, but two be log normal. given default.

54 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� A New Measure of Country Risk

Chart 8: Risks Go Beyond Creditworthiness euro zone neighbors, This approach has two limitations, Moody’s sovereign rating (x-axis), country risk (y-axis) but its sovereign however. First, it puts the cart before the 88 debt rating is lower. horse by assuming investors in the market 84 The country’s recent are able to accurately price risk without 80 growth struggles and specifying how that can be done. Second, 76 Ireland 72 deep fiscal hole are re- a market risk premium will be an accurate 68 flected in a low mac- signal of risk only for highly liquid and 64 China roeconomic risk sub- internationally tradable securities, and is Portugal 60 score, but the country largely a reflection of market expectations 56 Greece scores better in other for the exchange rate. For multinational 52 48 respects and hence in corporations and other long-term investors 44 the overall MACRI. in foreign businesses or properties, both Aaa Aa2 A1 A3 Baa2 Ba1 Ba3 B2 … C Another common credit ratings and yield spreads have limited Sources: MIS, Moody’s Analytics means of quantify- value as measures of risk. Businesses oper-

8 ing country risk is to ating overseas face risks from inconsistent of the risks associated with equity portfolio draw on market price signals. In contrast to or poorly applied government policies and investment, or the risks of a foreign joint the subjective judgments rendered by credit rules, a weak judicial system, labor disputes, venture, merger or acquisition. rating agencies, the market’s perception of and kidnapping and other violent crime, In general, countries judged the least risky country risk can be inferred directly from the none of which is a significant determinant by the MACRI all have government debt rated implicit risk premium that investors demand of sovereign default risk. Aaa, while a low country risk score is almost on various foreign assets, whether debt or These limitations of subjective ratings always associated with a poor risk rating (see equity. Under the efficient market hypothe- and market-based risk assessment provide Chart 8). In some cases, however, a mismatch sis, all existing information, both private and the motivation for creating a broader ranking exists between rankings based on the MACRI public, regarding potential risks and returns of aggregate country risk, which incorporates and sovereign debt ratings. For example, Ire- on foreign investments will be incorporated more fully the range of risks that equity inland’s MACRI score is in line with several of its into the prices of those assets. vestors face from foreign investment.

MOODY’S ANALYTICS / Regional Financial Review / December 2012 55 ANALYSIS �� A New Measure of Country Risk

Appendix A: Moody’s Analytics Country Risk Indicators

Ranking, Country risk subscores by freedom Default weight: 20% 15% 15% 15% 15% 20% Country name from risk Country risk Macro Business Financial Social Political Security Norway 1 88 80 89 85 87 97 90 Sweden 2 88 78 94 84 84 97 90 Canada 3 87 81 91 82 82 96 91 Luxembourg 4 86 82 92 83 77 95 87 Denmark 5 86 73 93 85 84 97 87 Switzerland 6 86 79 95 89 82 97 77 Australia 7 84 76 96 87 78 94 79 Hong Kong (China) 8 84 88 94 86 71 91 76 Finland 9 84 71 85 79 83 97 89 Austria 10 83 73 88 81 83 95 81 Netherlands 11 83 74 89 79 81 95 81 Singapore 12 82 86 95 89 74 91 60 New Zealand 13 81 68 85 77 74 95 90 Germany 14 79 74 79 75 79 94 75 Taiwan 15 78 84 94 81 80 84 53 Belgium 16 77 67 84 73 75 91 78 United States 17 76 69 80 75 76 90 70 Ireland 18 76 58 74 71 77 95 85 France 19 76 65 80 72 78 91 74 Korea (Republic of) (South) 20 75 77 87 71 77 79 61 United Kingdom 21 74 65 78 70 79 93 66 Brunei Darussalam 22 74 82 83 78 67 74 60 Czech Republic 23 73 76 65 61 78 81 78 Chile 24 73 79 64 65 66 88 74 United Arab Emirates 25 73 68 85 61 70 65 84 Malta 26 73 62 83 75 75 91 59 Cayman Islands 27 73 67 92 90 58 80 57 Bahamas 28 72 64 89 74 66 83 60 Slovenia 29 72 68 61 62 76 82 79 Qatar 30 71 71 84 60 70 72 70 Malaysia 31 71 77 72 72 70 62 71 Slovak Republic 32 71 72 63 62 71 78 76 Japan 33 70 50 80 75 83 90 54 Bermuda 34 70 62 85 81 62 86 53 Oman 35 69 71 85 71 70 65 57 Estonia 36 68 67 67 50 66 81 74 Poland 37 67 55 67 58 69 78 78 Mauritius 38 67 61 54 64 66 79 78 Costa Rica 39 66 69 60 59 64 76 69 Israel 40 66 77 91 74 72 70 23 Uruguay 41 66 43 59 66 70 82 80 Italy 42 66 51 69 62 74 75 68 China 43 65 84 92 68 66 30 51 Iceland 44 65 41 56 29 79 93 92 Spain 45 65 58 64 62 67 84 60 Trinidad and Tobago 46 64 64 78 75 65 56 53 Cyprus 47 64 65 58 54 75 85 53 Lithuania 48 64 55 59 45 62 76 82 Kuwait 49 63 53 76 62 72 61 61 Botswana 50 63 73 59 66 19 78 77 Hungary 51 63 58 65 49 69 61 75 Portugal 52 63 47 57 51 69 86 71 Panama 53 62 70 57 63 61 60 60 Saudi Arabia 54 62 65 90 80 57 39 43

56 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� A New Measure of Country Risk

Appendix A: Moody’s Analytics Country Risk Indicators (cont’d.)

Ranking, Country risk subscores by freedom Default weight: 20% 15% 15% 15% 15% 20% Country name from risk Country risk Macro Business Financial Social Political Security Bulgaria 55 60 46 66 53 70 61 68 Romania 56 60 47 63 51 69 62 71 Brazil 57 59 65 41 63 54 62 67 Latvia 58 58 49 62 35 64 72 69 Thailand 59 58 67 81 64 67 42 33 Croatia 60 58 52 71 46 72 69 46 Bahrain 61 58 71 90 36 65 54 36 Barbados 62 58 47 42 50 74 87 53 Tunisia 63 56 65 50 55 61 45 56 Saint Vincent and the Grenadines 64 56 61 33 41 62 82 57 Mexico 65 56 66 45 63 64 47 50 Vietnam 66 56 59 58 58 69 36 53 Kazakhstan 67 55 52 60 39 66 37 73 Mongolia 68 55 54 56 53 57 47 62 Peru 69 55 64 63 67 57 45 36 Montenegro 70 55 51 55 54 47 53 65 Argentina 71 55 47 50 51 67 39 70 Morocco 72 54 55 65 62 52 45 49 South Africa 73 54 65 57 69 16 63 50 Suriname 74 53 47 54 56 49 40 69 Samoa (Independent State of) 75 53 50 47 49 65 68 43 India 76 53 56 66 72 46 44 37 Azerbaijan 77 52 45 63 72 66 30 43 Bosnia and Herzegovina 78 52 62 59 38 57 41 52 Namibia 79 52 57 67 53 17 67 48 Bhutan 80 52 51 69 36 50 55 51 Netherlands Antilles (Aruba and Curaçao) 81 52 43 26 42 71 80 52 Maldives 82 52 59 55 39 69 50 40 Paraguay 83 52 55 44 50 62 34 60 Albania 84 52 47 45 48 66 48 55 Serbia 85 51 35 56 36 57 48 71 Vanuatu 86 51 51 53 54 46 67 39 Saint Lucia 87 51 41 30 38 59 82 55 Gabon 88 51 52 44 62 35 39 65 Ghana 89 51 44 36 46 46 61 66 Russian Federation 90 50 57 54 62 63 27 41 Jordan (Hashemite Kingdom of) 91 50 51 63 39 65 47 40 Macedonia, the former Yugoslav Republic 92 50 45 55 46 51 50 53 Georgia 93 50 58 62 48 57 36 40 Dominica 94 50 45 29 37 67 79 45 Grenada 95 49 44 30 33 66 71 53 St. Christopher (St. Kitts) and Nevis 96 49 49 28 33 67 82 40 Indonesia 97 49 59 52 59 57 27 41 Tanzania (United Republic of) 98 49 55 44 53 33 46 57 Colombia 99 49 67 53 68 56 28 25 Antigua and Barbuda 100 49 44 30 35 61 80 44 Bolivia 101 48 52 48 63 47 30 48 Moldova, Republic of 102 48 39 60 42 64 42 46 Belize 103 48 51 33 41 55 52 53 Turkey 104 48 52 55 44 61 37 38 Uzbekistan 105 48 56 49 48 59 15 53 Fiji 106 47 48 58 58 52 16 50 Algeria 107 47 63 54 57 53 26 29 Myanmar 108 47 69 72 70 41 4 24

MOODY’S ANALYTICS / Regional Financial Review / December 2012 57 ANALYSIS �� A New Measure of Country Risk

Appendix A: Moody’s Analytics Country Risk Indicators (cont’d.)

Ranking, Country risk subscores by freedom Default weight: 20% 15% 15% 15% 15% 20% Country name from risk Country risk Macro Business Financial Social Political Security Armenia 109 46 43 56 44 51 37 48 Egypt 110 46 41 50 61 60 37 33 Swaziland 111 46 48 56 58 7 38 62 Dominican Republic 112 46 54 38 49 48 41 44 Cape Verde 113 46 45 34 29 48 74 45 El Salvador 114 46 57 42 52 49 48 28 Philippines 115 45 52 53 59 53 32 26 Greece 116 45 33 23 33 68 65 51 Ukraine 117 45 23 50 34 66 29 67 Papua New Guinea 118 45 60 48 57 28 29 43 Sri Lanka 119 44 62 42 50 63 37 13 Ecuador 120 44 50 44 39 54 19 51 Zambia 121 43 32 51 48 10 48 67 Burkina Faso 122 43 36 40 29 33 49 64 Guatemala 123 42 53 39 62 37 24 37 Tuvalu 124 42 49 51 53 20 55 30 Honduras 125 42 53 32 57 47 28 36 Benin 126 42 38 37 32 25 47 67 Bangladesh 127 42 54 37 74 41 22 25 Tonga 128 42 38 50 50 47 43 30 Seychelles 129 42 39 12 20 59 59 55 Belarus 130 41 44 43 10 64 26 55 Nicaragua 131 41 46 44 33 52 33 37 Lesotho 132 41 35 46 26 12 45 71 Libya 133 41 23 47 53 47 19 56 Rwanda 134 41 33 61 59 32 47 21 Timor-Leste (Democratic Republic of) 135 40 59 40 48 24 25 41 Senegal 136 40 40 41 35 32 43 49 Malawi 137 40 35 46 39 31 48 44 Iran (Islamic Republic of) 138 40 39 53 56 52 11 32 Cameroon 139 40 42 41 44 37 27 46 Lao People’s Democratic Republic 140 40 49 55 33 43 25 34 Guyana 141 40 40 29 36 51 35 46 Uganda 142 40 47 47 46 39 36 25 Kyrgyzstan 143 40 22 51 30 57 24 54 Nepal 144 39 57 41 63 45 9 22 Mali 145 39 35 46 36 23 44 50 Venezuela 146 39 40 39 31 60 15 47 Jamaica 147 39 31 17 39 53 48 46 Turkmenistan 148 39 44 45 26 48 11 51 Cambodia (Kingdom of) 149 39 55 52 42 38 22 22 Solomon Islands 150 38 44 55 48 20 31 33 Syrian Arab Republic 151 36 33 41 31 53 24 34 Gambia 152 35 28 39 28 30 39 47 Nigeria 153 35 43 31 52 26 20 35 Togo 154 35 32 43 42 17 26 46 Pakistan 155 34 45 37 51 40 18 16 Kenya 156 34 38 44 44 22 33 24 Mozambique 157 34 30 39 30 14 49 39 Kiribati 158 34 21 22 23 40 57 40 Kosovo 159 33 42 26 26 13 28 53 Sao Tome and Principe 160 33 26 18 16 39 40 52 Ethiopia 161 31 30 50 36 21 21 31 Liberia 162 31 18 32 34 27 35 41

58 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� A New Measure of Country Risk

Appendix A: Moody’s Analytics Country Risk Indicators (cont’d.)

Ranking, Country risk subscores by freedom Default weight: 20% 15% 15% 15% 15% 20% Country name from risk Country risk Macro Business Financial Social Political Security Tajikistan 163 31 25 50 18 44 20 30 Iraq 164 31 48 38 40 35 9 14 Mauritania 165 30 25 55 19 14 26 41 Lebanon 166 30 19 39 32 62 12 22 Madagascar 167 30 19 37 14 31 27 48 Côte d’Ivoire 168 29 30 38 33 24 12 37 Equatorial Guinea 169 29 34 28 16 13 14 56 Niger 170 28 20 39 18 28 28 37 Angola 171 28 30 22 47 12 25 32 Guinea 172 27 26 34 23 25 15 39 Comoros 173 27 23 14 21 22 28 47 Yemen (Republic of) 174 27 33 41 28 22 16 19 Congo, Republic of the 175 26 27 14 25 25 20 40 Guinea-Bissau 176 26 20 37 21 20 24 32 Eritrea 177 24 20 50 25 18 9 23 West Bank and Gaza 178 23 24 39 9 35 14 18 Djibouti 179 20 28 15 20 7 31 18 Burundi 180 20 14 44 14 24 15 14 Afghanistan 181 20 35 25 28 6 8 15 Sierra Leone 182 19 10 17 20 12 26 31 Chad 183 19 22 18 28 8 9 24 Central African Republic 184 19 19 10 20 7 9 41 Sudan 185 16 26 8 14 19 4 22 Haiti 186 16 16 9 18 15 12 22 Zimbabwe 187 11 3 1 3 20 5 33 Congo, the Democratic Republic of the 188 11 5 19 3 5 9 25

MOODY’S ANALYTICS / Regional Financial Review / December 2012 59 ANALYSIS �� A New Measure of Country Risk

Appendix B: Variables Used in the Construction of the Country Risk Indicators

Sources Dimensions of economic risk Macroeconomic risk Economic instability (risks associated with the cyclicality of real activity) Gross national income (log, PPP international $) World Bank, IMF Historical standard deviation of the growth rate minus avg growth rate IMF, Moody’s Analytics Index of recession risk, over next 5 yrs IMF, Moody’s Analytics Investment, avg % share of GDP since 2000 Various sources, Moody’s Analytics Openness (sum of exports plus imports as share of GDP) Various sources, Moody’s Analytics

Monetary instability (risk of shocks to the price and quantity of credit) Inflation risk (log of monthly std. deviation of inflation rate since 1990) IMF, Moody’s Analytics Liquidity risk (log of std. deviation of credit/GDP since 1990) Various sources, Moody’s Analytics Policy risk (std. deviation of real monetary policy rate since 1990) Various sources, Moody’s Analytics

Fiscal instability (risks related to tax rates and sovereign default) General government debt as % of GDP, most recent IMF Government deficit as % of GDP, most recent World Bank Government interest payments as % of government revenue, most recent World Bank Government effectiveness index (standarized aggregation of primary surveys) World Bank

Business risk Operational risks Access to finance (% of firms identifying as a major obstacle) World Bank Electricity (% of firms identifying as a major obstacle) World Bank Power outages in a typical mo (log number) World Bank Avg total time of power outages per mo (log number of hours) World Bank Avg number of incidents of water insufficiency in a typical mo (log number) World Bank Firms paying for security (% of firms surveyed) World Bank Losses due to theft, robbery, vandalism and arson against the firm (% of sales) World Bank Security costs (% of sales) World Bank Products shipped to supply domestic markets lost due to theft (% of total) World Bank Losses from direct export due to theft (% of exports) World Bank Crime, theft and disorder (% of firms identifying as a major constraint) World Bank

Regulatory and market uncertainty Licenses and permits (% of firms identifying as a major obstacle) World Bank Customs & trade regulations (% of firms identifying as a major obstacle) World Bank Avg time to clear imports from customs (days) World Bank Government or state ownership (% of firms) World Bank Firms with more than 100 employees (%) World Bank Firms using email to communicate with clients and suppliers (%) World Bank Practices of competitors in the informal sector (% of firms identifying as a major constraint) World Bank Corruption (% of firms identifying as a major constraint) World Bank Firms with annual financial statement reviewed by external auditor (%) World Bank Senior management time spent in dealing with requirements of government regulation (%) World Bank Rigidity of employment (0=less rigid to 100=more rigid) World Bank Firing cost (wks of wages) World Bank Ease of doing business index (1=most business-friendly regulations) World Bank Time required to enforce a contract (days) World Bank Service firms competing against unregistered or informal firms (%) World Bank Firms formally registered when started operations in the country (%) World Bank Firms using banks to finance investments (%) World Bank Working capital internal financing (% of firms relying on) World Bank Prepaid sales (% of total sales) World Bank

60 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� A New Measure of Country Risk

Appendix B: Variables Used in the Construction of the Country Risk Indicators (cont’d.)

Sources Risks related to globalization Brain drain, emigration rate of college-educated population (%) World Bank Net foreign direct investment / GDP (%, avg since 1990) World Bank, IMF

Financial risk FX volatility (standard deviation of exchange rate over last 10 yrs) Moody’s Analytics

Market-derived risk measures 10-yr spread on U.S. Treasuries (central government 10-yr yield - U.S. Treasury yield) World Bank Risk premium on private lending (ppt spread between private and public yields of common World Bank maturity) Financial frictions (ppt difference between lending rate and deposit rate) World Bank

Leading indicators of currency depreciation Real overvaluation (% change in real exchange rate since 2000) IMF Current account balance (% of GDP, most recent) World Bank Ratio of foreign currency liabilities to foreign currency assets Various sources, Moody’s Analytics Gross external debt/GDP (%, most recent) Various sources, Moody’s Analytics Short-term external debt (% of total external debt, most recent) Various sources, Moody’s Analytics Short-term external debt (% of foreign reserves, most recent) Various sources, Moody’s Analytics Total debt service (% of exports, most recent) World Bank

Quality of financial institutions Credit info availability (index: 0=least information, 6=most information) World Bank Legal rights of borrowers and lenders (index: 0=least credit access, 10=most access) World Bank

Other dimensions of country risk Social risk Adult literacy rate (% of men and women ages 15 and above) World Bank Unemployment rate (%) World Bank Inequality (Gini index) World Bank Crime, theft and disorder (% of firms identifying as a major obstacle) World Bank Education (% of women with secondary schooling) World Bank Per capita health expenditure (log) World Bank Mortality rate (%) World Bank Incidence of tuberculosis (per 100,000 people) World Bank Prevalence of HIV, total (% of population ages 15-49) World Bank Prevalence of undernourishment (% of population) World Bank Poverty headcount ratio at national poverty line (% of population) World Bank Improved water source, urban (% of urban population with access) World Bank

Political risk Political stability index (standarized score of primary surveys) World Bank Rule of law index World Bank Corruption/transparency index World Bank Regulatory quality index World Bank Voice/accountability index World Bank Political instability (% of firms identifying as a major obstacle) World Bank

MOODY’S ANALYTICS / Regional Financial Review / December 2012 61 ANALYSIS �� A New Measure of Country Risk

Appendix B: Variables Used in the Construction of the Country Risk Indicators (cont’d.)

Sources National insecurity Militarism Military, as % of the labor force, avg last 3 yrs World Bank; Moody’s Analytics Military, as % of the labor force, change over last 6 yrs World Bank; Moody’s Analytics Risk from terrorism START Global Terrorism Database, Probability of an attack (total number of incidents since 2000 per square km) CIA World Factbook, Moody’s Analytics START Global Terrorism Database, Intensity of attacks (avg of killed + 1/2* number wounded, per attack) Moody’s Analytics START Global Terrorism Database. Census Threat level (total killed + 1/2*wounded from terrorism since 2000, as % of population) Bureau, Moody’s Analytics State insecurity Moody’s Analytics, based on data and analysis Geopolitical insecurity by The Fund for Peace (2012) Moody’s Analytics, based on data and analysis State insecurity by The Fund for Peace (2012) Environmental risks Moody’s Analytics, based on risk rankings from Disaster risk: human and economic losses due to natural disasters Harmeling (2011) and data from EM-DAT Moody’s Analytics, based on climate and geo- Vulnerability to climate change graphical data from the World Bank and CIA World Factbook

References: EM-DAT: The OFDA/CRED International Disaster Database – www.emdat.be, Université Catholique de Louvain, Brussels (Belgium); The Fund for Peace, 2012 Failed States Index [Data file]. Retrieved from http://www.fundforpeace.org/global/ Harmeling, Sven. “Global Climate Risk Index 2012: Who Suffers Most from Extreme Weather Events? Weather-related Loss Events in 2010 and 1991 to 2010.” Germanwatch Briefing Paper, November 2011. National Consortium for the Study of Terrorism and Responses to Terrorism (START). (2012). Global Terrorism Database [Data file]. Retrieved from http://www.start.umd.edu/gtd

62 MOODY’S ANALYTICS / Regional Financial Review / December 2012 FREQUENTLY ASKED QUESTIONS ��

Fiscal policy What are the common fiscal policy rules used around the world?

The ideal fiscal policy would be perfectly fluenced by elements outside of government share of nominal GDP. These rules are not symmetrical and countercyclical—the gov- control such as exchange rate, interest rates directly tied to debt sustainability since ernment would generate budget surpluses and market sentiments. Chasing a debt-to- there is no constraint on revenues that during expansion of the economy and rein- GDP ratio can at times turn procyclical as in could vary over the business cycle. But force domestic demand and generate a defi- Greece at present where pursuit of an elu- it offers an explicit control on the size of cit during contraction such that the surplus sive target has led to a deep recession now the government. of the good years perfectly balances the def- in its fifth year. Finally, there are revenue rules that set icit of the bad years. To design such an ideal A second common fiscal rule is to target a ceiling for government spending based policy is impossible because of the inherent the budget balance and directly constrain on revenues. These are a lot less common uncertainty embedded in the future—all variables that have primary influence on the and far more difficult to implement but are forward-looking plans have a margin of debt-to-GDP ratio. Such an objective pro- popular with Tea Party supporters in the U.S. error. There is no way to know how much vides clear guidance and budgetary targets since they explicitly limit the size of govern- saving during economic expansion is enough directly under the control of policymakers. ment. While analytically it makes a lot of to provide support during contraction. Thus, Budget balance rules can target the overall sense—spend what you earn—it makes no often fiscal deficits and sovereign debt can balance, the structural or cyclical balance, sense in the world of official fiscal policy- become unsustainable as in some euro zone and the balance over the business cycle. makers facing cyclical demands or windfall countries now and among South American Among the four types of fiscal balance rules, revenues. Further, such a rule has no direct countries in the 1990s. To keep a measure of the last three have explicit stabilization link with debt sustainability since there is no control over fiscal deficit and sovereign debt, levers for economic shocks. However, ac- constraint on expenditure. many countries use rules to target different counting for expected revenue and required Most countries use two or more fiscal types of budgetary aggregates and they are adjustment using deviations from the rules in guiding policy. None of the rules can used in combination. output gap—a widely debated concept—is on their own address common concerns— A commonly used rule is to set a tar- difficult to estimate and hard to explain or debt sustainability, economic stabilization, get or an explicit limit for public debt as a communicate. On the expenditure side, in- and limits on the size of government. Us- percent of nominal GDP.1 This rule is easy terest payments are not under government ing a combination of rules can fill some of to explain, monitor, and build a consen- control. There are also structural rigidities the gaps. For example, a debt-to-GDP ratio sus around. But since debt is sensitive to in the budget such as long-term capital and rule combined with an expenditure rule will budgetary aggregates such as deficit and social security spending in the expenditures provide enough flexibility to address debt interest payments, it does not provide that are difficult to adjust. sustainability, allow for countercyclical short-term policy guidance. Debt is also in- A third rule that is used in several coun- spending, and limit the size of the govern- tries is a limit set on expenditures—total, ment. The same result could be achieved 1 Fiscal Rules in Response to the Crisis—Toward the “Next- primary or current. The limits are usu- by a combination of a debt and cyclically Generation” Rules. A New Dataset; Andrea Schaechter, ally set in absolute terms or in terms of a adjusted balanced budget rules. Tidiane Kinda, Nina Budina, and Anke Weber; IMF Working Paper; WP/12/187 growth rate tied to nominal GDP or as a ——VIRENDRA SINGH

MOODY’S ANALYTICS / Regional Financial Review / December 2012 63 FREQUENTLY ASKED QUESTIONS ��

Demographics What is the national mover rate, and how has it changed recently?

The national mover rate measures the separately and specifically in the 2012 sur- include the District of Columbia, Wyoming percentage of Americans aged one year and vey but not in the 2011 survey, which relied and Alaska. older who changed their residence at least only on write-in responses. As a result, the In addition to the one-year mover rate, once during the prior year. Annual estimates 2011 estimate of foreclosure-related movers the Census Bureau publishes every five years of the total number of movers are based on is likely understated, making the increase a set of five-year mover statistics that mea- statistics collected by the U.S. Census Bu- from 2011 to 2012 appear larger than it sure the percentage of Americans aged five reau through its Annual Social and Economic might have been had respondents been years and older who changed their residence Supplement to the Current Population Sur- given the option to select foreclosure/evic- at least once in the prior five years. The five- vey. Respondents to the CPS ASEC are asked tion as their main reason for moving in the year statistics are better suited to summa- where they lived one year ago and what 2011 survey. rizing broad changes in migration patterns their main reason was for moving. The latest statistics also shed some light than are the one-year statistics. The one- Statistics from the 2012 CPS ASEC show on where recent movers are headed. Of the and five-year mover rates are not exactly 12% of the population aged one year and 36.5 million people who moved from March comparable since multiple moves by the older moved during the prior year, marking a 2011 to March 2012, most ended up not far same individual during the five-year time slight increase from the record low of 11.6% from their previous residence. Only 35.6% frame are only counted once in the five-year in 2011. Yet despite the increase in mobility of movers relocated to a different county, statistics even though the five one-year esti- from 2011 to 2012, the mover rate remains while 17% moved to a different state. mates covering the same time frame would below where it was in 2010. About two- From a regional perspective, the 2012 fig- show a larger total number of movers. thirds of the drop during the last two years is ures reveal that the South continues to ben- Five-year mobility figures released for attributable to fewer movers in the 20 to 29 efit from the net flow of domestic migrants 2005-2010 reveal the national mover rate year age group. from the Northeast and Midwest. Although dropped to 35.4%, the lowest on record. The When asked in 2012 to give their main the CPS ASEC does not possess a sample five-year mover rate peaked in 1985-1990 reason for moving, more people cited es- size large enough to produce reliable popu- at 46.7%. For 2005-2010, the percentage tablishing their own household and moving lation estimates below the regional level, of movers who relocated within the same because of a new job or transfer than did one-year figures from the larger American county increased modestly to 21.6% from so in 2011. In addition, 792,000 people are Community Survey provide a finer view. 20.4% during 2000-2005, although this estimated to have moved because of fore- From 2010 to 2011, the latest date for which proportion remains well below those re- closure or eviction, an increase of 380,000 ACS statistics are available, the most com- corded during previous decades. In addition, from 2011. However, a methodological mon move was from New York to Florida, principal cities saw a net exodus of 4.4 mil- change may partially explain the sharp followed by California to Texas. States show- lion movers during 2005-2010, while sub- increase. According to the Census Bureau, ing the greatest proportion of residents liv- urbs saw a net gain of 8.8 million. the foreclosure/eviction response was listed ing in another state during the previous year ——alexander miron

64 MOODY’S ANALYTICS / Regional Financial Review / December 2012 FREQUENTLY ASKED QUESTIONS ��

Macro What is the broken window fallacy? Are natural disasters good for the economy?

The broken window fallacy is based on cyclical unemployment in the affected re- just its estimate of GDP for the destruction the idea that destruction does not stimu- gion. Therefore, federal funding, government of capital stock. late the economy. This is widely debated spending, and some out-of-pocket expenses Cleanup, replacement purchases and among economists and nearly always for homeowners will provide a lift to eco- rebuilding will, however, add to GDP. This surfaces after natural disasters, including nomic activity, as it would not have been could be argued as a measurement issue Superstorm Sandy. deployed otherwise. but rebuilding could provide other long- The parable of the broken window was For example, rebuilding from Sandy will term benefits. introduced by French economist Frederic put construction workers to work that would While those affected by the storm are Bastiat in an 1850 essay. Bastiat’s tale starts have remained unemployed. Construction not better off now than prior to the storm, with a man’s son breaking a pane of glass, employment in the impacted region has over time, economic welfare will improve. forcing the man to pay to replace it. That barely budged since 2010 and is down 25% If done properly, rebuilding can play an im- adds to economic activity, but Bastiat since the U.S. recession began. New York portant role, as it will improve the capital argues the man is not better off. Bastiat also hired 5,000 unemployed workers to stock. New infrastructure will replace old observed that while the immediate benefit help with cleanup efforts. and outdated infrastructure. There will also of spending on reconstruction is visible, the There is also an important difference be additional investment. For example, New lost opportunities to spend elsewhere are between economic activity and economic York Governor Andrew Cuomo is seeking $9 “what is not seen.” welfare. Though property damages from billion in federal funding for preventive in- Bastiat’s analysis holds only if the man Sandy will be significant, totaling an es- frastructure. New Jersey is studying how to would have spent the money on something timated $50 billion, it does not subtract better rebuild the shore to provide stronger else. This likely does not hold today given from measured economic activity as the protection from hurricanes. the significant amount of spare capacity and Bureau of Economic Analysis does not ad- ——Ryan sweet

MOODY’S ANALYTICS / Regional Financial Review / December 2012 65 ANALYSIS

European Macro Outlook

BY MICHAEL WOLF AND THE EUROPEAN RESEARCH STAFF

he euro zone recession has persisted throughout 2012. The major driver for many countries was that their national governments cut expenditures and raised taxes to address large budget deficits. Tight credit ex- T acerbated the problem for some, ultimately leading to the European Central Bank’s aggressive commitment to buy sovereign debt, thereby lowering interest rates. Year over year, real GDP in the euro area is down a significant 0.6%, though this is a far smaller decline than in the 2009 recession. The countries in deepest distress are those that had to make the deepest budget cuts, including Greece, Portugal, Spain and Italy. The U.K. has also made deep cuts.

Net exports have improved in most of 2012; this drag will be reduced to less than 1 Real GDP growth will be 1% in each of 2012 the euro area countries, but this is largely percentage point in 2013. and 2013, before rising to 1.7% in 2014. The the unfortunate result of imports falling Second, the rebound in the global weak performance of this anchor economy faster than exports (see Chart 1). Regarding economy outside of Europe will strengthen is a key factor in the overall outlook for exports, every euro area country except Ger- external demand. Europe. France will see a weaker profile, ris- many has implemented value-added taxes. Third, ECB monetary easing will begin ing just 0.2% in each of 2012 and 2013. The Such policies encourage export-oriented to improve the flow of credit in some of the more troubled large economies, Spain and investment, but curb domestic spending less-troubled countries. However, signifi- Italy, will work to reduce their deficits fur- (see Table 1). Moreover, the risk is that the cant near-term growth is unlikely to come ther and to gain competitiveness after years reorientation to the external sector may through the investment channel because of rising imbalances. not prove valuable because most trade uncertainty and the bleak economic outlook Severe issues will confront the euro zone is intraregional. keep loan demand subdued (see Chart 2). even after recovery begins. The first is the The euro zone recession will continue On an annual average basis, euro zone region’s high unemployment, especially into the first part of 2013, but should end real GDP is estimated to have declined by among youth and temporary workers. Labor before midyear for several reasons. First, 0.4% in 2012 and will be up only 0.1% in market reforms have begun to address job fiscal austerity will lift in some countries as 2013. Stronger growth of the global econo- market rigidity, but coupled with broader they come closer to their deficit goals. On my should lead to an acceleration to 1.6% fiscal austerity these reforms have the average, government contraction has rein the following year. As usual, Germany undesirable effect of temporarily raising duced real GDP by 1.5 percentage points in will outperform, but not by much this time: unemployment even further and reducing

Chart 1: Weak Imports Improved Trade Balances Chart 2: Euro Zone Lending Remains Subdued Current account, % of GDP Loans outstanding, % change yr ago Netherlands 20 Germany Corporate loans Austria 15 Household loans Ireland Euro area 10 France Italy 5 U.K. Spain 2011 0 Portugal 2012E Greece -5 -10 -8 -6 -4 -2 0 2 4 6 8 10 08 09 10 11 12 Sources: IMF, Moody’s Analytics Sources: ECB, Moody’s Analytics

1 2 66 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� European Outlook

Table 1: Fiscal Austerity Measures Across the Euro Zone

France Germany Greece Ireland Italy Portugal Spain Wage freeze X X X X X Public sector job losses X X X X X X Pension spending cuts X X X X X X Healthcare cuts X X X X X X Welfare spending cuts X X X X X X Public investment cuts X X X X X Other cuts X X X X X Income tax increase X X X X X X Corporate tax increase X X X X X Capital gains tax hike X X X X Social security tax hike X X X X VAT increase X X X X X X Excise tax increase X X X X X X Property tax increase X X X X X Tax evasion measures X X X X X

Sources: IMF, Moody’s Analytics consumer spending. Moreover, even if the sovereign debt, an unstable house of cards. would be stepping down, increasing fears worst-performing countries had the fiscal The approval of a single bank supervisor by over whether his replacement would steer space to spend their way out of recession, Europe’s finance ministers was an important the Italian economy in the same direction. bailout terms and regulation would prevent step for the longer term, but it will take In Germany, Chancellor Angela Merkel is this (see Table 2). months to set up the supervisor and years up for re-election next year, a test of the Another issue is the fragility of the bank- to put in place the structure to adequately German appetite for ongoing bailouts to ing system. Nonperforming loans continue monitor the thousands of banks in the the periphery. to increase on Italian and Spanish bank euro zone. balance sheets because of bad construc- Persistent problems also lead to worries Recent Performance tion loans and worsening housing markets. over European willingness to continue with Real GDP in the euro zone fell 0.1% in Furthermore, banks guaranteed by the na- the necessary adjustments. Italian Prime the third quarter, and a return to growth in tional government still hold large sums of Minister Mario Monti announced that he the fourth quarter is unlikely. In October,

Table 2: Running Out of Fiscal Space

Fiscal space (ppts of 10-yr yield on government debt, 2012Q3, % debt/GDP ratio) Survival rate Fair rate Actual rate Germany 161.7 5.99 2.15 1.54 U.K. 135.5 7.06 2.36 1.74 France 122.5 5.30 3.15 2.17 Ireland 58.2 7.24 4.68 5.55 Greece 0.0 1.99 17.61 21.56 Italy 0.0 2.78 4.71 5.08 Portugal 0.0 4.74 11.42 8.29 Spain 0.0 5.00 3.71 5.69

Sources: Bloomberg, Moody’s Analytics

MOODY’S ANALYTICS / Regional Financial Review / December 2012 67 ANALYSIS �� European Outlook

Chart 3: Recession Lowered Inflation Chart 4: Slow Recovery in 2013 Producer price index, Europe, % change yr ago Real GDP, % change yr ago 8 Poland Germany 6 U.K. France 4 Czech Republic Spain 2 Italy Hungary 2013 0 Portugal 2012 Greece -2 10 11 12 -4 -3 -2 -1 0 1 2 3 Sources: Eurostat, Moody’s Analytics Sources: National statistical offices, Moody’s Analytics

3 4 the area unemployment rate rose to 11.7% ease inflation fears and giving the ECB more Lending will remain subdued in the euro and retail sales fell a sharp 1.2%. Industrial room for monetary policy (see Chart 3). zone until the shaky connection between production was down 3.6% year over year. Moreover, the euro zone ZEW indicator of sovereign debt and the financial industry Furthermore, manufacturing PMIs contract- economic sentiment improved, as fears over is broken. Additionally, house prices will ed in November in all euro zone countries a Greek exit eased. decline in countries such as Spain and the except Ireland. Netherlands. Real investment in Europe will Although the ECB has kept its policy Baseline forecast contract by 6.1% in 2012 and 1.9% in 2013. rate unchanged, this accommodative policy The euro zone outlook has been revised Germany will outperform the overall stance has yet to spur investment, which con- downward since November, as contrac- euro zone despite being weighed down by tracted by 0.7% in the third quarter. Lending tion in the Southern Tier economies slows its neighbors. Real GDP is projected to grow to firms and households was down by 2.1% growth in Germany and France more than in Germany by 1% in 2013. Income tax cuts and 0.6%, respectively. Additionally, the net previously expected (see Chart 4). Ris- will re-orient the economy inward and boost percentage of banks reporting tighter condi- ing unemployment throughout the euro domestic demand next year. Rising domestic tions for enterprises increased considerably in area will weigh on consumer spending. consumption will raise imports, eroding the the third quarter, and expectations of tight- Furthermore, austerity measures will country’s trade surplus, which was already ening in the fourth quarter are also rising. prevent an early recovery in the region as hit by a weakening global economy. As a Weak demand has caused commodity countries push to reduce deficits and lower result, the unemployment rate will peak at and consumer prices to ease, helping to borrowing costs. 7.2% in the second half of next year.

Real GDP, local currency units, % change Total employment, % change

2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 Germany 0.8 -5.1 4.0 3.1 1.0 1.0 Germany 1.2 0.1 0.6 1.4 1.0 -0.1 France -0.2 -3.1 1.6 1.7 0.1 0.2 France 0.9 -1.0 0.4 0.4 -0.3 0.2 Euro zone 0.3 -4.3 2.0 1.5 -0.4 0.1 Euro zone 0.9 -1.7 -0.4 0.0 -0.6 -0.2 Italy -1.2 -5.5 1.8 0.6 -2.1 -0.5 Italy 0.3 -1.2 -0.6 0.1 0.4 0.1 Spain 0.9 -3.7 -0.3 0.4 -1.4 -1.5 Spain -0.5 -6.8 -2.3 -1.9 -4.3 -1.4 U.K. -1.0 -4.0 1.8 0.9 -0.1 1.0 U.K. 0.7 -1.6 0.2 0.5 1.1 0.1 Sweden -0.8 -5.0 6.3 3.8 1.3 1.5 Sweden 1.1 -2.1 1.0 2.1 0.5 0.1 Greece -0.2 -3.2 -4.8 -7.2 -6.0 -4.6 Greece 1.1 -1.1 -2.7 -6.8 -8.0 -2.8 Portugal 0.0 -2.9 1.9 -1.6 -3.1 -1.6 Portugal 0.5 -2.8 -1.5 -1.3 -3.4 0.8 Ireland -2.1 -5.5 -0.8 1.4 0.0 1.0 Ireland -0.7 -7.9 -4.0 -1.8 -0.8 -0.5 Poland 5.2 1.6 3.9 4.3 2.1 2.0 Poland 3.7 0.4 0.6 1.1 0.3 0.3 Russia 5.3 -7.8 4.3 4.4 3.6 3.5 Russia 0.5 -2.2 0.5 1.4 1.0 2.0

68 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� European Outlook

France will fall back into a mild recession ish sovereign debt Chart 5: Fiscal Austerity Not Finished as real GDP contracts in the fourth quarter yields will remain Fiscal balance, % of GDP, 2011 of 2012 and early 2013. High labor costs will elevated. Although Surplus contribute to a high unemployment rate, recapitalization of 0 to -3.7 which will hit a 13-year peak in the first half Spanish banks has -3.7 to -7 of 2013. Additionally, the government’s been under way, -7 or more commitment to reducing its large fiscal defi- falling house prices, cit to 3% of GDP will prevent the public sec- rising unemploy- tor from adding to growth. Credit will remain ment, and consider- tight because of French bank exposure to the able opposition to sovereign debt crisis and falling house prices. austerity measures Deteriorating house prices in the Neth- that are needed to erlands will limit real GDP growth in 2013 to bring down interest a mere 0.6%. House prices are down about rates will plague the Sources: Eurostat, OECD, Moody’s Analytics

8% from a year ago, weighing on construc- banking industry. 5 tion and the production of raw materials Additionally, cuts to public sector worker pay their trade and financial linkages with the such as wood. Investment spending also will and increases to the VAT rate will push pri- rest of the euro zone. be hit hard and will not return to growth un- vate consumption down further in 2013. til the middle of 2013. Private consumption Portugal’s recession will be even deeper. Key assumptions will also remain weak. GDP is projected to decline an additional To tackle public sector deficits, most In the U.K., GDP growth in 2013 should 1.6% in 2013. Consumption has contracted European countries will proceed with aus- firm modestly to 1% as investment and con- sharply as deleveraging continues and resi- terity policies (see Chart 5). Countries with sumption improve. The Bank of England will dents make up for their history of low saving. little fiscal space such as Italy and Spain maintain accommodative monetary policy, The government announced increases in tax- face strong pressure to reduce government with rates expected to stay at 0.5% through es on income to meet deficit targets plus ex- spending, but those countries at the center the end of 2014. The public sector will weigh penditure cuts through 2014. However, fiscal of the crisis—Greece, Ireland and Portu- heavily on the economy, and more govern- austerity has weighed so heavily on output gal—and the U.K. will experience the biggest ment layoffs can be expected, contributing that the so-called troika—the International cutbacks. In contrast, the Scandinavian and to rising unemployment in the first half of Monetary Fund, EU, and ECB—is extending CEE countries have more fiscal space and are 2013. “Back-to-work” policies have yet to deficit reduction deadlines to reduce the under less pressure to cut spending. help many of the long-term unemployed find economic pain as the country makes its way European leaders will continue policy jobs and the large numbers of youth who to a sustainable debt-to-GDP ratio. initiatives to reduce sovereign debt growth are unemployed and not in school will drag The completion of a Greek bond buy- and to stabilize the banking industry, though long-term growth down. back program will allow official creditors to progress in resolving the debt crisis will be Italian GDP will fall again in 2013 by an reduce interest rates slightly and to extend slow. Further, bank reform and debt restruc- additional 0.5%. Fiscal drag from austerity maturities. Although this is a step in the turings will face political hurdles and require measures will weigh heavily. Further, credit right direction, further write-downs will be time to gain consensus. The ECB has gained is expected to tighten despite rising deposits required and the debt-to-GDP ratio will not considerable power to lower bond yields because of the rise in nonperforming loans. fall to a sustainable level until 2021 at the through open-ended sovereign bond pur- Weak exports will weigh on manufacturing. earliest. Real GDP in 2013 will contract by chases and to recapitalize struggling banks The only positive factor that may arise would more than 4.5%. through a newly approved single banking be government cuts in income tax rates for The Central and Eastern Europe countries supervisor. The supervisor should be in place the lowest wage earners, which will provide will outperform those in Western Europe, de- in March and will have the ability to shut some support to spending in 2013. spite close ties between the regions. Russia’s down unsafe lenders and to force banks to Spain’s contraction in 2013 will be more strong domestic demand and rising indus- raise capital. Other policy steps may include severe than that of Italy, with a decline in trial output will keep its economy growing pan-European deposit insurance, deeper fis- real GDP of 1.5%. Despite the possibility of at 3.6% in 2013, following a nearly equal cal integration, and a full banking union. having the ECB buy Spanish debt through its 3.5% pace this year. Likewise, Poland is still The ECB is expected to keep rates at Outright Monetary Transactions program, performing relatively well and should expand 0.75% until the fourth quarter of 2014, when Spain has not asked for additional assistance by more than 2% in both 2012 and 2013. they will increase to 1%. Monetary policy at to avoid the fiscal discipline required as a However, Hungary, the Czech Republic, and the Bank of England, Bank of Japan, and the condition for the assistance. Hence, Span- Slovenia will remain in recession because of Federal Reserve will also remain accommo-

MOODY’S ANALYTICS / Regional Financial Review / December 2012 69 ANALYSIS �� European Outlook

Chart 6: Low Policy Rates for Two More Years Nevertheless, out- coalition government in Greece and popular Monetary policy rate, % put growth in East rejection of the bailout terms could ac- 6 Asia is projected to celerate the country’s departure from the Fed BoE ECB stay below trend euro zone. In that event, contagion could 5 in 2013 because trigger an even deeper and more protracted 4 of the European recession in the euro area. A similar risk is recession and a secession crisis in Spain, brought on by 3 uncertainty as- the Catalonian push for independence. In 2 sociated with the general, the European crisis could deepen sovereign debt and as intense economic pain leads to social 1 banking crisis. unrest in any of the fiscally stressed euro 0 Oil prices will area countries, bringing about the demise of 06 07 08 09 10 11 12 13F 14F 15F 16F rise only moderate- pro-euro, pro-bailout governments. On the Sources: National statistical offices and central banks, Moody’s Analytics ly in 2013 because upside, policymakers could agree to focus on

6 of ample supply near-term growth-stimulating measures to dative, with low policy rates and expanding and a sluggish complement moves toward a tighter fiscal balance sheets (see Chart 6). The Federal global recovery. Additionally, it is assumed union. These actions would help to convince Reserve has pledged to maintain a “highly that tensions with Iran do not boil over into financial markets of the long-term viability accommodative stance” until the U.S. labor an overt conflict. of the monetary union. This would lower risk market improves considerably. aversion, strengthen confidence, and reduce GDP growth will remain higher in Forecast risks borrowing costs. Investment and consump- emerging markets than in Europe, provid- The risks to the outlook remain weighted tion spending would rise, and growth in the ing some support to exporters in Europe. to the downside. A collapse of the current region would be higher.

70 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� European Outlook

European Metro Area Outlook

The persistence of the euro zone reces- Included in this issue a six-year high, and an end to the French sion is increasingly weighing on major met- government’s opposition to pharmaceutical »» London »» Madrid ropolitan areas in the region. company Sanofi closing or selling its research »» Manchester »» Barcelona The London economy has declined facility would lead to job losses numbering in »» Paris »» Athens since the Olympics-charged third quarter. the hundreds. »» Toulouse »» Stockholm The purchasing managers’ index has fallen, Over the long term, however, there is »» Zurich »» Budapest particularly its employment component. some upside potential. Orders at Airbus, the »» Berlin »» Moscow The squeeze on banks is ongoing, and the metro area’s largest employer, have picked »» Hamburg »» Sofia financial industry could lay off an additional up since the EU suspended plans to impose »» Milan 13,000 in 2013, cutting industry employ- a levy on carbon dioxide emissions of flights ment to a 20-year low. In September, vacan- into and out of the region. Broad global de- cies in this industry hit their lowest level 4.8%, coming in at 5.6% in November. Long- mand for new energy-efficient commercial this year. The London unemployment rate is term unemployment is also above the U.K. aircraft remains quite strong. more than a full percentage point above the average and has risen sharply over the past Zurich is weathering Europe’s downturn national average and is likely to head higher year. The weak labour market and austerity so far, deriving support from the national through the first half of 2013. As a result, are drags on the important retail industry. economy, which in turn benefits from the other service providers and retailers will also Later in 2013, as the current cycle finally Swiss National Bank’s franc ceiling, which struggle amid austerity. winds down, growth in digital media, sports, has minimized the drag of a weakened euro. However, the metro area’s widely di- and culture-related industries and business Zurich’s employment rose in the first half versified economy will allow for continued, tourism will help bolster the recovery. of 2012, and the jobless rate is below the albeit below-potential growth in the com- The recession in Paris has deepened. The national average. House prices rose 3.8% ing year. Tourism, while easing somewhat, metro area’s jobless rate climbed to 8.4% in from the second through the third quarter of will remain a contributor to the economy. the second quarter, a two-year high, which 2012, lifted by in-migration and the fact that And ongoing major construction projects, has led to a weakening residential property regulations limit housing supply. However, along with new social housing projects, will market. The local Chamber of Licensed Zurich will not entirely escape the effects of bolster construction. Conveyance reported that the growth in the the euro zone recession. UBS has announced House prices in the capital are forecast to price per square meter for existing apart- significant job cuts, reflecting the risks to the grow by around 2.7% in 2013, little changed ments slowed in the third quarter to less metro area’s core financial industry from the from this year and well below their long- than 1%, the slowest pace in more than a debt crisis. term average of close to 9%. The 7% stamp year, and the price for existing houses fell for Despite a structurally weaker labour duty tax on properties worth more than £2 the first time in a number of years. market, Berlin appears to be performing million could weigh on the market more than Paris’ recession will continue as layoffs in a bit better than other parts of Germany. expected, but the combination of undersup- manufacturing and services weigh heavily on The unemployment rate declined about 2 ply and foreign demand will provide support consumer spending and housing. Job losses percentage points to 13.4% in August, and to prices. resulting from automaker Peugeot closing its vehicle sales have been rising since July. The Manchester economy is struggling local factory will number in the thousands. An increasing orientation of the economy amid weak manufacturing. The purchasing Furthermore, Paris-based French banks will toward services is part of the explanation. managers’ index for the wider North-West cut hundreds of positions. BASF now employs 1,000 workers in such area dropped sharply during the summer, in- Longer term, a U.K. boycott of Europe’s jobs in the Friedrichshain-Kreuzberg district. dicating contraction, and the industrial com- move toward a banking union could attract Likewise, Deutsche Bank has 700 employees ponent remains depressed. The residential business from London to Paris, boosting in Charlotenburg. Further, Mercedes Bank market is also weak. In 2012, house prices financial services. has set up a service center in Berlin-Mitte declined more than in the U.K.’s other major Toulouse’s recession has moderated in that will add 500 jobs in the next several metro areas, including London, Edinburgh, part because of gains in tourism. The number years. Amazon built its center in this same Leeds, Newcastle and Bristol. of passengers through the local airport in district. In recent years, a number of global As a result, the labour market remains un- November was 10% higher than in the same services companies have chosen Berlin for der pressure. The claimant count unemploy- month of 2011. Still, the metro area’s un- their headquarters such as Deutsche Bahn ment rate is above the national average of employment rate has risen to around 10%, AG, Siemens AG, Deutsche Telekom AG, and

MOODY’S ANALYTICS / Regional Financial Review / December 2012 71 ANALYSIS �� European Outlook

Chart 7: Extreme Pressure on All Spanish Areas cies that provided austerity for Italy, and Milan in particular, Unemployment rate, % strong incentives is uncertain. Ultimately, Milan’s economic 40 Palma de Majorca Malaga Seville to overbuild in the diversity will allow it to perform better than Valencia Barcelona Madrid years leading up Naples or the more deeply troubled metro 30 to the 2008 reces- areas on the Southern Tier. sion. The recent New government cutbacks will mean bankruptcy at even more public sector layoffs and reduced 20 Bremen-based Be- payments to regional governments in Spain. luga Reederei cost Madrid’s high concentration of public em- 10 that port city some ployment means that it will feel the largest 550 jobs. Continued direct impact. Further, the reduced flow 0 weakness in global of funds will impede its own efforts to tap 07 08 09 10 11 12 trade could lead capital markets to support infrastructure Sources: National statistics office, Moody’s Analytics to similar losses developments such as the planned theme

7 in Hamburg. park EuroVegas. Further, although the ef- Daimler AG. In the short term, the economy The outlook for shipping has consequenc- fect of fiscal policy on Barcelona will be will get a boost from organizing Berlinale, an es beyond the port. German banks invested proportionately smaller, the recent call for international film festival that will take place heavily in the now-precarious shippers. Na- political separation of Catalonia from Spain in February. tional institutions such as Hamburg’s HSH has hard-to-predict implications for the Hamburg, Germany’s second largest Nordbank, already facing tighter capitaliza- metro area. In general, no metro area in the metro area, faces a weak near-term out- tion requirements because of Basel III, could country will escape from the deep recession look because of its strong ties to foreign face major losses. Since Hamburg and the soon (see Chart 7). trade. At 7.1%, the official unemploy- neighboring state of Schleswig-Holstein are The latest agreement on the Greek ment rate is slightly higher than the 6.5% part owners of the bank, they could be on bailout, which will reduce its external debt national average. the line for as much as $1.3 billion in taxpay- significantly, boosted investor sentiment Third quarter year-to-date volume at er-funded bailouts. temporarily but will not result in any near- the Port of Hamburg fell 0.8% compared Milan’s economy remains weak, and the term improvement in the Athens economy. with the same period in 2011 as the world announcement by Unicredit that it will lay Both the country and the metro area remain shipping industry entered its fifth year of off a total of about 6,000 well-paid financial in deep recession, with unemployment rates contraction. As is typically the case, weak professionals by 2015 will hit the country’s above 25%, and the deal will add to the regional European trade has more than offset financial center. However, the public sector pressure to engage in the further fiscal cuts the effect of improved exports to markets job cuts of 10% proposed by Prime Minister required to aim toward sustainability. further afield, including the U.S. Mario Monti in early November are now less In sharp contrast, Oslo is among the German shipping companies have been likely to occur since his resignation on De- strongest-performing European metro area particularly hard-hit because of tax poli- cember 21. Consequently, the course of fiscal economies. Employment and disposable in-

Real GDP, local currency units, % change Total employment, % change

2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 London 1.3 -6.1 1.4 1.6 0.8 1.4 London 2.0 -1.3 0.9 1.3 0.6 0.2 Paris 0.3 -1.5 2.0 0.9 0.0 0.2 Paris 1.5 -0.7 0.2 -0.2 -0.7 0.6 Frankfurt 1.7 -4.4 3.5 3.2 1.0 1.1 Frankfurt 0.8 -0.4 0.5 0.9 0.8 0.1 Madrid 1.1 -2.3 -0.6 0.7 -0.7 -1.2 Madrid 0.4 -4.8 -1.5 -2.0 -5.1 -1.9 Moscow 7.9 -15.4 6.5 5.3 3.4 5.1 Moscow 0.8 -2.2 0.8 2.0 0.6 1.4 Stockholm -0.1 -3.4 6.2 4.5 2.6 2.9 Stockholm 3.3 0.6 1.3 2.2 1.2 1.0 Athens 0.6 -2.0 0.6 -5.6 -6.6 -9.4 Athens 2.1 -1.2 -3.3 -6.4 -7.3 -0.9 Dublin -2.6 -7.6 -0.7 1.7 0.4 0.9 Dublin -1.0 -8.0 -3.7 -2.2 -0.4 0.3 Warsaw 2.0 -0.8 4.1 3.9 2.3 1.1 Warsaw 9.1 0.5 3.2 2.8 1.2 0.9 Amsterdam 1.6 -3.7 1.4 0.8 -0.7 0.5 Amsterdam 4.4 0.5 -1.1 0.4 0.0 -0.8

72 MOODY’S ANALYTICS / Regional Financial Review / December 2012 ANALYSIS �� European Outlook

come are rising, and house prices have risen nearly a fifth of total population and an even year. Construction has risen even more significantly over the past year. Although larger share of economic activity. Govern- sharply, and retail sales are up as well. Public global energy prices have fallen from their ment budget cuts and rising unemploy- spending is supporting construction and in- May peak, they remain high enough to sus- ment have reduced disposable income and vestment spending as the City of Moscow’s tain the national government’s surplus. This, household spending. budget is up by 32% over the year, with in turn, has allowed for public spending to However, growing exports of information spending going to modernization and expan- increase, reducing reliance upon slowing technology and equipment have provided off- sion of the transportation network, housing exports for economic growth and thereby setting support. Demand is coming from grow- stock and utilities infrastructure. limiting the impact of the euro zone reces- ing economies in the Middle East, Asia, Africa, The metro area will grow over the next sion. Oslo will expand in 2013, driven mostly and South America, and the government has several years. In December, the local govern- by growth in its service industries. contributed by promoting such exports vigor- ment introduced legislation to decrease the Stockholm has slowed down relative ously in emerging markets. Moreover, pro- tax burden on innovation-oriented high-tech to Oslo. However, previous gains in em- duction of luxury Mercedes-Benz cars, slated enterprises. Such enterprises would enjoy ployment through mid-2012 support the mostly for export markets, will increasingly no property taxes and a reduced corporate above-average performance of its service support the economy. The company’s Kecske- profit tax rate. industries. Further, fiscal discipline has kept met plant in the metro area has been rolling Sofia’s economy, which accounts for the national budget near balance. The metro out Mercedes-Benz A and B class models since more than 30% of the Bulgarian economy, area continues to attract Sweden’s best- March. Right now, output remains well below will follow the positive trends of the national educated workers. capacity because of the euro zone recession, economy. The national government budget In Stockholm’s housing market, problems but the plant will be an important driver of is in balance, and real GDP should grow at are on the supply side. Sweden’s restrictive local gains later in 2013. Rising demand for a moderate 1.4% in 2013. Sofia’s municipal rent control laws lead to underinvestment in premium cars and rising labor costs in Western budget for 2013 will allow for increased rental housing, and as a result, multifamily Europe have made Eastern Europe attractive funds for education and street maintenance. housing starts are down on a year-over-year for higher-value automobile production. Further, the metro area will obtain funds basis, limiting the pace at which younger Moscow continues to outperform most from European programs to aid with the workers can relocate to the area. other European metro areas and has avoided construction of its subway, airport, and a Hungary’s economic downturn is evident recession. Manufacturing and business in- business park. No increases in local taxes and in Budapest; the metro area accounts for vestment are each up about 20% year over fees will be proposed for the next year.

MOODY’S ANALYTICS / Regional Financial Review / December 2012 73 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Northeast

Slew of Uncertainties Dampen 2013 Northeast Outlook

BY SOHINI CHOWDHURY

he Northeast recovery is lagging those of the other regions. Nowhere is this more evident than in the labor market. The region’s sluggish rate of job growth is matched by weak worker confidence, and despite T a rise in advertised openings, many go unfilled. The outward shift of the Beveridge curve—illustrating the relationship between the rates of job openings and unemployment—suggests that employers in the Northeast perceive greater risks to the economy in the near term and are hiring more cautiously. The Northeast is the only region where the unemployment rate has deteriorated over the past year. Although the West has a higher jobless rate, its steadily improving labor market means that the Northeast is quickly falling behind.

Overall job growth in the Northeast Included in this issue the summer. New York and New Jersey have will lag that of the rest of the U.S. in 2013, already requested billions of dollars in aid »» Connecticut...... 77 despite the boost to construction payrolls from the Federal Emergency Management »» Delaware...... 78 from Hurricane Sandy. One reason is weak Agency, and recovery has begun in earnest, »» District of Columbia...... 79 export demand from recession-stricken including the expansion of some tempo- »» Maryland...... 80 Europe, which will weigh on transportation rary shelter—the former Fort Monmouth »» Massachusetts...... 81 and manufacturing in New England and the Army base, for example, will accommodate »» New Jersey...... 82 Mid-Atlantic, given the regions’ geographi- 600 people. Also, to the extent that rebuilt »» New York...... 83 cal proximity and close ties with the Old infrastructure will be more flood- and wind- »» Pennsylvania...... 85 World; the EU accounts for more than 35% resistant, Sandy could even result in a net of total exports from Connecticut and Mas- improvement in the Northeast economy. sachusetts, and a quarter of all exports from that would mitigate the cliff, but not eliminate Unfortunately, even the boost from New Jersey and New York. it. Because Northeast states are among the Sandy-related rebuilding will not be enough The Northeast labor market will also feel nation’s wealthiest, higher tax rates on the to offset the drag from foreclosures in the the pinch from further payroll cuts by Wall rich will weigh on near-term confidence and Northeast in 2013. According to data from Street banks intended to maintain profits in spending. Sequestration would also hit the CoreLogic, the number of completed fore- the wake of lower revenues and tighter capi- Washington DC area with its heavy reliance on closures fell nationwide in October over tal requirements. Nearly every major bank, federal procurement and federal wages and its the year, but rose in the Northeast. One including Deutsche Bank, JPMorgan, Credit large contingent of defense contractors. reason is that foreclosures take longer to Suisse, Barclays, and Bank of America, have Rebuilding in the wake of Hurricane clear in most Northeast states because they handed out pink slips to thousands of em- Sandy, primarily in the New York City metro must pass through the courts. On average, ployees in New York City. In the latest round area and the Jersey Shore, will offset some of New York and New Jersey have the longest of layoffs, UBS and Citibank will each trim the region’s weakness and help construction foreclosure time lines in the nation. The their global workforce by more than 10,000 jobs to recover faster than earlier predicted, two states also have the highest foreclosure in 2013, with Stamford CT and Manhattan especially because the reconstruction will inventory as a percentage of all mortgaged bearing the brunt of these cuts. Since financial create construction jobs in traditionally lean homes, behind only Florida. However, some services account for a high share of wages in winter and spring. With insurance payments states are taking steps to tackle this crisis; the Northeast, the loss of these jobs, and their and federal aid gradually flowing in, repair New Jersey recently signed a bill that will wage and bonus payments, will hurt tax rev- of damaged infrastructure, homes and com- expedite foreclosures of vacant and aban- enues, consumer spending and home demand. mercial property will extend into the first doned homes and is also considering provid- The fiscal cliff adds to the near-term un- half of 2013. Rebuilding will be frantic at ing funding to turn foreclosed houses into certainty. The baseline forecast assumes a deal the Jersey Shore to get facilities in shape for affordable housing.

74 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Northeast

High-Frequency Indicators

Payroll Employment—Northeast States Payroll Employment—Northeast MSAs 1-yr vs. 3-mo performance (3-mo MA) Nov 2012 1-yr vs. 3-mo performance (3-mo MA) Nov 2012 Improving Expanding Improving Expanding Middle Atlantic 3 Middle Atlantic 6 New England Pennsylvania New England 5 Bethesda South Atlantic Maine South Atlantic 2 Maryland 4 Baltimore Rhode Island U.S. District Of Columbia Trenton 3 Boston Edison 1 Massachusetts Springfield 2 U.S. Philadelphia Wilmington New York New Haven Delaware 1 Pittsburgh Providence Newark 0 Washington New York -1 0 Vermont 1 2 0 Hartford Connecticut -1 0 1 2 3 New Hampshire Albany New Jersey -1 Camden -1 Manchester Harrisburg Syracuse Nassau Buffalo Annualized 3 - mo % change Annualized 3 - mo % change -2 Bridgeport Rochester Portland -2 -3 Contracting Slipping Contracting Slipping % change yr ago % change yr ago Note: Size reflects relative total employment Note: Size reflects relative total employment

1 2

Comparative Performance Indicators

3-mo MA, % change from previous 3-mo period, Nov 2012 Private service- providing Current Change in Change in employment unemployment unemployment Residential Industrial Overall recent outlook from (annualized) rate rate permits production performance last month Albany -1.3 6.9 -0.3 49.9 1.9 ↑ ↑ Bethesda 2.9 5.9 0.0 -22.1 2.9 ↑ ↓ Buffalo 0.2 8.2 -0.3 60.5 2.1 ↑ ↔ Cambridge 1.0 7.6 -0.2 -7.6 3.5 ↑ ↔ Nassau-Suffolk 4.1 7.2 -0.2 -3.4 2.3 ↑ ↑ New Haven 3.4 10.1 0.5 43.3 2.2 ↑ ↑ New York 2.4 9.7 -0.3 -45.4 2.0 ↑ ↑ Hartford -1.9 9.3 0.6 -28.3 0.9 ↓ ↓ Allentown -1.6 9.8 0.1 -31.9 1.9 ↔ ↓ Baltimore 0.5 8.2 0.4 -7.9 2.6 ↔ ↓ Boston 1.2 8.9 -0.1 4.9 2.2 ↔ ↔ Camden -2.2 10.2 -0.0 -46.2 2.7 ↔ ↑ Edison -1.2 9.3 -0.1 0.3 2.1 ↔ ↓ Newark -0.2 9.7 -0.1 10.2 2.0 ↔ ↓ Philadelphia 0.2 8.8 0.3 -23.1 1.7 ↔ ↓ Pittsburgh 0.3 8.5 0.5 -15.0 2.6 ↔ ↔ Providence -0.2 12.4 0.0 -28.8 2.0 ↔ ↑ Rochester -0.6 7.9 -0.3 -30.9 2.9 ↔ ↑ Washington 1.9 6.9 0.3 -17.3 2.2 ↔ ↓ Wilmington 1.3 9.5 0.4 4.3 -0.1 ↔ ↓ Northeast 1.2 9.1 0.1 -9.3 2.2 ↑ ↔ U.S. 0.6 9.7 -0.3 1.7 1.9 ↑ ↔ Sources: BLS, Census Bureau, Federal Reserve, Moody’s Analytics

MOODY’S ANALYTICS / Regional Financial Review / December 2012 75 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Northeast

What We’re Watching

Europe Crisis Batters Northeast Trade Rising Foreclosure Inventory Hurts Housing Exports of goods and commodities, % change yr ago, 3-mo MA Mortgage foreclosure inventory per 1,000 households, NSA 35 35 Includes preforeclosure, auction and REO properties 30 30 25 20 25 15 20 10 5 15 0 10 -5 Northeast Midwest South West 5 -10 Northeast Midwest South West -15 0 10 11 12 08 09 10 11 12 Sources: Census Bureau, Moody’s Analytics Sources: RealtyTrac, Moody’s Analytics

1 2

Cyclical Indicators

Employment Housing Starts Personal Income 1998=100 3-mo MA, 1998=100 Yr/Yr Growth Rate 112 180 12 10 110 160 140 8 108 6 120 4 106 100 2 104 80 0 60 102 -2 40 -4 100 20 -6 98 0 -8 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12

U.S. Northeast U.S. Northeast U.S. Northeast Unemployment Rate (%) Median House Price (Existing) Personal Bankruptcy Filings 3-mo MA, Yr/Yr Growth Rate 1998=100 11 30 250 10 20 200 9 10 150 8 7 0 100 6 -10 50 5 -20 0 4 3 -30 -50 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12

U.S. Northeast U.S. Northeast U.S. Northeast

Sources: BEA, BLS, Federal District Courts, NAR, Moody’s Analytics

76 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Northeast

Connecticut

Connecticut’s recovery continues to move at a snail’s pace. In rolls at worst. The Sikorsky plant in Stratford, in particular, remains October, the economy added barely 1,000 new jobs, leaving the vulnerable to defense sequestration cuts in helicopter orders, while unemployment rate stuck at 9%. The slower pace of recovery also professional/business services have also trimmed workers in the past adds up to lower than expected tax revenues, which will necessitate few months. However, Fairfield County did suffer more damage from more fiscal tightening in the coming year. The positive effects from Sandy than the other coastal counties in the state and will benefit Hurricane Sandy reconstruction will prop up the economy in the from a blip in construction activity in coming months. coming months, but the state’s outlook has been adjusted slightly Hartford managed a slight increase in payrolls in September and Oc- downward, mainly because of fiscal drag that will pull on local gov- tober but still has a downward employment trend through 2012 because ernment and casino payrolls. of declining insurance and local government payrolls. However, the The costs of Hurricane Sandy to the state are estimated to be expansion of the University of Connecticut Health Center at Farmington well more than $360 million in property damage alone, according to will help boost healthcare employment in 2013. Unfortunately, risks are mid-November estimates; since this assessment probably increased still weighted to the downside. Pratt & Whitney and UTC Aerospace Sys- since then and the effects of lost output and income need to be con- tems may be hurt by sequestration cutbacks. More importantly, another sidered, the state is most likely looking at close to $1 billion in total round of state fiscal tightening may be in order. Because of slow growth, hurricane costs. Some upside risks, however, are present in Governor state revenues slipped 2% in the third quarter, more than predicted and Dan Malloy’s request of $3.2 billion from the federal government for quite likely to precipitate another round of state spending cuts at a time future storm preparation. If most of this request is approved by Con- when the economy can least afford them, especially if the federal gov- gress, it will lead to a short-term jump in nonresidential construction ernment also steps over the fiscal cliff. As always, the worst effects may in the state, especially in coastal cities. be indirect: cuts to local government payrolls due to reduced state aid to However, the short-term boost to construction from the hur- county and city governments. ricane will not be immediately accompanied by a burst in new-home Employment in New Haven remains flat, not what the metro permits. Connecticut still has a large shadow inventory of foreclosed area needs if it is to dent its unemployment rate, which is close to homes and delinquent mortgages. The lack of upward price expecta- 10%. As in much of the last year, most industries in the metro area, tions in the short term is evident: Sales since early 2009 have been other than higher education and healthcare, have stagnated. On flat with the exception of the brief boost provided by the homebuyer the plus side, manufacturing in New Haven is more diversified, and tax credits. Only multifamily construction has increased strongly therefore less vulnerable to sequestration cuts, than in neighboring over the past year, but the multifamily market will level out in the Bridgeport and Hartford. coming year given the expected increase in supply and the slowing Norwich remains stuck in recession. Tourist activity at the Fox- growth of rents, while single-family sales and starts are unlikely to woods and Mohegan Sun casinos continues to decline, and as ex- start rising in earnest before 2014. pected, November slot machine revenues were lower than the previ- Though its job total is still trending flat over the past year, Bridge- ous year and hurt by the Hurricane Sandy aftermath. It is likely that port reported the third month of slight losses in October. The securi- a few more months of falling activity will see renewed layoffs at both ties industry most likely is still hiring, but most of the metro area’s casinos, further pulling down the metro area. other flagship industries are moving sideways at best or cutting pay- ——ANDRES CARBACHO-BURGOS

Connecticut’s Recovery Is Stalling Home Sales Are Still at Bottom Yr-over-yr change in employment, ths, by MSA Existing single-family home sales, ths, SAAR, 3-mo MA 30 60 Norwich Rest of state 25 New Haven 50 Norwich 20 Hartford New Haven 40 15 Bridgeport Bridgeport Hartford 10 30 5 20 0 -5 10 -10 0 11 12 00 01 02 03 04 05 06 07 08 09 10 11 12 Sources: BLS, Moody’s Analytics Sources: CoreLogic, Moody’s Analytics

1 2 MOODY’S ANALYTICS / Regional Financial Review / December 2012 77 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Northeast

Delaware

Delaware’s economy is not going anywhere fast and the risks of equity market declines, which, in turn, would drag on the wealth of recession have risen. Nowhere are the warning signs more apparent the area’s above-average share of affluent households. than in the state’s woeful labor market. A steady loss of jobs over the Ironically, Wilmington is the lone bright spot in Delaware. Unlike past six months has pushed payroll employment back below year- elsewhere in the state, local job growth has maintained momen- ago levels for the first time since late 2011. Raising additional red tum, accelerating on a year-ago basis to a pace more in line with flags is the increasing prevalence of the slump. The share of industries the national average. Downsizing in its outsize professional/business adding to their staff or keeping headcount stable has fallen to less services is subsiding and a pre-holiday season ramp-up in hiring at than one-third; the last time this level was breached was early 2009 Amazon’s new fulfillment center is boosting transportation employ- while the state was in the midst of the Great Recession. However, ment. The metro area also got some reassuring news from Citigroup; falling unemployment insurance claims indicate that while business- the bank told state officials that none of its recently announced es have grown increasingly cautious with respect to investment and 11,000 global job cuts will take place in Delaware. To this point, it is hiring plans, they are not panicking just yet. The near-term outlook imperative that Wilmington’s vital financial district remains relatively for job growth in the state has been downgraded for several months sheltered from any large-scale cost-cutting restructuring of its large running because of the recent struggles. Nonetheless, gains are ex- banking institutions for its recovery to stay on track. pected to be slow but steady in the next six to nine months before Dover’s recovery has backtracked markedly in recent months accelerating along with the rest of the country late next year. and risks are rising that the metro area could fall back into reces- Concurrent with expectations for a rebound in its labor market, sion. An overwhelming majority of industries are contracting and Delaware, and both of its metro areas, should avoid falling back into anecdotal evidence of an improving housing market has yet to recession. However, the biggest question mark for the First State, like show up in the data. Labor market conditions would be worse if it much of the nation, is federal policymakers’ handling of the looming were not for expansion of state-run institutions. Indeed, Delaware fiscal cliff and the response of private businesses to any outcome. If State University recently announced a $10.5 million grant to fund Washington can come to a substantive and durable agreement in a the creation of the Delaware Center for Neuroscience Research at somewhat reasonable amount of time, as assumed in the baseline, its Dover campus. the statewide recovery will persevere. On a brighter note, in contrast to other nearby Mid-Atlantic On the other hand, if no action is taken and all of the cliff-related states, Delaware made it through Superstorm Sandy relatively tax hikes and spending cuts are enacted on January 1, it is highly unscathed and, thus, did not require any material changes to the unlikely Delaware will avoid recession. To be sure, if such a scenario forecast. The hardest-hit area was the rural Sussex County, with the played out, the state economy is projected to take a much larger hit Dover and Wilmington metro areas insulated from the brunt of the than that of the nation by any measure: Output, employment and in- storm. The Federal Reserve’s Beige Book noted tourist areas on the come would fall further next year. Of the two metro areas, Wilming- Delaware shore were affected but had limited damage and are largely ton would suffer disproportionately. In addition to its highly concen- open for business. Current estimates of storm-related damage are trated credit card industry losing out in the wake of across-the-board about $6 million, a far cry from the multibillion-dollar tolls on the tax hikes and depressed consumer confidence, the initial shock of go- New Jersey and New York economies. ing over the cliff would cause severe financial market panic and sharp ——Tim Daigle

Delaware at Risk as Labor Market Deteriorates Fiscal Cliff Looms Large in Wilmington Payroll employment, 3-mo diffusion index, 4 digit NAICS level Diff in forecast, fiscal cliff vs. baseline, ppt inverted, 2013Q4 80 -5.5 Delaware U.S. GDP Personal income Payroll employment -5.0 70 -4.5 60 -4.0 50 -3.5 40 -3.0 -2.5 30 -2.0 20 -1.5 10 -1.0 06 07 08 09 10 11 12 Wilmington Delaware Dover

Sources: BLS, Moody’s Analytics Source: Moody’s Analytics

1 2 78 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Northeast

District of Columbia

The District of Columbia’s recovery has slowed to a crawl. The not changed since summer, but the concomitant risks have heated federal government continues to hamstring progress, and the private to a boil. sector is locked in a holding pattern as firms brace for the unnerv- A legislative misstep carries extensive consequences for the local ing fiscal cliff. Payroll employment is virtually unchanged from six economy. Slated tax hikes would be painful for the entire country, months ago, but the coinciding unemployment rate decline offers but sequestration would be disproportionately harmful to the DC the encouraging caveat that residents are successfully finding jobs in economy. The nondefense portion of scheduled across-the-board DC’s suburbs. spending cuts is most threatening to the district’s 200,000 federal Unlike its hard-hit neighbors in the Northeast, DC weathered employees. Some federal officials estimate that tens of thousands Hurricane Sandy with minimal structural or economic damage. of furloughs would be necessary. In addition, about 16% of DC’s Moody’s Analytics estimates that DC incurred, at most, $800 gross product originates from federal contracts awarded to private million in lost output, or less than two days’ worth, which can- companies. National contract spending fell sharply in 2012 as agen- not be recouped. Although not insignificant, the losses are far cies reined in costs ahead of possibly steeper cuts in fiscal 2013. On less severe than in Greater New York, which lost more than two the upside, Congress will have some time to reverse the automatic days of output totaling in the billions of dollars. The federal gov- spending cuts, even if it does not address the issue before January. ernment shut down for two full days, but this had no economic By law, sequestration caps budget appropriations rather than out- impact since employees were paid despite the closure. Relatively lays, meaning that actual spending cuts would be gradually realized few power outages also allowed many business professionals to over 2013 rather than bearing an abrupt blow. work from home. Retailers and tourist services suffered the most, Federal government consolidation over the next decade could as many permanently missed out on several days of revenue. impede DC’s demographic awakening. In 2011, population growth The local government reported minor instances of infrastructure in DC outpaced the Washington-Arlington-Alexandria metro damage, but the $4 million in federal aid will easily cover repairs. area for the third consecutive year and was the highest in the U.S., Sandy’s impact is inconsequential for fourth quarter output and barring North Dakota. The labor force too is growing faster in DC the employment forecast, and DC will miss out on the subsequent than in the Washington metro area, and multifamily permitting is construction boost that hard-hit areas will receive during their running at more than double the previous all-time high. Mixed-use rebuilding efforts. development projects are spurring household formation in formerly With Hurricane Sandy in the rearview mirror and President undesirable neighborhoods, and the surfeit of new apartment sup- Obama re-elected, Washington’s attention is aimed squarely on ply is turning DC’s market in renters’ favor. Government hiring is a the fiscal cliff. The president and GOP leaders have laid out their major source of this revival, so the projected slowdown in federal broad fiscal plans and both sides have expressed willingness to employment growth could curb in-migration in the coming de- compromise, but a great deal of brinksmanship will need to occur in cade. This assumption has been built in to the population forecast, order for Congress to pass a bill that balances deficit reduction and relegating DC proper to a below-average demographic performer economic expansion. Congress will not solve all of the country’s in the Washington region, though better than other large cities in fiscal problems at once, but expectations are high that it will craft the Northeast. a reasonable and timely deal. This crucial forecast assumption has ——James Bohnaker

Sequestration a Grave Concern in DC Nation’s Capital Will Remain a Preferred City Federal procurement spending, % of nominal GDP, 2010 Population growth, %, avg over 2013-2022 18 Nondefense Washington* 16 Defense Richmond 14 District of Columbia 12 *Washington MSA ex District Wilmington 10 of Columbia 8 Baltimore 6 New York City 4 Boston *Washington 2 Northeast MSA ex District of Columbia 0 Philadelphia District of Washington* Maryland Virginia U.S. Columbia 0.0 0.2 0.4 0.6 0.8 1.0 1.2 Sources: Census Bureau, Moody’s Analytics Sources: Census Bureau, Moody’s Analytics

1 2 MOODY’S ANALYTICS / Regional Financial Review / December 2012 79 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Northeast

Maryland

Maryland’s economy has taken a step forward over the past on access to Washington DC’s businesses and federal funds and few months and is now leading the Northeast, but its performance an exceptionally well-educated workforce. Healthcare employs still trails that of the rest of the nation. Private sector employment one in every five Bethesda residents, and the metro area has growth is relatively robust, with more than half of industries adding grown twice as fast as the state over the last year, boasting an jobs; the unemployment rate remains low, and wage incomes are unemployment rate of 5%, significantly better than the state and growing faster than the national average. Still, employment growth national averages. is barely more than 1% on a year-ago basis, and next year’s outlook State and regional virtues will turn to vices if Congress fails is comparable. Barring the shock of full federal fiscal sequestration, to avert the federal fiscal cliff in 2013. Maryland is home to Maryland will add around 30,000 jobs in 2013, somewhat lagging its more than double the average share of federal employees, and pace of job creation in 2011 and 2012. Bethesda is home to quadruple the average. Maryland also re- Maryland’s job gains this year have been concentrated in high- ceives 9% of its gross product in the form of federal contracts and skilled, high-paying services. Since October 2011, scientific and grants, more than twice as much as other states. The full seques- technical services have grown by 6%, about twice the national ter would cut federal aid by 8.2% across the board, devastating rate. The state government gets some of the credit; since the onset Maryland’s biggest employers. Bethesda’s National Institutes of of the Great Recession, it has used tax credits and capital infusion Health, the nation’s biggest distributor of biomedical research programs to foster growth and attract out-of-state firms. This year, funding, would alone lose $3.9 billion. Johns Hopkins University the government venture capital initiative, InvestMaryland, raised System, which annually receives more NIH funding than any $84 million through tax credits that will fund tech startups in other healthcare research group in the country, stands to lose a 2013. Since 2007, Maryland’s Biotechnology Tax Credit has doled lot. The National Security Agency’s Cyber Command and other out $6 million per year to the large industry. Representing more components of Fort Meade would also face stiff funding short- than half the state’s workforce, Baltimore perennially has received ages. These losses would spread into private health and defense the bulk of such stimulus. The city has a big technology footprint, consulting and contracting markets. All told, the state would lose supplements state aid with a microloan program, and supports in- around 60,000 jobs and $200 million in tax revenues and likely cubators and business parks that centralize resources, including the go into recession. Emerging Technology Centers and the BioPark at the University of Casino revenues, however, could take away some of the sting Maryland, Baltimore. Service jobs are expected to lead state pay- from the state budget. Gaming contributed $43 million, or about rolls in the long term. 3%, of Maryland’s tax revenues in November. Recently, voters ap- The Old Line State’s services are benefiting from additional proved a ballot measure allowing casinos to boost earnings by op- demand for health-related services. The Affordable Care Act will erating around the clock and with table games such as blackjack and boost federal health spending in the short term and has led to roulette. Developers are also expanding and building facilities across a boom in health consulting. Private companies and govern- the state, which will boost construction and leisure and hospitality ment agencies are increasingly seeking professional assistance payrolls. Longer-term contributions will be more modest since rela- to navigate the regulatory thicket of the new law. As a national tively few of the permanent jobs are high-paying. center for health research, Bethesda leads the way, capitalizing ——Bradley turner

Sequestration Is a Big Risk in Maryland Credit Quality Remains Comparatively Weak Employment, % change yr ago Delinquency rate, % by $ volume, NSA, Nov 2012 5 Maryland baseline Bankcard Maryland 4 Maryland under fiscal cliff Home equity U.S. 3 Bethesda under fiscal cliff Baltimore under fiscal cliff Auto 2 1 Student loan 0 Total

-1 Consumer finance

-2 First mortgage -3 12 13F 14F 15F 3 5 7 9 Sources: BLS, Moody’s Analytics Sources: Equifax, Moody’s Analytics

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80 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Northeast

Massachusetts

Massachusetts’ economy continues to strengthen after a lull in ware publishing, are well positioned to pick up the slack. Still, growth the third quarter. In addition to professional/business services, con- will slow sharply, and the metro division won’t outperform the rest of struction and financial activities employment has been trending high- the state to the extent it did in 2012. er recently as well. The state also will likely receive significant upward Boston’s recovery next year will be driven in large part by the revisions to employment growth, especially in financial, education/ rebound in residential construction. Growth has been particularly health and leisure/hospitality services, when the Bureau of Labor Sta- strong in the multifamily market; for the three months ending in tistics releases its annual benchmark revisions in March. October, multifamily housing permits were at their highest level in The residential real estate market, which has been a drag on the more than five years. The Seaport District has been the source of state’s economy for so many years, is becoming an increasingly impor- much of this growth, with major projects such as Waterside Place tant source of growth. Both single and multifamily housing permits and the Boston Wharf Tower having broken ground recently. Nation- are substantially above their cycle lows, and house prices in many wide, the sharp increase in the demand for apartments is due to a areas are rising. However, the rebound in construction has not been couple of reasons. There is an increased aversion to taking on debt for uniform across the state. While permit issuance has soared in Boston home purchases, and although banks have loosened their mortgage and Cambridge, it has been trending lower in Springfield and Worces- lending standards, access to credit for younger borrowers with little ter. Manufacturing is growing, but is being held back by weak foreign to no credit history remains limited. Boston has been no exception to demand. Payrolls are less than 2% above their trough reached in late this trend, which is likely to be maintained over the next year. Con- 2009, compared with growth of more than 4% nationwide. The euro sequently, multifamily construction will account for an increasingly zone recession has hampered the industry’s recovery, and with near- large portion of overall residential construction in the metro division term prospects for growth in the region still poor, manufacturers will in the near term. remain reliant on domestic demand. In the third quarter, manufactur- Leisure and hospitality will also play an important role in the ing exports were down more than 15% from a year earlier, compared state’s recovery next year. A Boston-Hyannis rail service will be open with growth of just over 2% for the U.S. Although exports to the Old by Memorial Day and should boost Cape Code tourism next summer. World have stabilized since the end of the first quarter, it is unlikely This will be the first passenger train service from Boston to Cape Cod they will record any significant growth over the next few quarters, in 25 years, and will provide another travel option for potential visi- particularly since the German economy, which accounts for roughly a tors who are turned off by the region’s notorious traffic. third of the state’s exports to the euro zone, has begun to weaken. Longer term, the construction of several casinos across the state The impending fiscal cliff poses a major downside risk to the near- will provide a major boost to the state’s hospitality industry and have term outlook for Cambridge, given the substantial number of defense a spillover effect on retail as well, even though the first casino license contractors in the area. Talks between House Republicans and the is not expected to be issued until early 2014, and construction will White House have made minimal progress, and it is looking increas- not be complete until the latter half of 2015. Delays in issuing the ingly likely that an agreement won’t be reached until the last minute, licenses are a downside risk, but the chairman of the Massachusetts if one is reached at all. However, even if no resolution is reached and Gaming Commission has stated that it is looking into ways to speed defense spending is cut, Cambridge won’t tumble back into recession up the approval process. since nondefense tech industries, such as biotechnology and soft- ——PATRICK ARMSTRONG

Euro Woes Hurting Manufacturers Housing Recovery Not Uniform Across State Manufacturing exports, % change yr ago, 3-mo MA Single-family housing permits, 2009Q1=100 30 180 Massachusetts U.S. Boston Cambridge Worcester Springfield 20 160

10 140

0 120

-10 100

-20 80

-30 60 07 08 09 10 11 12 09 10 11 12 Sources: Census Bureau, Moody’s Analytics Sources: Census Bureau, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 81 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Northeast

New Jersey

Labor market weakness is weighing on New Jersey’s recovery. The South Jersey office market is weaker. With small businesses According to the latest payroll survey data, the state lost more still downsizing, Camden’s offices, especially those that comprise than 11,000 jobs in October; only Michigan suffered a larger de- less than 10,000 square feet of space, are struggling to find ten- cline. The unemployment rate, at 9.7%, is significantly above the ants. But demand for larger quality office space is being propped up Mid-Atlantic’s and 2 percentage points higher than the U.S. aver- by the metro area’s concentration of healthcare providers. Cooper age. Even worse, the Moody’s Analytics Employment Diffusion University Hospital, Lourdes Health System, Virtua, and The Roth- Index has remained below the benchmark value of 50 for the better man Institute are opening new care centers and outpatient facilities part of the year, indicating that job gains have been concentrated in the area. Expanding the state Medicaid program under the Af- in a select few industries such as healthcare, retail, and profes- fordable Care Act will increase the number of people seeking medi- sional and business services. The Philadelphia Fed’s leading index cal benefits and further boost demand for health services. Over for New Jersey also has declined in recent months, and the fall the last year, healthcare has been the only bright spot in Camden’s in the average workweek suggests that more job losses could economy. With its unemployment rate nearly a percentage point be forthcoming. above New Jersey’s, Camden has the weakest labor market in the Layoffs are hurting all of the state’s metro areas. Newark is state, barring the tourism-centric economies of Atlantic City and particularly vulnerable to cutbacks in financial services because of Ocean City. its above-average exposure to banking and insurance services. The Revenue losses are driving many Atlantic City casinos near the finance industry is trimming its workforce and slashing bonuses as brink of bankruptcy. The $2.6 billion Revel resort, which opened this it grapples with tighter capital requirements and lower revenues. spring, is more than $1.3 billion in debt and $12 million overdue Nearly all of the 294 Citibank jobs to be culled in New Jersey in 2013 in its property tax payments. With revenues still weak, especially will be in Newark. Layoffs outside financial services are also weighing in the wake of Hurricane Sandy, the gambling house will likely be on income growth and spending. foreclosed. Since the casino is Atlantic City’s largest tax payer, its Camden, with per capita income that is only a fraction of the poor finances reflect on the city’s fiscal health and borrowing costs. state average, is among New Jersey’s poorest metro areas and will be Fortunately, local tourism stands to receive a shot in the arm from made even poorer when Hostess Brands Inc. shutters a Philadelphia the $27 million expansion completed at the Atlantic City Interna- bakery. Most of the bakery’s 300-plus employees live in Camden. tional Airport. The 750,000-square-feet expansion paves the way for Layoffs in New Jersey not only slow earnings growth but also increased air traffic, including Atlantic City’s first direct international dampen commercial real estate markets. Office vacancy rates in flight—to the Caribbean Islands. northern and central New Jersey are at decade highs, and rents have Edison’s outlook has not improved, as its two economic heavy- not been as low since 1998. However, with office space still expen- weights, retail and professional services, are not hiring. The biophar- sive in Manhattan, northern New Jersey’s cost advantage is increas- maceutical industry is also struggling with higher costs, dwindling ing. So as the economic recovery strengthens in 2013 and companies revenues from expiring patents, and competition from generic drug begin to expand operations, Newark is well-positioned to gain jobs manufacturers. The proportion of the labor force without jobs is at a from across the Hudson River. Already, year-to-date leasing activity historic high in Edison. is well ahead of last year’s pace. ——SOHINI CHOWDHURY

Hiring in New Jersey Is Not Broad-Based Healthcare Is Among Few Bright Spots 3-mo diffusion index, 4-digit NAICS Employment, ths 80 4,100 540

70 Total (L) Healthcare (R) U.S. 4,050 530 60 4,000 50 520 3,950 40 510 New Jersey 3,900 30 500 20 >50=more industries are 3,850 expanding than contracting 10 3,800 490 09 10 11 12 08 09 10 11 12 Sources: BLS, Moody’s Analytics Sources: BLS, Moody’s Analytics

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82 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Northeast

New York

New York’s recovery is progressing at a more moderate pace upstate businesses operated below capacity for one to four days, and than it was earlier in the year, especially upstate, where weakness 7% were shut down completely for the same amount of time. in manufacturing is weighing on hiring and wages. Downstate, the Last month, the forecasts for the state, New York City, and recovery was progressing faster than upstate before Hurricane Sandy Nassau-Suffolk were adjusted to account for lost output, and the struck New York City and Nassau-Suffolk at the end of October. November forecasts will reflect the positive impact of rebuilding in The storm certainly disrupted business activity in the early part of 2013 once more information comes in on the extent of both dam- November, but there are early indications that the economy had ages and federal aid. already begun to bounce back strongly by the end of the month. For Governor Andrew Cuomo has asked the federal government for this reason, it is difficult to gauge how much of an impact Sandy $33 billion to cover cleanup and rebuilding costs and an additional will have on the November jobs data. WARN notices filed with the $9 billion to protect New York City and Long Island from future New York Department of Labor so far show layoffs involving about storms. It is unlikely the governor will get this full amount given 1,000 New York City-based workers; more than half of those are the already-tense negotiations over the fiscal cliff that are going on temporary and all are in either Manhattan or Brooklyn. The Federal in Washington and Republicans’ previously stated stance that any Reserve’s Beige Book for November shows that the state was grow- disaster relief to states should be offset with spending cuts in other ing at a modest pace before Sandy struck, but the storm weakened areas. President Obama has asked Congress for “only” $60 billion to growth. Given the widespread loss of power, many businesses were be split between New York, New Jersey and Connecticut. This will shut down through the first few weeks of November, but most were mute, to some extent, the rebuilding that will occur in 2013, though up and running by the end of the month and the Fed noted very few the boost will still be significant. instances of businesses closing permanently because of the storm. More bad news for New York City: Citigroup announced 11,000 Sandy may have delayed hiring in some industries and hurt retail layoffs across its global offices, with most of the cuts coming from sales early in the month, but these are expected to be made up for institutional wealth management, consumer banking, and back in subsequent weeks. Home sales were also hurt by the storm, also a office. Almost 2,000 of those jobs will be in New York City. The De- likely temporary impact. cember forecast update will include a downward revision to financial The Empire State Manufacturing Survey showed another contrac- services in the first half of 2013. Long Island is also losing about 100 tion in factory activity in November and at least some of that was jobs because Citigroup is closing a branch there. because of temporary shutdowns due to the storm. Not surprisingly, Wall Street job losses are certainly not helping state tax revenues, the vast majority of businesses that were impacted by the storm were which have fallen below forecast through October, and the governor downstate and in the New York City area. Long Island-, Brooklyn- and has said that Sandy will add $1 billion to the deficit already projected Queens-based businesses bore the brunt of the catastrophe. Every for fiscal 2013, which begins in April. This bodes ill for Albany’s re- single manufacturer located downstate was affected, and only 8% covery, which has been weak because state government has been a did not shut down at all. Half of all downstate businesses shut down drag on growth. This is likely to continue for the next year, though for one to four days, and 42% shut down for five or more days. Even no layoffs are expected. Instead, it has been Albany’s private sector upstate New York businesses were affected, mostly because their and, in particular, its high-tech manufacturing driving the recovery. customers and supply chains suffered disruptions; more than 20% of Hiring at Global Foundries has been swift over the past year, and

New York Manufacturing Hobbled by Sandy… …Particularly Downstate Empire State Manufacturing Survey, diffusion index, >0=expansion Due to Sandy, average number of days of… 30 5 25 Reduction in business Complete shutdown 20 4 15 10 3 5 0 2 -5 -10 1 General activity # of employees -15 -20 0 11 12 NYC area Upstate Sources: New York Federal Reserve, Moody’s Analytics Sources: New York Federal Reserve, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 83 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Northeast

rumors are circulating that another large chip fab may be coming to Wall Street Continues to Downsize the metro area in 2013. The covertly named “Project Azalea” refers to a Employment, ths large manufacturing company that is scouting the Albany area looking 590 195 Financial activities, New York City for millions of square feet of space, larger even than what is currently 580 metro division (L) 190 at Global Foundries, and with plans to add 1,000 workers initially. This 570 Securities/commodities brokerages, 185 lends upside risk to the forecast for another subpar year for Albany five boroughs (R) in 2013. The metro area is expected to lag the nation in terms of job 560 180 growth for the fourth consecutive year. By the end of 2013, it will 550 175 roughly match the national rate of growth. 540 170 It has been a drag in Albany, but state government is one of the few 530 165 industries adding jobs in Syracuse. Outside of the public sector there has been almost no growth for the past two years. Manufacturing has 520 160 08 09 10 11 12E 13F 14F been a huge weight on Syracuse’s recovery. Welch Allyn, the medical device maker, is downsizing its global workforce, which will include a Sources: BLS, Moody’s Analytics small number of cuts in Syracuse and no growth for the foreseeable 3 future. Aside from short-lived hiring at Destiny USA, growth in other private industries has been too slow to offset declines in manufacturing. Not until the second half of next year will job growth in the metro area begin to pick up; when it does, it will be slower than the Albany’s Recovery Powered by High Tech national average. Rochester’s near-term performance will be a considerable change 70 of pace from its performance over the past five years—for the worse. 60 Share of total jobs in Jan 2011 Kodak’s downsizing is taking a toll on the metro area, which had been 50 Share of jobs gained since Jan 2011 40 the second best performing in the state after New York City since the 30 recovery began. Professional services and manufacturing jobs are being 20 lost quickly, and growth in retail and leisure/hospitality has slowed. 10 Rochester’s stellar performance is not anticipated to be repeated in 0 2013: Next year will be the first since before the recession began that -10 the metro area will underperform the national average. Kodak’s bid to -20 eliminate retiree health and other benefits was approved by a bank- High tech State government Private services ex ruptcy court, and they will end on December 31. This will be a drag on tech consumer spending in the metro area since many Kodak retirees still Sources: BLS, Moody’s Analytics live there. Though it is not enough to offset the pain Kodak’s bankrupt- 4 cy is inflicting, Verizon’s call center in Henrietta will hire 200 workers in 2013 to meet the growing need for customer support for its smart- phones and tablets. These are relatively low-paying jobs and therefore will not be enough to replace losses in higher-paying manufacturing. Rochester’s Reign on Top Will Soon End Buffalo’s recovery has weakened considerably over the past couple Payroll employment, % change yr ago of quarters, reversing many of the job gains during the first half of the 3 Rochester U.S. year. The weakness is broad-based across manufacturing and private 2 services. The November Beige Book notes weakening in Buffalo’s 1 housing market in October, though CoreLogic data show a pickup in 0 prices, which have barely fallen in the metro area. Next year, Buffalo’s -1 job market will underperform the national average by a considerable margin, with almost no net job growth during the first half of the year. -2 Banking jobs, which had been a growth driver early in the recovery, are -3 now falling fast, and the fate of Citigroup’s 2,100-person office in the -4 metro area is unknown. It could fall victim to the latest round of lay- -5 offs, many of which will come from back-office operations. 07 08 09 10 11 12E 13F 14F ——Marisa di natale Sources: BLS, Moody’s Analytics

84 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Northeast

Pennsylvania

The economic loss in Pennsylvania from Superstorm Sandy remains as the U.S. Senate passed the National Defense Authorization Act, significant, but damage estimates are coming in lower than Moody’s including an amendment that would require the Air Force to justify Analytics initially thought. Pennsylvania’s Emergency Management to Congress the need to close Pittsburgh’s 911th Airlift Wing. This Agency puts the cost of storm preparation and damage to infrastruc- reduces the odds of its closure in 2013. ture, including sewage treatment plants, at $16 million. Damage to The City of Philadelphia’s cash-strapped school district borrowed the state’s housing stock remains unclear, but anecdotes from the $300 million to cover budget shortfalls this year and next. Neverthe- Fed’s Beige Book suggest it was relatively small. Therefore, the near- less, 40 schools will be closed in June, but this has not been factored term rebound in residential investment and construction in the fore- into the baseline forecast yet. Closure of these schools will hurt cast may be too strong. Odds are the double-digit growth in housing the job market and could cause Philadelphia to experience another starts in the first quarter of 2013 will be revised lower next month. summer slump. President Obama has asked Congress for $60.4 billion in fed- Talk of another casino in Philadelphia does not warrant an im- eral aid for states hit by Sandy, but Pennsylvania will likely get only mediate change to the forecast. Bids for the second casino license in a small portion of this. The potential, if any, burden on the state the city were submitted in November, but a time line for approval budget from Sandy is so far uncertain. Pennsylvania general fund and potential construction is lacking. While a new casino will boost revenue came in less than expected in November but is coming in demand in construction and leisure/hospitality, it is not an unhin- slightly stronger year to date. The state also faces a significant pen- dered growth engine. The success of any casino hinges on its ability sion gap that could lead to cuts in the fiscal 2014 budget. Local to bring in outside dollars to the local economy. This is increasingly communities may be forced to share the burden. Higher than antici- difficult for Philadelphia as competition in the Northeast intensifies. pated government spending cuts will deliver a blow to Harrisburg’s Aside from Atlantic City, there are proposals to expand gaming in already-sluggish recovery. Maryland, Rhode Island and Massachusetts. Even if the near-term outlook for rebuilding is dialed back, 2013 Allentown and Scranton are not immune to increased casino will be a much better year for Pennsylvania than 2012. Employment competition. Some of the growth over the past few years is attribut- is forecast to increase more than 66,000, nearly triple the expected able to the Sands casino in Bethlehem and Mohegan Sun at Pocono increase this year. The drivers of the recovery will shift from busi- Downs, but their biggest contributions to the job market have ness investment and tourism to education/healthcare. After being a passed. Hiring in leisure/hospitality in both Allentown and Scranton significant drag on the job market since late 2010, the public sector will slow noticeably next year. will be a slight positive in 2013. Another important milestone next Allentown is better positioned to weather this slowdown as the year will be the turn in house prices as they record the first annual in- housing market will begin to heal and the metro area will also ben- crease since 2007. This, coupled with a shift in the construction cycle, efit from the improvement in the New York City economy. Scranton will contribute positively to the Keystone State’s growth next year. will struggle, as manufacturing will resume cutting payrolls as the Philadelphia will continue to play second fiddle to Pittsburgh in U.S. recovery shifts from business-led to consumer-driven. Scran- 2013. Construction, retail, financial activities and education/health- ton’s weak fiscal position will also be a drag on growth next year as care will all fare better in Pittsburgh than in Philadelphia. Other government payrolls will decline for most of the year. developments over the past month have been positive for Pittsburgh ——RYAN SWEET

Rebuilding May Be Weaker Than Expected in PA Taking Philadelphia Longer to Right the Ship Housing permits, % change Employment, % change from 2007Q4 40 10 Philadelphia Pennsylvania 8 Pittsburgh 30 New York 6 Harrisburg Allentown 20 4 Scranton 2 10 0 -2 0 -4 -10 -6 12 13F 07 08 09 10 11 12 13F 14F 15F Sources: Census Bureau, Moody’s Analytics Sources: BLS, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 85 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Midwest

Midwest Forges On Amid Uncertainty BY AARON D. SMITH

he Midwest’s recovery is losing steam. There is support from consumer spending and a pickup in housing from deeply depressed levels, but uncertainties related to the fiscal cliff and policy direction are weighing T on business investment and growth is weakening. The slowing is likely to appear more pronounced when each region’s job estimates are benchmarked to the more accurate but less timely Quarterly Census of Employ- ment and Wages. This nearly complete count of payrolls reveals that job gains in most Midwest states late last year and early this year were much stronger than generally believed.

The slide in business spending is making Included in this issue states, which recorded the biggest gains it even tougher on manufacturing, which in per capita income in 2011. The Midwest »» Illinois...... 89 has been under pressure from weaker global was the only region whose relative standing »» Indiana...... 90 demand and rising inventories. The effects versus the nation improved last year. Per »» Kansas...... 91 of all three are showing through in weaker capita income is still about 4% below the »» Michigan...... 92 trade patterns and industrial production. national average, but the gap is the smallest »» Minnesota...... 93 Factory output was off about 7% at an an- since 2003. »» Missouri...... 94 nual rate in the three months ending in Oc- Also, in most cases, the region’s low »» Ohio...... 95 tober, the steepest fall among the regions. living costs mitigate the negative conse- »» South Dakota...... 96 At the same time, freight volumes at the quences of below-average incomes. In fact, »» Wisconsin...... 97 region’s three largest airports have fallen, as the standard of living is above that of the has in- and outbound container traffic at the average U.S. resident in all but four of the Port of Chicago. tries are under pressure from fewer tempo- region’s 25 largest metro areas. Grand Rap- Because manufacturing has played a rary positions in manufacturing, which are ids MI, Detroit, Youngstown OH, and Gary much larger role in the Midwest’s recovery, the first to be eliminated when production is IN all have significant cost advantages that the slowing under way will do more damage. curtailed. Temp help has accounted for more do not make up for low relative incomes. The region is expected to underperform the than half of the rise in professional/busi- Living costs will become more important national average by an even wider margin in ness services employment in the Midwest, to the outlook as the share of the popula- the first half of 2013. The industry has been the highest share among the regions. The tion on fixed income grows. By 2020, almost especially important to the region’s labor core of high-paying professional service and 17% of the Midwest’s population will be 65 market, accounting for one-third of the job headquarters jobs has also grown, but more and older, the second highest among regions gains during the upturn. Manufacturing has slowly than elsewhere. Payrolls are still be- after the Northeast. Retiring baby boomers contributed just 5% of the job gains in the low their prior peak, while nationally they could prove more sensitive to living costs other three regions. In all Midwest states are 3% higher. if their nest eggs are eroded or if cuts are but Kansas and Missouri, factory employ- Eventually, the factory slowing will also made to government social programs such ment is closer to its prior peak than it is na- constrain incomes, making it tougher on as Social Security and Medicare. Smaller tionally. Missouri has also experienced some consumer industries such as retailing and numbers of retirees migrating to warmer of the largest cutbacks in recent months, leisure/hospitality. The Midwest has experi- climes would mean less slowing in popula- along with Minnesota, Michigan and Ohio. enced the biggest gains in per capita income tion growth, the fundamental underpinning The factory slowdown has already done in recent years thanks in part to the strength of any economy. The Midwest has trailed significant damage to service industries, of manufacturing. A combination of tight all other regions in population growth since which will settle into a period of slower, labor markets and strong growth in agricul- 2008, but at least its deceleration slowed below-average growth. Office-using indus- ture and energy has also helped the Plain this year.

86 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Midwest

High-Frequency Indicators

Payroll Employment—Midwest States Payroll Employment—Midwest MSAs 1-yr vs. 3-mo performance (3-mo MA) Nov 2012 1-yr vs. 3-mo performance (3-mo MA) Nov 2012 Improving Expanding Improving Expanding West North7 Central West North Central6 East North Central East North Central5 Fargo 6 Akron 4 Kansas City Dayton 5 St. Louis 3 Des Moines Omaha U.S. Cincinnati 4 2 Chicago Madison Missouri 1 Columbus 3 Milwaukee Gary Sioux Falls Wichita Minneapolis Minnesota 0 2 Illinois Indiana -1 0 1 Cleveland 2 3 4 5 Toledo -1 Grand Rapids Ann Arbor North Dakota Indianapolis 1 U.S. Lansing -2 Fort Wayne Wisconsin Iowa Ohio Peoria -3 0 Kansas Warren -1 0 1 Nebraska 2 3 4 5 6 7 -4 Detroit

Annualized 3 - mo % change -1 Annualized 3 - mo % change Michigan -5 -2 -6 Contracting South Dakota Slipping Contracting Slipping % change yr ago % change yr ago Note: Size reflects relative total employment Note: Size reflects relative total employment

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Comparative Performance Indicators

3-mo MA, % change from previous 3-mo period, Nov 2012 Private service- providing Current Change in Change in employment unemployment unemployment Residential Industrial Overall recent outlook from (annualized) rate rate permits production performance last month Cleveland 2.0 9.4 -0.1 11.7 2.4 ↑ ↔ Milwaukee -0.2 9.3 0.1 19.2 2.4 ↑ ↑ Minneapolis 0.7 7.2 -0.3 3.5 2.2 ↑ ↔ Akron -3.1 11.2 0.3 7.0 2.1 ↔ ↓ Chicago 0.8 11.0 -0.0 -18.3 1.8 ↔ ↔ Cincinnati -2.1 10.4 0.2 -4.6 1.4 ↔ ↓ Columbus -0.1 9.6 0.3 43.2 1.8 ↔ ↓ Dayton 0.0 12.0 -0.1 4.6 2.2 ↔ ↓ Des Moines -0.9 6.6 0.5 14.7 1.8 ↔ ↓ Detroit -2.5 16.4 -0.3 120.5 3.0 ↔ ↓ Grand Rapids -1.8 12.3 0.2 -0.7 2.1 ↔ ↓ Indianapolis 0.7 8.9 0.3 33.9 1.6 ↔ ↔ Kansas City -3.0 8.8 0.0 -51.9 1.7 ↔ ↓ Lake County -2.2 12.2 1.2 6.7 2.2 ↔ ↓ Madison -0.2 6.4 0.1 -47.2 2.3 ↔ ↑ Omaha -2.8 5.6 0.6 13.9 1.5 ↔ ↓ St. Louis -0.0 10.4 0.0 3.3 1.5 ↔ ↓ Toledo -2.8 12.4 -0.1 25.5 1.3 ↔ ↓ Warren -2.7 14.7 -0.2 43.4 2.8 ↔ ↓ Wichita 0.6 8.3 -0.2 -4.8 -0.8 ↔ ↑ Midwest 0.1 10.0 0.1 -6.9 2.0 ↔ ↔ U.S. 0.6 9.7 -0.3 1.7 1.9 ↑ ↔ Sources: BLS, Census Bureau, Federal Reserve, Moody’s Analytics

MOODY’S ANALYTICS / Regional Financial Review / December 2012 87 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Midwest

What We’re Watching

Hard Count Shows More Midwest Jobs Manufacturing Giveth and Taketh Away Employment, % change yr ago, Mar 2012 Manufacturing employment, over 3 mo, % change annualized Michigan 8 Midwest Indiana Northeast 6 South Dakota South Nebraska West Minnesota 4 Ohio 2 Iowa U.S. 0 Kansas Illinois QCEW -2 Missouri CES Wisconsin -4 -1 0 1 2 3 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Sources: BLS, Moody’s Analytics Sources: BLS, Moody’s Analytics

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Cyclical Indicators

Employment Housing Starts Personal Income 1998=100 3-mo MA, 1998=100 Yr/Yr Growth Rate 112 160 12 110 140 10 8 108 120 6 106 100 4 104 80 2 102 60 0 100 -2 40 98 -4 96 20 -6 94 0 -8 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12

U.S. Midwest U.S. Midwest U.S. Midwest Unemployment Rate (%) Median House Price (Existing) Personal Bankruptcy Filings 3-mo MA, Yr/Yr Growth Rate 1998=100 11 20 350 10 15 300 9 10 250 8 5 200 7 0 150 6 -5 100 5 -10 50 4 -15 0 3 -20 -50 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12

U.S. Midwest U.S. Midwest U.S. Midwest

Sources: BEA, BLS, Federal District Courts, NAR, Moody’s Analytics

88 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Midwest

Illinois

Illinois’ near-term outlook depends importantly on the uncertain ability and have yet to say how they will pay for the new teachers outcome of fiscal policy negotiations in Washington. Although the union contract. Still, some parts of the economy that were hit hard by state is not overly exposed to possible defense cuts, it would be the financial crisis and recession are starting to heal. Insurer expan- among the hardest-hit by reductions to nondefense discretionary sion has halted financial services job losses ahead of expectations, for spending because of its reliance on federal aid. Federal grants subject example, and paved the way for stronger services employment. Key to sequester account for 8.5% of Illinois’ revenue, the second high- player Allstate benefits from a strategic focus on its core insurance est share in the nation after South Dakota. Champaign, home to business and has avoided some of the problems that have hurt com- the University of Illinois, is the most exposed. Although some of the petitors. Meanwhile, a surge in mortgage refinancing and expanding federal money goes to financial aid grants, the bulk goes to research mortgage profit margins have given banks a shot of much-needed institutes, which are important drivers of private sector growth, as revenue. They are still cutting back, but the pace has slowed. Capital personnel and research ideas drift into private companies and univer- One, a big credit card issuer, is the latest to announce that it is mov- sity spin-offs. ing downtown from the suburbs, bringing 350 jobs. A greater reliance on unpredictable federal funding is one of With more employers shunning suburban corporate campuses, several pressing fiscal issues facing the state, which has such severe Lake County will be among the state’s worst performers in 2013. budget troubles of its own that it cannot simultaneously continue Motorola Mobility’s departure and a surge in foreclosures will make current services, provide promised benefits, and invest in education their presence felt in renewed weakening in manufacturing and and infrastructure while keeping tax rates unchanged. The state’s housing before long. Factory payrolls are not expected to retest their severely unfunded pension system is the biggest impediment to a former low thanks to additions in fabricated metal manufacturing, sustainable budget. While many states have unfunded pensions, Il- but the hole left by Motorola will be too large for other producers to linois’ situation is especially bleak. The shortfall of its five retirement fill and manufacturing employment will contract for a time. systems is estimated to be $97 billion. Collectively, they have a fund- Rockford also has a large foreclosure overhang, but its manufac- ing ratio of 39%, the lowest in the nation and about half of what is turing should bounce back pretty quickly. Hiring is forecast to stay considered healthy. weak until mid-2013, but risks favor it picking up sooner. Chrysler Pension reform measures that reduce benefits appear inevitable has struggled to keep inventories in check because of the tepid debut but will be legally difficult since the state’s constitution protects of the Dodge Dart, for which the automaker added a third shift and retiree benefits. The governor wants lawmakers to act during a 1,800 workers to build. It will likely take time for the Dart to catch lame-duck session in early January. A group of House members has on because the automaker has not produced a compact sedan since proposed a plan that would increase pension contributions by em- 2005 and only recently began to advertise its most significant new ployees and reduce cost-of-living increases in retirement. It would offering this year. Moreover, even if the auto industry disappoints, also gradually shift some costs of teacher and university employee aerospace will help pick up the slack. In the first quarter, Woodward pensions to school districts and colleges, putting additional strain on Inc., which makes fuel systems for commercial aircraft, will begin increasingly stretched local governments downstate. construction of a new $200 million campus that will create 550 jobs Chicago’s school districts fund their own pensions, but that does in five years. not mean that it is in the clear. They also have a large unfunded li- ——Aaron D. Smith

Pension Gap at Center of Illinois Budget Crisis Chicago’s Finance Industry on the Mend % of state pension liabilities funded as of fiscal 2011 Employment, ths, change yr ago Illinois 6 Kansas 3 Indiana Ohio 0 Michigan North Dakota -3 Missouri -6 Minnesota Real estate, rental and leasing Iowa -9 Nebraska Insurance South Dakota -12 Securities and investments Wisconsin Credit intermediation -15 30 40 50 60 70 80 90 100 10 11 12 Sources: PEW, Moody’s Analytics Sources: BLS, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 89 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Midwest

Indiana

Indiana’s recovery continues to outpace both the region’s and the hicle production plans were revised up for the fourth quarter, the big nation’s. Retail and leisure/hospitality are bouncing back, and the first quarter production increases of the past two years will not be once dour household survey has brightened over the last couple of duplicated in 2013. Some near-term slowing in sales seems likely as months. The unemployment rate is falling, and some workers have the boost from pent-up and replacement demand from Hurricane returned to the labor force. Construction has also offset weaker Sandy wanes. Although manufacturers such as Toyota expect to raise manufacturing. On the downside, the factory sector has shifted production, others plan to pull back relative to the same quarter a into a lower gear. Industrial production is waning, and exports are year ago. General Motors’ large inventory of pickup trucks is prompt- expanding at a much slower pace. Average weekly hours worked ing production cutbacks at a plant in Fort Wayne, for example, in manufacturing are falling, and demand for temporary workers is where the recovery has slowed. weakening. The rebound in factory employment has also stalled, Indianapolis’ recovery has underperformed even though job mar- putting pressure on construction to keep goods-producing payrolls ket improvement has been less reliant on new factory hires. Private on an upward path. There has been hiring recently, but gains are at services are a big driver and ought to bounce back quickly from re- risk from the increased flow of distressed properties to the market. cent weakening once uncertainty surrounding fiscal policy decisions Processing delays have eased, and foreclosure inventories have risen is reduced. Healthcare will benefit from above-average population by one-third this year. growth and a solid hospital system, anchored by Indiana University Indiana’s outlook has not significantly changed over the past Health, which was recently ranked one of the top 20 hospitals in the month. Job growth is expected to slow in the first half of 2013 as country by U.S. News and World Report. goods-producing industries ratchet back. Housing will shift back to Indiana closed fiscal 2012 with its largest budget surplus in a headwind, and manufacturing, which has been a key driver of the history, though there are still hurdles for the recovery of both recovery, will grow more slowly as producers rely more on current state and local governments. For one, gaming tax revenues have employees and productivity gains to boost output. The slower rate slumped amid tight discretionary spending and increased com- of factory hiring will be especially deflating for Indiana’s economy petition from casino expansion in neighboring states. Indiana and because of its large role in the upturn to date. Since the recession metro areas near state lines use casinos to draw in money from ended, almost two-fifths of all job gains in the state have been in outside the area, but neighboring states are turning to casinos in an manufacturing, the highest-paying industry. effort to heal their budgets. Michigan has expanded its casino foot- With its focus on transportation equipment, factory activity could print, and the $400 million Horseshoe Casino will open in Cincin- outperform. Auto sales are forecast to strengthen over the next year nati next year. Lawmakers in Gary are also worried that potential as the job market improves and credit standards ease. To better gaming expansion in neighboring Illinois could cut into revenues. Il- capitalize on North American demand and avoid expensive shipping linois Governor Pat Quinn vetoed legislation earlier in the year that costs and a strong yen, Subaru is considering expanding its Lafayette would open new casinos, including one in Chicago, but talks over a plant. Toyota had similar rationale earlier in the year when it decided deal continue. Gary, which is wrestling with fiscal troubles, is home to shift production from Japan to its plant in Evansville, a move that to four of the state’s 13 casinos, the largest concentration of any will create 400 jobs by the end of 2013. Nevertheless, the forecast metro area in the state. anticipates little growth in the first part of next year. Although ve- ——MARshALL CARTER

Indianapolis Is Less Reliant on Manufacturing Indiana Casino Tax Revenues Fall Short Factory share of job growth since start of Indiana’s recovery, % Gaming tax revenues, % change yr ago 0.00 Columbus Gary -0.02

Lafayette -0.04 Indiana -0.06 South Bend Kokomo -0.08 Admission Fort Wayne -0.10 Wagering Indianapolis Total -0.12 0 10 20 30 40 50 60 70 Aug-12 Sep-12 Oct-12 Nov-12 Sources: BLS, Moody’s Analytics Sources: State of Indiana, Moody’s Analytics

FROM MOODY’S ECONOMY.COM 1 FROM MOODY’S ECONOMY.COM 2

90 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Midwest

Kansas

Kansas’ recovery has slowed. The state trails most other harder to retain aerospace manufacturing in the longer term, how- midwestern states and the nation in payroll employment but is ever, as suppliers look to save on transportation costs and right-to- outperforming in other gauges such as industrial production and work states such as Florida offer incentives to draw jobs away from housing starts. Still-receding public sector payrolls have been the the state. primary drag on job growth. Private sector employment has risen A possible new source of growth in 2013 and beyond involves this year, but only barely, with declines in each of the past three the exploration of the Mississippian Lime formation, the oil and gas months. The larger household survey paints a similarly downbeat play that covers much of southwestern Kansas. Drilling has increased picture of the labor market this year, but momentum has been substantially in recent years but still accounts for a small fraction of more positive recently. Reductions in the labor force, which is economic activity. A key source of uncertainty in the outlook is how at a four-year low, are responsible for the lower unemployment quickly horizontal drilling, the costly but more efficient method of rate, which at 5.7% is more than a percentage point below the extracting oil and gas, is adopted in the state. national average. While most of Kansas has been hurt by contraction in the pub- Manufacturers in the state have been adding to payrolls this year, lic sector, Topeka was particularly hard-hit and is still struggling. but employment has lagged that of the rest of the Midwest during Although the state’s finances appear healthier, Governor Sam the recovery. The mainstay aerospace industry has relied heavily on Brownback’s tax initiatives will curtail sources of revenue. Not until its current workforce to meet demand. While aerospace production businesses hire more and growth in consumer spending picks up will has reversed most of its recessionary decline, related employment is the state’s public sector workforce start to expand. The emphasis not far above its cycle low. Wichita’s aerospace has had an especially on higher education in the budget for this year and next bodes well rough year with the loss of Boeing. Earlier this year, the airplane for Manhattan and Lawrence, both home to large public universi- maker said that it will shut down its local facilities by the end of 2013 ties. Manhattan is also home to Fort Riley, which does face some and send work to three other states as it deals with defense spending risk from federal fiscal consolidation. It is hard to see how some cutbacks. The closure will cost nearly 2,200 workers their jobs and spending cuts associated with the Budget Control Act are entirely end the company’s presence in the metro area, where it has been a avoided, even if the draconian sequestration does not occur. Fortu- major employer for generations. Factory payrolls declined last quar- nately, the fort is the Army’s most modern combat-ready division, ter as the first round of layoffs took place. suggesting that there is little chance of large-scale cutbacks to The loss of Boeing’s Wichita plant will cast a pall over what military personnel. should otherwise be a better year for the state’s aerospace in 2013. The state’s housing market has improved this year. Fewer foreclo- Kansas is Boeing’s fourth largest supplier network, having spent sure filings have helped unclog the foreclosure pipeline and alleviate more than $3 billion with the state’s suppliers in 2011 alone. Sev- downward pressure on house prices. Most house price indexes show eral aircraft makers also still have plants in the state, and airlines gains for the state this year. Homebuilders are responding to better are expected to spend more to upgrade their fleets once there has pricing and demand, with residential permits picking up, especially in been a resolution of the fiscal cliff. Boeing recently snagged an or- Lawrence. A lasting pickup in housing hinges on a stable public sec- der from Icelandair for the 737 Max, and Spirit builds about 70% of tor and continued growth in manufacturing. the parts for the aircraft in Wichita. Boeing’s departure will make it ——RENU ANN JOSEPH

Public Sector a Bigger Problem for Kansas Home Construction Perks Up, Led by Lawrence Payroll employment, Jan 2009=100 Residential permits, single-family, 2009Q1=100 101 300 Kansas Midwest U.S. Wichita Topeka 100 250 Manhattan Lawrence 99 Kansas 200 98 150 97 100 96

95 50 09 10 11 12 09 10 11 12 Sources: BLS, Moody’s Analytics Sources: Fiserv, FHFA, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 91 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Midwest

Michigan

Michigan’s recovery has weakened further, with most parts of Per capita incomes in Michigan are already 12% below the na- the economy taking a step back. The labor market has been espe- tion’s. Still, they far exceed the averages for auto manufacturing- cially soft, with payroll employment declining in five of the past six heavy right-to-work states such as Alabama. Over the long term, months. Weaker demand for manufactured goods has halted the rise further erosion of manufacturing wages could have negative con- in factory payrolls and slowed growth in other private industries. The sequences for consumer spending and industries such as retail and resolution of the November elections has done little to improve con- leisure/hospitality. fidence among businesses and consumers as the threat of harsh aus- Manufacturing will remain soft in the near term, though some terity from Washington remains. Also, while the state’s fiscal outlook factory payroll additions are expected. The Southeast Michigan has improved and the foreclosure overhang has continued to shrink, Purchasing Managers’ Index fell to 51.9 in November after a one- local governments continue to shed jobs, primarily in education, and month rally to 58.9 in October. A score above 50 indicates economic the poor quality of the housing stock is keeping prices down. growth in the region, which includes Detroit and Ann Arbor. The State lawmakers unexpectedly passed legislation to make Michi- fall in the headline index was driven by sharp drops in both produc- gan a right-to-work state. Twin bills will limit the ability of public and tion and new orders. The employment index also declined, but at private sector labor unions to compel employees in unionized work- 55.7 remains securely in expansionary territory. Further to the west, places to pay dues. Supporters of the bill, including Governor Rick a comparable manufacturing measure for Grand Rapids was simi- Snyder, claim the policy shift was needed to keep jobs after similar larly soft, while in Kalamazoo, supply chain managers were a little legislation was passed in neighboring Indiana. Opponents of the bill more optimistic. believe it will depress wages and incomes for all workers. Auto sales rebounded strongly in November, rising to a season- To the extent that weaker labor unions attract jobs to the state, ally adjusted annualized rate of 15.5 million, up 1.2 million from their contribution to growth will be diminished somewhat if they hurricane-depressed October. There are about 500,000 vehicles that cause factory workers’ wages and benefits to weaken further. Hourly need to be replaced because of damage done by storm, and the fore- earnings in manufacturing have come down in recent years as a cast for auto sales has been adjusted higher as a result. With about result of concessions from unions such as the United Auto Workers. one-third of its factory jobs in transportation equipment, Michigan During the auto industry rescue, unions agreed to a two-tiered com- stands to benefit from stronger near-term auto production. Manu- pensation system whereby new hires are paid about half as much as facturing employment is forecast to rise this quarter and next before their longer-tenured coworkers. As a result, hourly manufacturing taking a breather toward the middle of next year. wages have fallen by nearly 10% since mid-2009, a trend that will The holiday season should be decent for the state’s retailers. Ac- continue as older workers retire and are replaced. cording to the Michigan Retailers Association, retail sales ticked up Despite the fall in labor costs, manufacturing job growth in the in October after remaining flat for most of 2012. Unfortunately, the state has slowed this year, not picked up. The impact of this legisla- modest growth in sales will not translate into significant increases in tion is likely to be relatively small and additive to current trends seasonally adjusted retail employment. Risks are to the upside, espe- rather than transformative over the long term. Still, odds are that the cially if a deal can be struck in Washington that would provide certain- move will attract enough new jobs to the state to offset the impact ty that households’ tax burdens will not rise sharply in the new year. of lower wages on retail sales and tax revenues. ——BRIAN KESSLER

Michigan Factory Workers Earn Less… …But More Are Working as Auto Sales Climb Avg hourly manufacturing earnings, $ per hour, 4-qtr MA 23 17 650 22 16 625 Michigan 21 15 600 20 14 575 Ohio 19 13 550 18 12 525 Georgia 17 11 500 Vehicle 16 10 475 Alabama sales, mil (L) Manufacturing 15 9 employment, ths (R) 450 14 8 425 08 09 10 11 12 07 08 09 10 11 12 Sources: BLS, Moody’s Analytics Sources: BLS, Autodata, Moody’s Analytics

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92 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Midwest

Minnesota

Minnesota is maintaining its recovery despite signs that the slow- month when construction is complete in 2015. Mayo is also purchas- down in U.S. business spending is starting to bite. A three-month ing vacant industrial buildings and lots in anticipation of expansion, slide in manufacturing payrolls and a pause in the business services supporting the commercial property market. expansion are hurting the labor market, and job growth now lags the Construction in Rochester will also benefit from revival in the Midwest and U.S. averages. On the upside, the factory workweek, a residential market. After breaking a five-year slump in 2011, home leading indicator, is near its prerecession high, a reminder that much sales have strengthened even further this year. Single-family home of the recovery bounce in production remains intact. Consumer- sales are up 21% year to date through October, according to the related industries and construction are supporting the recovery, and Southeast Minnesota Association of Realtors, and prices are up 5% measures of hiring intentions suggest the current lull in job creation from a year ago. The better balance of supply and demand will pro- will be temporary. A complete count of payrolls through the first pel homebuilding and construction employment toward a lasting quarter suggests that employment will be revised higher next year. recovery in 2013. Yet Minnesota’s economy will struggle in the near term as ner- Less exposed to the slowing in capital equipment spending, vousness about looming fiscal policy decisions increases. Manufac- Mankato is among the state’s top performers this year. Outsize turing employment will hold steady at best in the coming months manufacturing leaves the metro area vulnerable and industry em- as firms wait for the resolution of the fiscal cliff and stabilization ployment is expected to soften somewhat, but other parts of the in Europe before making capital expenditures. State exports fell economy will make up the difference. Strong population growth has almost 23% at an annual rate in the third quarter, more than twice created pent-up demand for infrastructure upgrades, and financing the fall nationally. Minneapolis-St. Paul appears vulnerable since for such projects will become easier to obtain in the coming year. A exports account for a higher than average share of gross metro number of long-delayed public works such as the expansion of High- product. Weak global demand is also hurting Duluth’s economy. way 14 could receive funding in the coming quarters. Easing budget Cliffs Natural Resources reported a 36% drop in iron ore prices in constraints should also lead to more public-private partnerships. the third quarter and is scaling back its production target for next Commercial construction proposals for downtown Mankato total year. Minnesota’s recovery will lag the nation’s until the fiscal cliff nearly $20 million and include a six-story office tower on the river- is safely negotiated and the global economy regains some steam. front for which the state could provide site development funds. Job growth will catch up with the U.S. average by the end of 2013 as The state’s improving finances have already led to fewer cutbacks consumer and business services shake off the jitters and manufactur- in state and local government, and outright payroll additions are ing hiring resumes. expected by the second half of 2013. Minnesota Management and Cutbacks in manufacturing have dealt a blow to Rochester’s Budget projects a $1.1 billion deficit for the 2014-2015 biennium, far economy, but it has other drivers that will help it maintain its less than the $6.2 billion shortfall during the previous budget cycle. recovery. Importantly, Mayo Clinic will further cement its already- More important, November’s election result gave control of both formidable status as a world-class healthcare provider, supporting legislative chambers to the Democrats, dramatically increasing the growth in the short and long run. The most ambitious project cur- chances that the deficit will be resolved through increased revenue rently under way is the clinic’s $185 million proton therapy cancer than decreased spending. treatment center, expected to boost visitor counts by hundreds every ——Arijit dutta

Minnesota Labor Market Stronger Than It Looks Mankato Set for Strong Year, Duluth Lags Payroll employment, % change yr ago, Mar 2012 Private employment, % change 2012, ytd through Oct 2.2 CES QCEW Mankato 2.0 U.S. 1.8 Minneapolis 1.6 Midwest 1.4 Minnesota 1.2 Rochester 1.0 Duluth 0.8 Northeast U.S. Midwest Minnesota 0.6 0.8 1.0 1.2 1.4 1.6 Sources: BLS, Moody’s Analytics Sources: BLS, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 93 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Midwest

Missouri

While still at risk for recession, Missouri’s economy might be household income growth over time. House price data are gener- healthier than first thought. Data from the Quarterly Census of ally consistent with this story; the CoreLogic index that excludes Employment and Wages, which forms the basis for the annual distress transactions has underperformed those of the region and benchmark revision to the payroll survey, suggest that job growth nation the past two years. was markedly better in late 2011 and early 2012. The labor market Weak demand trends will inhibit not only St. Louis but much has been choppy since then, with payroll employment falling in of the state over the forecast horizon. Job creation over the next late spring and early summer and rising late in the summer and in few years will be predominantly in private services and construc- the fall. tion. Unlike manufacturing, which is more dependent on relative Though the QCEW data paint a rosier picture of the recovery to business costs, these industries rely on local demand, driven by date, they do not alter the forecast for below-average growth. The demographics and earnings. Population flows typically follow sudden surge in private service-providing employment has been job availability, which has been a huge headwind for Missouri largely concentrated in business/professional services and is expect- throughout the recovery. Population growth in the state will be ed to prove temporary. Excluding the industry, private service pay- only about half the national average, and places where service rolls are little changed over the past two years. Consumer-related in- industries command an unusually large presence are the most at dustries are a sore spot; weak state sales tax collections through the risk for a subpar recovery. One such place is Springfield, which first five months of fiscal 2013 suggest that consumers are spending is trailing the nation in population growth for the first time in more, but only a little. Meanwhile, goods industries are struggling about three decades. The resulting sharp slowing in the pace of as construction payrolls bounce along a bottom and manufacturing household formation is hurting demand for housing and other employment loses ground after a solid start to the year. Missouri’s consumer services. Two places where weak consumer demand manufacturing exposure is considerably less than most Midwest will be less of an issue are Columbia, home to the University of states’, and hence the pickup in service activity has helped improve Missouri’s flagship campus, and Kansas City, which has a grow- its standing within the region. ing young and highly educated population and above-average per One forecast modification this month was to dampen St. Louis’ capita income. house price outlook. Prices are now expected to trail the national The state’s laggard, Cape Girardeau-Jackson, may finally be get- average beyond 2014 for a couple of reasons. First, given underly- ting its act together. For one, the QCEW data suggest that payroll ing economic and demographic drivers, house prices in St. Louis employment in the metro area was stronger around the turn of the appear properly valued, limiting the upside potential once the year than initially believed. Second, three years after its approval, economy is in full swing. Second, the metro area suffers from un- the Isle of Capri Casino has opened, creating more than 700 lei- favorable demographic trends, with net migration negative every sure/hospitality jobs. The casino will draw out-of-town visitors and year but one over the last two decades. The resulting slower rate benefit local retail and hotels. Finally, Procter & Gamble is plan- of household formation will undoubtedly inhibit housing demand. ning to build a new plant, which if approved by municipal officials Finally, wage and salary growth has been below average and is will provide much-needed construction jobs and breathe new life expected to lag for some time given below-average job growth. into manufacturing. This is crucial because house price appreciation typically tracks ——Gregory Bird

Missouri Closer to U.S. Than Initially Thought House Price Growth Lethargic in St. Louis Employment, % change yr ago, 3-mo MA, NSA CoreLogic ex distressed house price index, % change yr ago 2 6 U.S. Plains St. Louis 1 4

0 2

-1 0

-2 -2

-3 -4

-4 -6 Missouri, CES Missouri, QCEW U.S., QCEW -5 -8 10 11 12 10 11 12 Sources: BLS, Moody’s Analytics Sources: CoreLogic, Moody’s Analytics

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94 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Midwest

Ohio

Ohio’s economy is moving in the right direction. The Buckeye recently expanded its specialty services division by constructing State’s recovery has moderated from its rapid pace earlier in 2012 a new medical office building in Mentor. The Cleveland Clinic is but is still outperforming the majority of its Midwest peers. Profes- not only an important provider of health services but also a key sional and business services, healthcare, and other private services leader in healthcare research and technology. It has helped drive have been the pillars of support to the labor market in recent innovation through partnerships with startup companies that com- months. By contrast, manufacturing output and hiring have deceler- mercialize technology developed at the clinic. This has been an ated because of slowing external demand. Regionally, Cincinnati and especially robust year for health services employment in Ohio, with Columbus remain the best performers among Ohio’s major metro payrolls up 3.4% over the year, compared with only 2.1% nation- areas, while Toledo and Dayton lag behind. The near-term outlook is ally. Healthcare jobs now account for approximately 15% of total unchanged from the prior update: Job growth will downshift into the payroll employment. first part of 2013 before moving gradually higher in the remainder of In contrast to the robust gains in services, manufacturing job the year and into 2014. growth has downshifted from its earlier rapid pace and now slightly Professional and business services have been the primary trails the national rate. Exports have dropped off, and the subse- growth engine for the labor market recovery. High-paying jobs in quent hit to production has limited the need for additional work- consulting, technical services and software development are be- ers. The uncertainty associated with the fiscal cliff is also keeping ing added to urban areas with highly educated populations. For employers on edge and hurting hiring via low business confidence. example, IBM is constructing an advanced analytics center in Over the near term, manufacturers in energy, auto and steel Columbus that will bring 500 high-value-added jobs. Some of the will look for support from domestic demand rather than export- positions will be in R&D, data analytics and computer software. oriented growth. Big Blue will also collaborate with nearby Ohio State University to Although housing has made some progress in the state, it will offer related coursework in order to develop human capital. More be another quarter or two before a sustainable upturn is under way. broadly, technical and scientific services employment is up more A pickup in the flow of foreclosures to the market will add to sup- than 3% from last year in the state, slightly more than nationally. ply and slow improvement in construction and prices. Foreclosure Highly educated populations in Columbus and Cincinnati retain an inventories are on the rise, and at 17 per 1,000 households, they advantage over less educated, manufacturing-intensive Cleveland, are the second highest in the region after Illinois and higher than Dayton and Akron. nationally. Cleveland, Toledo and Akron will be the hardest hit as an Health services will also remain a core source of support for abundance of deeply discounted properties keeps builders on the Ohio’s recovery. Hospitals across the state are opening new facili- sidelines in the first part of 2013. Meanwhile, a slow rate of popula- ties and investing in medical equipment in order to satisfy growing tion growth will also restrain long-term house price appreciation as healthcare demand from aging and sickly populations. For example, fewer new households form. The state has experienced a slowdown Miami Valley Hospital in Dayton will invest $12 million to expand in population growth since the early 1990s because of out-migration its emergency medical facilities. Also, the hospital’s south divi- and a slower rate of natural population increase compared with the sion is nearing completion of a new $51 million cancer center. In national average. addition, The Cleveland Clinic, Ohio’s second largest employer, ——Brent Campbell

Cincinnati, Columbus Lead in Business Services Housing Will Take Longer to Recover in Ohio Prof./business services employment, Jan 2008=100, 3-mo MA 105 22 116 Cincinnati Cleveland Case-Shiller® Home Price 21 Columbus Dayton Index, 2000Q1=100 (R) 114 20 100 Toledo Akron 19 112 18 95 110 17 16 108 90 15 Foreclosure inventory, # 106 14 per 1,000 households (L) 85 13 104 08 09 10 11 12 08 09 10 11 12 Sources: BLS, Moody’s Analytics Sources: Fiserv, RealtyTrac, Moody’s Analytics

MOODY’S ANALYTICS / Regional Financial Review / December 2012 95 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Midwest

South Dakota

South Dakota’s recovery has stalled. The labor market has group study revealed that energy-related industries within a 200- weakened since the start of the year. Payroll employment is barely mile radius of the Rapid City trade area were among the leaders in above its year-ago level and may in fact be down from a year ago job and earnings growth from 2006 to 2011. Two permits related to when the benchmarked data are released in the spring. A near com- Powertech’s proposed uranium mine in southwestern South Dakota plete count of employment suggests that gains were much larger are under review, and spillover growth from oil drilling in neighbor- than originally reported in the second half of 2011 and early part ing North Dakota is bolstering South Dakota payrolls. If managed of 2012. The household survey paints a similarly downbeat view properly, additional extraction-related development in the Midwest of the job market. Rapid City and the state’s rural areas have shed will support the state’s labor market and pad its budget throughout jobs over the last three months, while Sioux Falls has managed the recovery before becoming an even stronger driver as companies modest growth. expand their oil pipelines and transportation infrastructure. With its focus on agriculture, manufacturing is a mixed bag. The state’s housing market is in the early stages of recovery, with Average weekly hours are trending higher, but average hourly earn- the best performance in and around Sioux Falls. According to the ings have barely budged this year. Although farm insurance and Federal Reserve’s latest Beige Book report, both commercial and federal funding have helped limit the damage, there have been sig- residential permitting are up substantially from last year. Similarly, nificant crop and livestock losses from this summer’s drought. Food both home sales and the median sale price have been climbing in the processors, which employ one-fifth of the state’s factory workforce, metro area for most of 2012. While construction projects have been have been hurt by rising input costs and are curtailing hiring. Those less abundant in Rapid City, the volume of multifamily permits is up producers that cater to overseas demand face pressure from a slug- considerably from last year as the influx of workers in energy-related gish global economy. The International Trade Association estimates fields has bolstered demand for apartments. that 14.5% of manufacturing workers in the state are export-de- Solid population growth should help limit the extent of slowing pendent. State exports have made little headway over the last year in consumer industries as households grow more concerned about despite strength in the North American market. While the ripple possible tax increases at the start of the year. Statewide population effects from the crisis in Europe have extended across the globe, growth slowed last year but still exceeded the regional and national they are the least pronounced in North America. About one-half averages. Sioux Falls is the faster growing of the two metro areas as of the state’s exports go to Canada, more than twice the national its large core of high-skilled, high-paying jobs in finance helps it at- share. The country’s economy has been weak recently and bears tract migrants from around the Midwest. Rapid City does not have close watching, as further slowing could prolong the slowdown the same appeal even though its residents are nearly as skilled. The in manufacturing. remoteness of the metro area and the economy’s small size makes Natural resources present the greatest opportunity for growth. it a tough sell to startup or relocating businesses. Fortunately, both Once a hotbed of activity during the Gold Rush in the late 1800s, the metro areas boast a high birth rate and a low death rate, resulting in Black Hills in southwestern South Dakota have attracted an influx of above-average support from natural population increases. The latter investment. While mining has long been a staple of South Dakota’s helps explain why population growth in Rapid City is also above av- economy, a recent surge in oil, natural gas and uranium exploration erage even though net migration is not that strong. has increased the importance of its extraction sector. A state work ——ANTHONY ANTONIK

Exports Are a Headwind in South Dakota Natural Population Increases Are a Big Plus Exports, % change yr ago, 3-mo MA Natural population growth, birth rate less death rate 50 10 40 30 9 20 8 10 0 7 -10 6 -20 -30 5 -40 South Dakota U.S. 4 -50 -60 3 08 09 10 11 12 Midwest U.S. South Dakota Rapid City Sioux Falls Sources: Census Bureau, Moody’s Analytics Sources: Census Bureau, Moody’s Analytics

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96 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� Midwest

Wisconsin

Wisconsin’s recovery is among the weakest in the Midwest and is down from more than one-third in the prior survey. Manufacturers, at risk of coming unraveled. What had been limited to just services in particular, are hiring less aggressively, a contention reinforced by has spread to goods-producing industries as the labor market con- the employment index of the ISM-Milwaukee survey, which has fall- tracts. Private employment is exhibiting a similar pattern to last year en sharply and is now firmly in contractionary territory in the mid- in that it has failed to sustain early year gains. The breadth of hiring 40s. Although quantifying the damage of heightened uncertainty to has been especially disappointing this year, as less than half of pri- growth can be difficult, persistent weakness in global demand and vate industries have increased their payrolls. The rest of the economy the intensification of fiscal cliff worries undoubtedly played a role in looks pretty dour. Industrial production is falling at its fastest pace the weaker incoming data. Consequently, even those manufactur- since the recession ended, and even though housing is showing signs ers that do not have a lot of overseas exposure and have performed of life, activity remains severely depressed. reasonably well are likely to wait for the resolution of the fiscal cliff A dearth of skilled labor has hurt many of the state’s smaller before moving ahead on expansion plans. metro areas, and there is no solution in sight. Though the educa- Industrial activity is also at risk from federal fiscal consolidation. tional attainment of Wisconsin’s workforce is only slightly below Even if lawmakers strike a deal to avoid the fiscal cliff, it will entail average, if Madison and Milwaukee are excluded a large skills gap some fiscal drag. The automatic budget cuts written into the Budget appears; indeed, such a state would be regarded as one of the least Control Act pose the greatest threat to Oshkosh, which derives more educated in the country. Financial services and professional, techni- than 90% of its gross metro product from defense procurement con- cal and research services have been particularly weak over the past tracts, the highest in the nation. Cuts in defense spending have al- year, and in places such as Eau Claire, these industries have been ready led to layoffs at Oshkosh Corp., the largest local employer, and pulling back for several years. With manufacturing struggling and the threat of losing more defense-targeted appropriations has it and these service industries expected to grow at a below-average rate, it other defense contractors nervous. Although most appear to be opt- will be difficult for Wisconsin’s smaller metro areas to make progress, ing for a wait-and-see approach, the announced layoffs and specter let alone outperform. of additional cutbacks put the metro area’s recovery at risk of a new Agriculture will not do much for Wisconsin’s rural economies phase of economic contraction. until the spring and summer. This year’s severe drought will keep On a positive note, Madison’s economy is rapidly improving. A farm output and nonfarm food- and dairy-related business depressed turnaround in state tax revenues has brought an end to public sector through the first quarter. Although milk production in Wisconsin is layoffs, which have plagued the economy since the recession began faring well relative to that in other states, dairy farmers still must in 2008. Tax collections in the second quarter, which typically ac- contend with higher costs for feed and other raw materials. With count for half of the annual total, were up 9% from a year earlier. As milk prices forecast to increase only modestly in 2013, profits in the a result, the public sector is hiring at a pace not seen in years. Mean- important dairy industry will be under pressure for much of the year, while, healthcare, another driver, is flourishing and giving the private keeping producers cautious on output and employment. sector a much-needed boost. GE Healthcare’s $33 million research Milwaukee is suffering the sting of lower business confidence, facility for the Wisconsin Institutes for Medical Research will be the judging by incoming surveys. According to the latest Manpower sur- fourth major healthcare construction project in as many years. vey, less than one-fifth of local companies plan to increase payrolls, ——Mike Zoller

Many Wisconsin Industries Are Not Participating Key Industries Stage Comeback in State Capital 3-mo employment diffusion index, 3-digit NAICS Madison nonfarm employment, ths, 6-mo MA 80 124 240 Wisconsin U.S. Healthcare and government (L) 70 122 All else (R) 236 60 120 50 232 118 40 228 116 30 224 20 114

10 112 220 08 09 10 11 12 07 08 09 10 11 12 Sources: BLS, Moody’s Analytics Sources: BLS, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 97 STATE AND METROPOLITAN AREA FORECAST REVIEW �� South

2013 Outlook: South Primed for Growth BY CHRIS LAFAKIS

ob growth in the South has strengthened over the last few months, and the region is now growing at a faster clip than the nation. The South’s resurgence coincides with a resumption of payroll expansion in its construction in- J dustry, which is no coincidence. The region’s majority of nonjudicial foreclosure states have successfully reduced housing inventory, as housing demand has solidified while building has been suppressed. Moreover, distress inventory is logjammed in the region’s judicial states such as Florida. Across the region, builders are responding to lower inventories and stronger demand by building more housing. Permits in the South have more than doubled since their trough and are at a 4½-year high. All southern states are in recovery with the exception of Alabama and Mississippi, which are at risk of recession because of public sector retrenchment and limited private sector growth.

The construction revival is expected to Included in this issue companies are planning to build cracking continue in 2013, partially underpinning the facilities to churn out these components us- »» Florida...... 101 region’s sanguine forecast, which calls for ing natural gas liquids. There are 17 projects »» Georgia...... 103 stronger employment and income growth either planned or being considered that »» Kentucky...... 104 over the next two years. In addition to con- would turn ethane, a natural gas liquid, into »» North Carolina...... 105 struction, the South’s industrial structure ethylene, and a majority of these projects »» Oklahoma...... 106 and demographic advantages will also en- will be built in the Gulf Coast region. Sasol’s »» Tennessee...... 107 able the region to excel. The South attracts planned $21 billion complex in Lake Charles »» Texas...... 108 the most cost-sensitive business investment, to crack ethylene and produce diesel from »» Virginia...... 109 which explains why its employment volatil- gas will be the single largest investment in ity exceeds the national average. It also has Louisiana history, creating 1,250 permanent flexible labor markets; all southern states Central region for two reasons. First, since oil positions in 2017 and thousands more dur- except West Virginia and Kentucky are right- and gas are located in shale formations such ing construction. European chemical compa- to-work states. While these characteristics as the Barnett, Eagle Ford and Haynesville, nies are already looking toward the U.S. to prompted employers to retrench more dur- and in basins such as the Permian and Fort expand, evidence that the shale revolution ing the recession, they will ensure that the Worth, the new jobs tied directly and indi- has delivered the U.S. a significant com- South will have a stronger cyclical recovery. rectly to natural resource extraction will be parative advantage that will largely benefit Moreover, an increasing number of created primarily in Texas, Louisiana, Okla- the Southeast. southern metro areas will regain their status homa and Arkansas, as they have been for Weaker global growth poses one of the as population magnets as labor force mobil- the last five years. Second, the lion’s share of greatest threats to the South’s sanguine ity improves, workers from other states seek the new investment being made by chemi- outlook. Exports have been hit throughout employment opportunities in Florida, and cal and plastics makers will be in the Gulf the region because of Europe’s recession older workers stop delaying their retirement Coast region, since it is in proximity to shale and weaker emerging market growth. Coun- plans. Population growth likely accelerated formations and ports, which can be tapped to tries such as China, India, Russia, Brazil and in 2012 in metro areas such as Orlando, export chemicals and plastics. Argentina are growing at their slowest rate Raleigh and Palm Bay, and the trend is ex- Petrochemical and plastics makers use since the Great Recession, and the South is pected to continue. ethylene and polythene to make products particularly exposed to Latin America. Manu- Energy is another factor that will propel ranging from plastic containers to deter- facturers are already likely to curtail industrial the South’s growth, although the energy gents. These products have traditionally production growth over the next few months spoils will be concentrated in the West South been made mostly with oil, but increasingly in response to inventory accumulation.

98 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� South

High-Frequency Indicators

Payroll Employment—South States Payroll Employment—South MSAs 1-yr vs. 3-mo performance (3-mo MA) Nov 2012 1-yr vs. 3-mo performance (3-mo MA) Nov 2012 Improving Expanding Improving Expanding Jacksonville Charlotte 4 5 Orlando Oklahoma City South Atlantic North Carolina South Carolina South Atlantic Austin East South Central East South Central Florida Texas 4 West South Central 3 West South Central Louisville Tampa Mississippi Fort Worth Virginia 3 Dallas Houston 2 Tennessee Greenville Oklahoma Alabama Nashville 2 West Palm Beach Georgia Kentucky U.S. 1 U.S. Little Rock Louisiana New Orleans Arkansas 1 Greensboro San Antonio 0 Atlanta Birmingham Richmond -2 -1 0 1 2 3 0 -1 -1 0 1 2 3 4 Memphis -1 Fort Lauderdale Raleigh -2 Miami Virginia Beach -2

-3 Annualized 3 - mo % change Annualized 3 - mo % change -3 West Virginia -4 -4 Contracting Slipping Contracting Slipping % change yr ago % change yr ago Note: Size reflects relative total employment Note: Size reflects relative total employment

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Comparative Performance Indicators

3-mo MA, % change from previous 3-mo period, Nov 2012 Private service- providing Current Change in Change in employment unemployment unemployment Residential Industrial Overall recent outlook from (annualized) rate rate permits production performance last month Atlanta 1.1 10.5 0.2 13.8 1.7 ↑ ↔ Austin 3.5 7.2 -0.1 4.5 3.5 ↑ ↔ Charlotte 3.0 12.2 -0.1 15.6 2.0 ↑ ↔ Nashville 0.0 9.5 -0.1 11.6 2.3 ↑ ↔ Oklahoma City 1.6 6.3 0.0 2.4 2.1 ↑ ↓ Louisville -2.0 10.8 0.5 -22.3 1.9 ↓ ↓ Dallas 0.5 8.3 0.0 8.5 2.4 ↔ ↓ Fort Worth 1.1 8.3 0.0 12.2 0.6 ↔ ↓ Ft. Lauderdale 0.1 10.7 0.3 13.3 1.9 ↔ ↑ Houston 0.0 8.6 0.4 -8.9 2.4 ↔ ↓ Jacksonville 1.6 11.9 0.6 12.5 0.7 ↔ ↑ Memphis -1.8 10.8 0.2 71.2 1.2 ↔ ↔ Miami 1.0 11.9 0.5 150.1 1.4 ↔ ↑ New Orleans 0.9 6.8 0.0 -24.4 1.2 ↔ ↑ Orlando -0.6 12.4 0.7 48.3 1.7 ↔ ↑ Richmond 2.4 8.2 0.3 -32.3 1.8 ↔ ↔ San Antonio -1.9 7.3 0.2 36.1 0.7 ↔ ↓ Tampa 0.2 12.8 0.5 -34.8 2.1 ↔ ↑ Virginia Beach 3.5 7.5 0.2 -20.3 2.4 ↔ ↔ West Palm Beach 0.0 12.5 0.4 -13.1 1.4 ↔ ↑ South 0.5 9.8 0.3 1.4 1.8 ↔ ↔ U.S. 0.6 9.7 -0.3 1.7 1.9 ↑ ↔ Sources: BLS, Census Bureau, Federal Reserve, Moody’s Analytics

MOODY’S ANALYTICS / Regional Financial Review / December 2012 99 STATE AND METROPOLITAN AREA FORECAST REVIEW �� South

What We’re Watching Homebuilding Revival Has Been Crucial Slowing Global Growth Has Tempered Exports Residential construction permits, 2011Q1=100 Foreign GDP growth and South exports, % change yr ago 180 30 15 Northeast Midwest South West 170 20 10 160 150 10 5 140 0 0 130 South exports (L) 120 -10 China (R) -5 India (R) 110 Russia (R) -20 -10 100 Brazil (R) Argentina (R) 90 -30 -15 11 12 07 08 09 10 11 12 Sources: Census Bureau, Moody’s Analytics Sources: Census Bureau, foreign statistical agencies, Moody’s Analytics

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Cyclical Indicators

Employment Housing Starts Personal Income 1998=100 3-mo MA, 1998=100 Yr/Yr Growth Rate 116 200 12 114 180 10 112 160 8 6 110 140 4 108 120 2 106 100 0 104 80 -2 102 60 -4 100 40 -6 98 20 -8 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12

U.S. South U.S. South U.S. South Unemployment Rate (%) Median House Price (Existing) Personal Bankruptcy Filings 3-mo MA, Yr/Yr Growth Rate 1998=100 11 20 250 10 15 200 9 10 150 8 5 7 0 100 6 -5 50 5 -10 0 4 -15 3 -20 -50 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12

U.S. South U.S. South U.S. South

Sources: BEA, BLS, Federal District Courts, NAR, Moody’s Analytics

100 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� South

Florida

Florida continues to recover at the same pace as the region and Healthcare is another strong spot. Although the state’s new the nation. A construction revival and stronger service industry ex- method for reimbursing Medicaid providers—designed to be budget- pansion have enabled the Sunshine State’s unemployment rate to neutral—will appreciably reduce revenue for the state’s training and retrench even more quickly than the nation’s in 2012, even though safety net hospitals such as Jackson Memorial Hospital in Miami, the labor force has expanded to a record high. Shands Teaching Hospital in Gainesville, and the Orlando Regional The two-year outlook for Florida has dimmed from six months Medical Center, the cuts at ORMC will be offset by expansion at the ago, but the state is still expected to outpace the nation as housing Lake Nona Medical City and Florida Hospital’s Health Village. Florida shifts from a liability to an asset and in-migration accelerates. The Hospital recently announced new tenants at its second bioresearch weaker Florida forecast is consistent with the weaker outlook for the facility, which will break ground in early 2013. U.S. economy. Earlier, business and consumer confidence was ex- Orlando’s medium-term prospects are also bright. The metro area’s pected to be strong enough to trigger a self-sustaining expansion. A construction forecast has been upgraded beginning in 2014 since two self-sustaining expansion is no longer expected until the latter half of commercial construction projects were announced. The first of these 2013, when economic and political uncertainty will have diminished. projects is a massive multi-use development in Osceola County that While Florida is expected to outperform the nation in the near will include a large hotel, 700 homes, and 1.5 million square feet of term, the outlook is fraught with risks. The procyclical state would be wholesale space. Orlando’s construction employment forecast has hurt more than most states if the fiscal cliff is not averted or if federal been increased by 1,300 workers from the third quarter of 2014 to the policymakers cannot mitigate the nation’s long-term fiscal imbalance. third quarter of 2019, and an additional 2,000 workers are expected to Such an agreement is expected to revive confidence, enabling an ac- be hired upon completion. The second project is a magnetic levitation celeration of both working-age and retiree migration into Florida. train that will link Orlando’s airport to its convention center and Walt Moreover, there are also fewer upside risks to Florida’s outlook. The Disney World. The smaller project will create 600 construction jobs Obama administration is pushing for emergency unemployment insur- over three phases and will employ 60 workers upon completion. Con- ance benefits to be extended for another year in a package to avert the struction on the first phase could commence by the fall. fiscal cliff, but a smaller percentage of Florida’s unemployed workers Both the wholesale space and transportation infrastructure proj- rely on those benefits than do unemployed workers in other states. ects are a reflection of a significant comparative advantage that -Or Furthermore, Florida’s revenue base is less cyclical. Even if income lando holds over similar-sized metro areas in the nation. The ware- growth is stronger than expected, public sector hiring would be little house mixed-use project could transform Osceola County into the changed since Florida does not have a state income tax. gateway hub for emerging-market manufacturers, while the maglev The state’s best-performing large metro area in 2013 will be Or- project will establish transportation links that are necessary for Or- lando. Travel and tourism will be at the vanguard of the recovery. In lando’s population to expand. Few projects such as these or the Sun- addition to the new tourist attractions being built for the spring at Rail commuter rail are being built in other U.S. metro areas. Walt Disney World and SeaWorld, hotels are looking to hire nearly Tampa’s medium-term prospects are also bright; the metro area 500 more workers, with 80% of them being full time. Hotels are an- received a vote of confidence from Kinder Morgan when the pipeline ticipating another healthy dose of visitation during the metro area’s operator decided to expand its petroleum product pipelines in the peak tourism season, which lasts from January to April. metro area, creating hundreds of jobs. Earlier this year, Kinder Mor-

Construction, Services Underpin Strength… …But the Outlook Has Weakened Florida employment growth, annualized % change 11.0 9.36 3.5 Labor force 10.5 9.34 3.0 Unemployment mil, FL (R) 9.32 2.5 10.0 rate, %, FL (L) Unemployment 9.30 2.0 9.5 rate, %, U.S. (L) 9.28 1.5 9.0 9.26 1.0 8.5 Jun forecast 9.24 0.5 Dec forecast 8.0 9.22 0.0 7.5 9.20 -0.5 11 12 12 13 14 Sources: BLS, Moody’s Analytics Sources: Univ. of Florida, BLS, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 101 STATE AND METROPOLITAN AREA FORECAST REVIEW �� South

gan and CSX built the nation’s first ethanol train and pipeline distri- Florida Relies Less on Emergency Benefits bution system in Tampa. Also, the REK oil terminal is currently under Emergency UI claimants as a % of unemployed workers way at the Port of Tampa. Firms are investing in Tampa’s energy in- 25 frastructure because they know that Tampa will be one of the better- performing large economies in the nation over the next five years. 20 A core consisting of financial, professional and business services will 15 underpin the metro area’s overperformance and lies at the heart of its comparative advantage over other southern metro areas. 10 Jacksonville will recover at only a slightly slower pace than Tampa over the next couple of years, despite its hefty reliance on 5 military spending. Since Jacksonville’s military functions are critical and in many cases irreplaceable, it will hardly suffer even if policy- 0 makers allow budget sequestration to take place in 2013. This theme New York California U.S. Florida Texas is reinforced by two recent announcements. First, General Electric’s Sources: BLS, Daily Finance, Moody’s Analytics contract for fleet repair and maintenance at the Fleet Readiness Cen- 3 ter was renewed for three years. No new employees will be added to GE’s division, but its current staffing size is secure over the contract’s duration. The FRC is the largest tenant at Naval Air Station Jackson- ville, employing nearly 4,000 civilian and enlisted employees. International Woes Have Weighed on Miami Second, the Jacksonville Aviation Authority will build a new Tourism taxable retail sales, % change yr ago, 3-mo MA hangar at Cecil Airport. Contractors and U.S. armed forces perform 15 maintenance on military aircraft and conduct training with that aircraft at Cecil Airport. The new hangar would allow JAA to expand 10 Cecil’s maintenance and training activities, creating 400 jobs during 5 construction at a time when the Pentagon is tightening its belt. Miami’s recovery will fall short of the state’s in 2013 because of 0 comparatively weaker growth in service industries and in the public Miami Orlando sector. Miami lacks the in-migration engines of Central Florida and the -5 Fort Lauderdale West Palm Beach retiree havens on the Paradise and Treasure coasts, which explains its Jacksonville Tampa subpar forecast. Moreover, Miami’s foreclosure overhang and slower -10 pace of domestic in-migration put its housing market at a disadvan- 10 11 12 tage in Florida, although international investors are an offset. Sources: State of Florida, Moody’s Analytics

The slight slump in global tourism and trade will abate. Miami 4 International Airport has opened a new arrivals center so that it can accommodate more visitors. On the trade front, Florida East Coast Industries is building a warehouse near the airport for international cargo. The warehouse will feature an intermodal complex that con- Renting Is Cheaper in Fort Lauderdale nects to PortMiami, Port Everglades, and the Port of Palm Beach. House price-to-rent ratio, % above or below equilibrium level Fort Lauderdale, which shares similar demographic characteristics 20 with Miami and is to a large degree tethered to the global city, will also 15 trail in Florida, but its multifamily housing market will fare better than Miami’s because it has comparatively less foreclosure inventory. A new 10 plan to build 1,000 rental units on top of a ground floor of retail space 5 is the latest evidence that the construction cycle is turning. Construc- 0 tion will likely start in early 2014. By building more rental units, the property developer seeks to take advantage of the pricing power that -5 expensive house prices are giving to landlords. House prices have been -10 sliced in half over the past six years, but buying a home is still 13% Orlando Tampa West Jacksonville Fort Miami more expensive than renting in Fort Lauderdale. Palm Beach Lauderdale ——chris lafakis Sources: Fiserv, PPR, Moody’s Analytics

102 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� South

Georgia

Georgia is outperforming the South and the U.S. Job growth is cession peak is a key indication that the state’s major urban centers broad-based, and the state’s more troubled housing markets are will regain their economic vitality. Atlanta’s manufacturing is also healing. Factory hiring has continued at a modest pace, laying the reviving. Auto parts manufacturer Decostar will invest $26 million foundation for increasingly strong contributions from consumer and in a new plant in Carroll County next year following fresh contracts business services. The outlook still calls for job growth to slow in the from carmakers, including Nissan. The new facility will add 120 jobs, near term in line with the nation, as firms await resolution of federal including engineering and research positions. budget issues and global economic growth bottoms out. Georgia’s The revival in higher-paying jobs is boosting incomes in Atlanta recovery will accelerate strongly in the second half of 2013 as these and underpinning the nascent housing recovery. Metro area per cap- drags fade, allowing the state to outpace the nation in job growth. ita personal income rose 4.1% in 2011, accelerating sharply from the While a deal on the fiscal cliff is within grasp, federal spending 1.7% pace in 2010 and pulling closer to the national rate. Per capita reductions pose substantial risks to the state. No personnel reduc- income is still shy of the prerecession level, however, as the income tions are expected in sequestration, shielding Georgia’s numerous drops in 2008 and 2009 were especially sharp. After outpacing the military bases, but unless a cliff deal is reached, automatic spend- nation in the 1990s, metro area per capita income growth has lagged ing cuts will hurt defense contractors dependent on procurement. the U.S. average in the new millennium. Income growth lagged in the Encouragingly, the state’s large aerospace industry has adopted a aftermath of the dot-com bust and then again since the onset of the wait-and-see approach thus far, led by Lockheed Martin’s decision housing meltdown. Wages and salaries have grown at a much slower not to lay off workers at its 7,000-employee plant in the Atlanta pace since 2000 compared with the norm during the preceding de- metro area. Further shielding the Marietta facility, Lockheed has cade. Incomes in most major industries are now catching up, with received a commitment from the Air Force that planned purchases construction a notable exception. Overall income growth is expected of the new F-35 fighter jets assembled at the plant will proceed as to catch up with the U.S. average in the medium term as Atlanta’s ordered. The industry’s medium-term prospects in Georgia remain multiple economic drivers swing into full force. solid. Planned developments include a spaceport in rural Camden Gainesville, easily among the healthiest economies in the state, County near Brunswick that is attracting proposals from several could transition to expansion sooner than anticipated. Hiring in major aerospace companies. food production, which accounts for nearly 10% of total employ- The forecast assumes a moderate drag from the expiration of ment, has stagnated in the past three years because of subdued federal emergency unemployment compensation, which has been in demand and elevated input costs. Yet the proposed deepening at place with few interruptions since July 2008. Georgia has one of the the Port of Savannah in preparation of the Panama Canal’s expan- highest shares of unemployed workers on EUC; while the loss of EUC sion is increasing the industry’s chances of tapping foreign markets. benefits will represent no more than 0.4% of personal income, the U.S. poultry exports through the first five months of the year in- figure is twice the national average. For households that rely on un- creased 13% from the same period last year, and firms are optimis- employment insurance benefits, the sudden decline in income will be tic about their growth prospects. Poultry processor Gold Creek has painful and result in sharp spending cuts. announced that it will expand its Gainesville facility, adding almost While the cliff is creating near-term uncertainty, the steady ad- 200 jobs next year. vance of professional and technical services payrolls past their prere- ——Arijit dutta

End of EUC Will Especially Pinch Georgia Atlanta Income Growth Catches Up % of unemployed workers receiving extended benefits Per capita personal income, % change 30 8 6 25 4 20 2 0 15 -2 10 -4 Atlanta -6 5 U.S. Alabama Tennessee Florida South U.S. Georgia -8 Carolina 06 07 08 09 10 11 Sources: BLS, Moody’s Analytics Sources: BEA, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 103 STATE AND METROPOLITAN AREA FORECAST REVIEW �� South

Kentucky

Kentucky’s recovery is slowing, as weakening global and national federal fiscal cliff would offset the weight from Europe’s economic demand is weighing on manufacturing and mining output. Payrolls in woes by boosting U.S. demand. This would move Kentucky manu- both industries are contracting, and for the first time in nearly a year, facturers closer to expansion. state job growth is below the national average. Job gains in retail Large publicly funded infrastructure projects in north-central trade, professional/business services, and transportation are offset- Kentucky will partially offset the drag from residential construction ting these losses, but the unemployment rate has been slowly edging employment over the outlook. The Ohio River Bridges Project—a up toward 8.5% since the middle of the summer because the labor joint venture between Kentucky and Indiana to improve cross-river force is growing faster than employment. House prices are gathering traffic between Louisville and Jeffersonville IN—will ramp up in the traction throughout most of the state, and multifamily permits have spring and is expected to support 4,100 construction and engineering more than doubled in the past year. However, this has not yet trans- jobs through 2016. The resurgence of the public sector as a growth lated into construction job growth. driver is also occurring on the local level. Louisville’s county govern- While manufacturing will drive growth over the next few years, its ment, along with LG&E and KU Energy, is investing $940 million to role as a primary growth driver will lessen. GE is adding 150 workers renovate the Mill Creek Generating Station, creating 700 construc- for the production of its new energy-efficient washer, but it is nearing tion jobs. What is more, risks are to the upside. The Builders Exchange the end of its $1 billion investment campaign in Louisville’s Appli- of Kentucky, the state’s largest construction trade organization, ance Park. Other large expansion projects across the state are either is listing a record number of projects to bid on, a result of rising winding down or have concluded. Thus, in Lexington, manufactur- business confidence. ing gains are stemming from smaller investments such as Webasto Energy production will drag on Kentucky’s recovery over the me- Sunroof System’s $10 million expansion of its current facility, which dium term, as coal’s outlook was downgraded this month. More than will create 65 jobs. Production gains in Bowling Green are similar, 2,000 miners have been laid off since the start of 2012, with several aside from the retooling of GM’s Corvette plant, which was recently mines slowing production or closing. Further layoffs are expected pushed back until the beginning of 2013. over the coming year, as demand remains weak: The euro zone is Risks to manufacturing are mixed. Producers are struggling to mired in recession, one-fifth of U.S. coal-fired power plants have shut find appropriately skilled workers, slowing their ability to fill open- down over the past two years, those still operating have a surplus of ings. This is critical since a dearth of skilled workers could impede coal because of last year’s mild winter, and consumers continue to future investment in the state. Most of the manufacturing jobs switch their energy service to natural gas because of its low prices. created in Kentucky and throughout the U.S. over the past few These effects are spilling into other sectors of eastern Kentucky’s years have been for high-value-added production, but not enough economy. Consumer spending is falling as highly paid coal miners are workers in the state are trained in the appropriate fields. Further- laid off, weighing on not only the service sector but also state sales more, much of Europe remains in recession, and diminished exports tax revenue. The coal severance tax is declining too, plummeting 41% could weigh on manufacturers. In 2011, the euro zone accounted for in October. Local governments in eastern Kentucky are dependent on 21% of all Kentucky exports and represented a considerable share this revenue and will likely be forced to cut vital services and infra- of northern Kentucky’s gross product: 2.8% in Louisville, 6.2% in structure projects as a result. Evansville, and 7% in Cincinnati. The resolution of the looming ——SEAN F. ELLIS

Exposure to Euro Zone Puts Producers at Risk Coal Cannot Compete With Glut of Cheap Gas Exports to European Union, goods and commodities, % of GMP 14 26 2011 Kentucky mining employment, ths (L) 12 25

10 24 Kentucky 8 23

No data 6 22 Less than 0.6 4 21 0.6 to 2.4 U.S. natural gas futures price, $ mmBTUs (R) U.S.=1.5 Greater than 2.4 2 20 05 06 07 08 09 10 11 12 Sources: BEA, Census Bureau, ITA, Moody’s Analytics Sources: BLS, Census Bureau, EIA, Moody’s Analytics

FROM MOODY’S ECONOMY.COM 1

104 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� South

North Carolina

North Carolina is closing out 2012 with a disappointingly subpar of the state’s smaller than average pipeline of foreclosures. After recovery. The weak trajectory of payrolls over the last several months that, an overall improvement in the state economy and healthy de- has weighed on the outlook for the state; the latest December fore- mographics will fuel higher demand for new housing, boosting prices. cast calls for total payrolls in the state to cross their prerecession There will, however, be some disparities in the pace of the hous- peak in early 2015, a quarter later than expected six months ago. The ing recovery across the state’s metro areas. Economic performance fiscal cliff is an important and related downside risk to the near-term over the past year is a good indicator of where growth will be faster. outlook. Uncertainty regarding how the fiscal cliff will be resolved The housing market of major areas such as Charlotte, Raleigh and has already been detrimental to business confidence, curtailing eco- Greensboro will fare better because these areas have created more nomic activity and threatening to weigh on growth. jobs in 2012, implying that they are a bigger draw for in-migrants. This is most relevant in the Fayetteville metro area. The domi- In particular, Charlotte and Raleigh have a distinct edge; both metro nant influence of federal and military spending in Fayetteville keeps areas had relatively less exposure to manufacturing and relied more optimism for a quick rebound restrained. The influence of the federal on a diverse set of private services that have fared well during the government on the metro area cannot be overstated; using any mea- recovery and will continue to be drivers. Charlotte, for example, has sure—including employment, income and output—it is the most sig- a network of business headquarters that makes it attractive to new nificant piece of the local economy. Fort Bragg is the largest employ- relocating businesses. Raleigh will benefit from the presence of the er not only in the area, but also in the entire state by a measurable Research Triangle Park, a cluster of high- and biotech firms. A steady margin. Fort Bragg and many of its related government contractors inflow of new residents to these areas will keep their housing mar- are bracing for the fiscal cliff, which could have a stultifying impact kets humming along at a steady pace. on Fayetteville over the next three to six months if defense cuts are Among old-line manufacturing centers, the Winston-Salem hous- not mitigated as expected. Longer term, the unwinding of the Iraq ing market recovery will strengthen once prices begin to recover in and Afghanistan wars as well as the military’s shifting focus toward 2013, as the impact from foreclosure sales will be negligible. Unlike the Pacific Coast could lessen the area’s dependence on the federal most of the country, the metro area never experienced a large housing government, but also limit demand for local services. bubble. As a result, prices have not dropped nearly as much as they North Carolina’s recovery will be a step slower than the nation’s have in other areas. Additionally, Winston-Salem has fewer foreclo- through the first half of 2013, as job growth will remain weak and sures relative to its size than does the nation, limiting the downward public spending limited. Most of the state’s drivers should accelerate pressure on house prices from distress sales in the months ahead. Ac- in 2013 and beyond, allowing the jobless rate to finally drop below cording to RealtyTrac, for every 1,000 homes in Winston-Salem, eight 9% by late 2013. The housing market is also expected to kick into are in foreclosure, compared with 13 nationally. Winston-Salem’s fore- higher gear over the next year and return as a driver by 2014. Home- closure inventory edged up last year because of foreclosure processing building has shown signs of life in 2012, particularly in the second delays, but the foreclosure pipeline has once again become fluid. Since half of the year, and market fundamentals imply that the recovery there is very little excess housing inventory, and people are still mov- will steadily improve and begin to take off in late 2013. House prices, ing into the area, building permits are expected to pick up next year, which are scraping along the bottom, according to the Case-Shiller and house prices will follow soon thereafter. index, are expected to hold their ground through mid-2013 because ——BODHI GANGULI

Outlook Ebbs on Sluggish Recent Performance But the Housing Market Will Improve Payroll employment forecast, mil Housing indicators 4.4 90 136 Jun forecast 80 134 4.3 Case-Shiller® Home Price Dec forecast 70 Index, 2000Q1=100 (R) 132 4.2 60 50 130 4.1 40 128 4.0 30 126 20 3.9 10 124 Single-family permits, SAAR, ths (L) 3.8 0 122 08 09 10 11 12 13F 14F 15F 10 11 12 13 14 Sources: BLS, Moody’s Analytics Sources: Fiserv, Census Bureau, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 105 STATE AND METROPOLITAN AREA FORECAST REVIEW �� South

Oklahoma

Oklahoma’s recovery has achieved self-sustaining momentum. new skyscraper headquarters portends that, despite short-term soft- Although the unemployment rate has risen since June, the cause ness, energy will remain a long-term pillar of growth in Oklahoma. is salutary: More people are joining the labor force, including in- Thanks largely to the energy industry, Oklahoma City is leading the migrants and formerly discouraged residents. Total employment has state by far on job growth. climbed steadily since breaching its prerecession peak in August. Job Persistent drought will factor into the state slowdown, hurting rural gains are broad-based, with education/healthcare and construction residents most deeply. Drought has depleted crop yields and compelled the principal laggards. Average wages are rising along with employ- livestock liquidation because of higher feed costs and pasture loss. As ment, suggesting strong demand for high-skilled positions. measured in October, agriculture exports are down nearly 50% from a Despite the strong recent performance, Oklahoma’s recovery year ago. Agriculture accounts for a larger share of the Oklahoma econ- will succumb to national macroeconomic weakness in the first half omy than it does in other states. The current drought threatens to close of 2013. Employment growth is expected to fall from an annualized the Mississippi River to barge traffic. This would destabilize the region rate near 2% in the third quarter of 2012 to below 1% in the first and raise transit costs for Oklahoma producers. quarter of 2013. Job growth will then begin to strengthen again later The federal fiscal cliff adds to the pall of uncertainty. The forecast in the year. The forecast is little changed since its prior update. assumes that sequestration will be mediated by a congressional deal, Slowing energy production will be the main cause of the weaker but the full package of across-the-board cuts remains a downside performance. Low natural gas prices have already curbed exploration risk. Even a smaller set of cuts could pack a punch, curbing growth and drilling operations. Mining payrolls, which plateaued in the third in the national economy and demand for Oklahoma manufactures. quarter, have begun to contract in the fourth. Energy companies in Having been in recession all of 2012, Lawton stands to lose the Oklahoma City will ride out the downturn on the back of the rela- most, yet it can afford to lose the least. Since October 2011, payrolls tively strong price of oil, but the downside risk that they will cut jobs have shrunk by 4%. The economy is dependent on the state’s largest or unload commercial real estate in the capital has increased. In De- military installation, Fort Sill, as well as the Goodyear plant and local cember, after months of selling out-of-state assets to reduce its debt, hospital. While military personnel are exempt from federal budget Chesapeake Energy announced voluntary buyouts for 275 employees; sequestration, the base’s long-term future is far from certain. although the location of the targeted employees was not publicized, Manufacturing has so far been resilient to energy’s weakening, about one-third of the company’s 14,000 workers are employed at its adding jobs faster than any of Oklahoma’s industries in 2012. At 56 in Oklahoma City headquarters. Energy companies, including the equally November, Oklahoma’s NAPM index reached a calendar-year high and belabored SandRidge, will spend and hire less over the near term. is among the highest in the nation. Readings above 50 imply expan- Still, a slowdown will not undo energy’s major contributions to sion. Tulsa’s recovery has trailed Oklahoma City’s, but Tulsa has added the resurgence of Oklahoma City’s downtown. A new sales tax will manufacturing jobs at twice the rate of the rest of the state, despite raise funds earmarked for projects such as a new convention center, layoffs and buyouts at its American Airlines maintenance facility. This downtown park, and sidewalk renovation; some have already oc- pace will slow as exports to Canada wane. Oklahoma’s manufacturing curred, and some are down the pike. Energy companies have relo- exports flattened in the second half of 2012. The state sends 30% of cated downtown, swelling professional services payrolls, spurring de- its exports to Canada, compared with 20% nationally. velopment in retail and hospitality and boosting real estate. Devon’s ——Bradley Turner

Natural Gas Plateaus but Is Offset by Oil Lawton’s Labor Market Misses Out on Growth 3-mo MA Employment, % change yr ago, 3-mo MA 240 220 4 Oil production, ths barrels per day (L) Oklahoma City Tulsa Lawton 230 Active rotary rigs, # (R) 200 2 220 180

210 160 0 200 140 190 120 -2 180 100 -4 170 80 160 60 -6 08 09 10 11 12 09 10 11 12 Sources: Baker Hughes, EIA, Moody’s Analytics Sources: BLS, Moody’s Analytics

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106 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� South

Tennessee

Softer than expected data on retail spending, factory output and of the military under the 2013 Defense Authorization Act. Although exports in the fourth quarter indicate that Tennessee’s economy is the Senate’s version of the budget may be subject to change during slightly weaker than previously estimated. Retail sales tax collections, the reconciliation process, this will not prevent pay from increasing in which serve as a proxy for household spending, are flat to down in January for most service members at Fort Campbell. Higher pay will many of the state’s metro areas. Auto manufacturing is headed higher, mostly offset the hit to incomes from higher payroll taxes in January, but abundant inventories are discouraging nonauto manufacturers when the Social Security tax reduction lapses. Although retail sales from increasing production. The state purchasing managers’ index for tax collections in Clarksville fell sharply from a year ago in the third October and November sits no higher than its third quarter average, quarter, the drop reflects a difficult comparison against last year, when while average hours worked in manufacturing have fallen to their low- troops returned to Fort Campbell, boosting spending. est point in a year. State exports decreased sharply in October, and a Prospects for consumers are not as bright in Tennessee’s other large chunk of the drop stemmed from the euro zone. metro areas, where sales tax collections are weakening by varying The December baseline is mostly consistent with the November degrees. In general, metro areas in the western half of the state are baseline. In terms of real output growth, Tennessee will remain in the faring better than those in East Tennessee, where manufacturing is middle of the pack in the first half of 2013. Consumers will be a weak less tied to autos and sales have been hit worse by the drop in de- force for the recovery, which means that the economy will lean on mand from Europe. Retail collections in Knoxville, Kingsport, Mor- manufacturing and, to a lesser extent, construction to offset softer ristown and Cleveland dropped from a year ago. The retail outlook household spending on retail and food services. The latest factory is most downbeat in Knoxville, where labor market weakness and data suggest auto production will be a modest source of strength for waning federal government support will weigh most on personal the fourth quarter, and automakers’ factory expansions in Nashville income growth. and Chattanooga will keep hiring on its upward path in the near Recent anecdotes of expansions and layoffs do not meaningfully term. But Tennessee will slip down a few ranks during the second half alter the outlook. A major expansion in Nashville’s healthcare affirms of the year as consumers begin to exhaust pent-up demand for autos the outlook for solid gains in employment during the next few years. and the contribution from manufacturing wanes. Hospital management provider HCA will invest about $200 million Tennessee’s major housing indicators are looking better. Home in two new office towers and add 1,000 net new jobs in the next five sales in Memphis climbed 22% from a year ago in August, and they years. This is broadly in line with the contours of the baseline fore- are up a whopping 33% in Nashville, compared with a national aver- cast for general hospital employment to rise strongly through the age increase of less than 10%. The months’ supply of inventory is medium term. The higher-paying nature of these new jobs will sup- also improving in Nashville and Memphis, dropping to near its long- port the metro area’s average income in the near term. run average as the foreclosure inventory shrinks. The strong trajec- FedEx is offering its employees a buyout package in an effort to tory of most housing indicators heading into early 2013 leaves few reduce costs amid a shift away from costly air delivery. The buyouts reasons to alter the forecast for gains in homebuilding and existing- will limit hiring in Memphis’ key logistics industry. The baseline fore- house prices. cast anticipates that transportation employment will stay mostly flat The baseline forecast for Clarksville is more upbeat than the rest of for the next several years. the state. The U.S. Senate approved a 1.7% pay increase for members ——alexander miron

Consumers Will Provide Less Lift Construction, Manufacturing to Put Wind in Sails % change annualized, 6-mo MA, SA % change, 2013 20 7 Retail sales tax collections Tennessee 15 6 Retail trade employment South 10 5 5 4 0 3 -5 2 -10 1 -15 0 -20 GDP Employment Construction Industrial House prices 05 06 07 08 09 10 11 12 put in place production

Sources: State of Tennessee, MTSU, Moody’s Analytics Sources: BEA, BLS, Census Bureau, Federal Reserve, FHFA, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 107 STATE AND METROPOLITAN AREA FORECAST REVIEW �� South

Texas

Texas is expanding at a firm pace above the national average, and yet another extension to complete its exit plan, the fourth delay in is one of only a few states to have fully recovered. Its above-average a year, impeding the business of vendors supplying the airline. The payroll growth is all the more impressive because gains in trend third is weakening semiconductor demand, which caused Texas In- expansion mode are typically slower than in recovery. Payrolls in struments to announce significant global layoffs. all major industries are above their year-ago levels, although there The American Airlines delay and the fiscal cliff would also hurt has been recent weakness in manufacturing, energy exploration, Fort Worth. In general, the metro division has been performing a bit and state and local government. Construction is leading the way, better than Dallas because of strength in Fort Worth’s core manufac- consistent with a measureable strengthening of the state’s housing turing base, including autos, aircraft, locomotives, and energy-relat- markets. Housing permits have more than doubled from their nadir ed supplies and equipment. However, Lockheed had announced that and are now at a four-year high. The unemployment rate dropped to full sequestration would require job cuts of 10% globally, and the lo- 6.6% in October. cal cuts would be especially large since the F-35 is assembled there. The outlook, which calls for persistent above-average growth in Despite the recent weakness in oil prices and drilling, Houston re- 2013, is intact, but downside risks remain. The drop in the West Texas mains at the forefront, with other industries driving growth. Housing Intermediate crude oil price from $109 per barrel in February to is now leading the way, with home sales up 15% since last year and around $87 has underpinned a 7% decline in active rotary rig counts inventories at a multiyear low. Additionally, the chemicals industry across the state since the beginning of the year, resulting in layoffs. is expanding to take advantage of low-cost natural gas feedstocks, One risk is that further price declines, or even persistence at the with Lubrizol, Chevron and Dow all building new plants. Further, Mit- current oil price, would further constrict drilling and the manufactur- subishi Caterpillar Forklift will build a new headquarters and boost ing of associated equipment and supplies. But the baseline outlook manufacturing capacity by 40% to meet the growing demand in the is that oil prices will firm in 2013 once the U.S. gets past the fiscal materials handling business for electric products. cliff, the euro zone recession comes to an end, and emerging-market An improvement in local government following the losses in 2011 economies accelerate. Weakness in both energy-related and high- should help San Antonio strengthen in 2013. The cutbacks were the tech industries was behind declines in manufacturing employment result of the deep state budget deficit at the time. Recently, however, in recent months, but the production index in the November Texas tax collections have reversed course and are 13% above the original Manufacturing Outlook Survey stayed in positive territory for the projection for the first half of the state’s 2012-2013 two-year budget 12th straight month, and new orders turned positive again, pointing cycle, in part because of soaring energy production. Eagle Ford Shale to better times ahead. is still a driver. The metro area’s high military concentration makes it Dallas is performing well, and employment gains have lifted the vulnerable to the fiscal cliff, but the concentration of critical military total above its prerecession peak, though other major Texas metro medical and cyber technology should limit the losses. areas got there first. The outlook calls for the recovery to continue, In Austin, the improving housing market will offset potential loss- but prospects will look a lot better once the metro area clears several es in IT manufacturing. Although Dell and AMD plan layoffs, house hurdles. The first is the fiscal cliff, which is more important to Dallas prices and home sales are up significantly, leading to strong growth since it has a high concentration of military contractors. The second in multifamily construction. is the American Airlines bankruptcy. The company recently asked for ——EDWARD FRIEDMAN

Texas Housing Market Will Lead Growth Heavy Manufacturing Lifts Houston, Fort Worth New permits for residential construction, ths, 6-mo MA Manufacturing employment, % change since Jan 2011 110 70 Houston

100 60 Fort Worth Multifamily (R) 90 50 Austin

Texas 80 Single-family (L) 40 U.S. 70 30 San Antonio 60 20 Dallas 50 10 08 09 10 11 12 -2 0 2 4 6 8 Sources: Census Bureau, Moody’s Analytics Sources: BLS, Moody’s Analytics

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108 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� South

Virginia

The Virginia recovery is lagging the national recovery. The re- years has been strong in the latter two. The outlook for the former covery would be even worse were it not for technology industries. two is also threatened by income revisions. The BEA’s recently re- Tech-producing industries outpaced the rest of the U.S. economy leased 2011 personal income data for counties reveal slower income from 2003 to 2012 and are forecast to do likewise over the next gains than Moody’s Analytics had estimated for most metro areas in five years. This will support the Virginia economy, as the state has Virginia, with Lynchburg and Washington DC being the exceptions. a larger than average exposure to technology industries. Those jobs Income growth was already forecast to slow in all metro areas account for 7.4% of total employment in Virginia, well above the this year, consistent with recent weakening. However, the down- national average of 4.7%. Technology payrolls in Virginia are more ward revisions mean that income is lower in most metro areas and than 6% higher than before the recession started; they are barely that growth was slower entering 2012, both of which point to less higher nationally. income in 2012 and beyond. This weakens the outlook for consumer- Technology jobs are very concentrated within the state, however, sensitive industries such as retail and leisure/hospitality. Blacksburg, limiting the benefit to two clusters. Northern Virginia is the primary Danville, Harrisonburg, Winchester and Charlottesville had particu- beneficiary. In the Washington metro division, technology jobs ac- larly large downward revisions for 2011, and all had material down- count for more than 10% of total employment. Growth in Washing- ward revisions for at least one of the prior two years as well. ton since the start of the recession has exceeded the state average. The Richmond recovery remains weak, as income increases are Stimulated by the presence of the University of Virginia, technology middling and technology expansion is minimal. Richmond is one of jobs are also concentrated in Charlottesville, accounting for 5.1% the few metro areas in Virginia with below-average tech employ- of employment. ment growth since the recession began. Nowhere else in the state do technology jobs account for an Roanoke employment data are conflicting. The employment above-average employment share. Even Virginia Beach, where survey of establishments shows a labor market stuck in neutral since defense contractors and shipbuilders require technology workers, the Great Recession ended; payrolls rest just barely above 2010 such jobs account for just 3.5% of total employment. Job growth levels. However, the household employment survey suggests the in Virginia Beach has been minimal; employment is below its labor market is thriving. Employment surpassed its prerecession peak prerecession level. in the second half of last year, and the jobless rate is a scant 6%, The Virginia Beach outlook is also threatened by events in the nearly 2 percentage points lower than the U.S. rate. Roanoke’s aver- Middle East. As a result of the latest conflict between Israel and age hourly and weekly earnings are rising considerably faster than in Hamas, three warships due to return to port in November were or- the U.S. and Virginia, which suggests a relatively tight labor market. dered back to the Middle East. The ships carry about 4,400 Marines Further, Quarterly Census of Employment and Wages figures show and sailors. Troops returning from a deployment normally have cash employment increased more vigorously than reported in the payroll and the desire to spend, which provides a lift to the local economy. survey in late 2011 and the first quarter of 2012. Hence, it appears The delay, especially if it is lengthy and extends to more ships and that Roanoke’s recovery is on a much more favorable trajectory service people, could hold off some economic activity in the area. than what the current payroll employment data show, supporting Winchester, Danville and Lynchburg have particularly low con- the outlook. centrations of technology jobs, although growth over the past five ——SCOTT HOYT

Tech Jobs Highly Concentrated in Virginia Income Revisions Undermine Outlook Tech employment, % of total, Oct 2012, 12-mo MA Personal income, 2011, % change Winchester Blacksburg Danville Danville Lynchburg Harrisonburg Blacksburg Harrisonburg Winchester Virginia Beach Charlottesville Richmond Virginia Beach Roanoke Richmond U.S. Roanoke Charlottesville Revised Lynchburg Virginia Previous Washington metro div Washington metro div 0 2 4 6 8 10 12 3 4 5 6 7 8 9 Sources: BLS, Moody’s Analytics Sources: BEA, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 109 STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

Housing to Rise Beyond the Cliff BY EDUARDO J. MARTINEZ

ntering the fourth quarter, the West outpaced all other regions. Consumer spending, travel and tourism, and homebuilding have helped to mitigate the worst fallout from the European recession and natural disasters E that have weighed on other regions. Retail and visitor-dependent industries have driven recent job gains. Some headwinds are materializing, mainly uncertainty surrounding the looming federal fiscal cliff and slowing export growth.

The Mountain West is set to end 2012 Included in this issue be felt throughout the West since the U.S. outpacing the Pacific Coast after lagging economy is expected to slip back into reces- »» Arizona...... 113 well behind the growth rates of not only the sion. Employment in metro areas with a high »» California...... 114 Pacific Coast but also the U.S in the middle degree of correlation with U.S. fluctuations, »» Colorado...... 116 of the year. Arizona, Colorado and Utah particularly Portland OR, Los Angeles and »» Hawaii...... 117 have fueled job growth in the division on the Oakland CA, would be impacted the most as »» Nevada...... 118 strength of professional and business servic- businesses and consumers scale back invest- »» Oregon...... 119 es, retail, and visitor-dependent industries. ments and spending. »» Utah...... 120 New Mexico is the only state to experience Housing will be an increasingly positive »» Washington...... 121 declining payrolls through October, but out- driver of the West’s economy next year. size losses in state government employment Early signs of belated optimism for housing could be wiped away when benchmark revi- 2.5% in the first quarter of 2013, well below can be seen among homebuilders. The Na- sions are released in early 2013. A rejuve- the almost 4% rate expected in January. tional Association of Home Builders’ hous- nated California labor market has accounted Despite the downgraded outlook, the West ing market index for the West has more than for most of the Pacific Coast’s job gains, ac- will outpace all other regions in 2013 and doubled since January and reached its high- companied by Washington’s strengthening 2014 on the strength of its burgeoning tech, est level since 2006 in the fourth quarter. technology and manufacturing. tourism and housing-related industries. The The majority of homebuilders, albeit a dwin- Job growth through the first 10 months West will be impacted unevenly by any com- dling one, still view sales conditions as poor. of 2012 was consistently the strongest in promise on spending cuts and tax increases. Much more advanced conditions for existing technology centers such as San Francisco Cuts to federal procurements will hit metro housing are driving homebuilders’ improving and Seattle. Los Angeles, lifted by leisure and areas with large exposure to government optimism. According to RealtyTrac, the REO hospitality and thawing financial services, contracts, particularly for weapons and other foreclosure inventory rate in the West has recorded the strongest improvement among defense products. Tucson AZ and Colorado fallen by more than half since the beginning the West’s major metro areas and divisions. Springs CO are among the five major metro of 2011, the biggest drop for any region, and Weighed down by still-weakened local gov- areas with the largest defense procurement is now below that of another region—the ernment and slow-to-improve retail, River- shares of metro GDP. In addition, San Diego, Midwest—for the first time since the first side is the only major West metro area with Ogden UT, Sacramento CA and Honolulu quarter of 2008. Improving labor markets, smaller payrolls in October than in January. have defense procurement shares that are generally nonjudicial foreclosure laws, and The West will face some headwinds at the more than double the U.S. average of 2.2%. strong interest from investors and foreign beginning of 2013 because of the looming The implementation of the full multiyear buyers explain the improvement. Denver, federal fiscal cliff and weakness in the global spending cuts and tax increases, a downside Los Angeles and San Diego are among the economy. The combination of tax increases, risk for now, would extend beyond metro ar- major metro areas where the REO foreclo- the end of the payroll tax holiday, and spend- eas with sizable exposure to federal procure- sure inventory rate has slipped back below ing cuts will slow regional GDP growth to ments. The impact of the full fiscal cliff would the national average.

110 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

High-Frequency Indicators

Payroll Employment—West States Payroll Employment—West MSAs 1-yr vs. 3-mo performance (3-mo MA) Nov 2012 1-yr vs. 3-mo performance (3-mo MA) Nov 2012 Improving Expanding Improving Expanding Pacific 7 Hawaii Pacific 6 Oxnard Mountain Mountain San Jose 6 5 Honolulu Eugene Utah 5 Salt Lake City Provo 4 Phoenix Spokane 4 Nevada Idaho Colorado 3 Los Angeles Seattle Montana 3 Las Vegas Boulder Santa Ana Washington 2 2 San Francisco Arizona San Diego Denver U.S. Albuquerque 1 U.S. 1 Boise City Tacoma New Mexico Oregon California Sacramento 0 0 -2 -1 0 Tucson 1 2 3 4 -1 0 1 2 3 -1 Annualized 3 - mo % change -1 Annualized 3 - mo % change Riverside Portland Alaska Wyoming Colorado Springs Oakland -2 -2 Contracting Slipping Contracting Slipping % change yr ago % change yr ago Note: Size reflects relative total employment Note: Size reflects relative total employment

7 8

Comparative Performance Indicators

3-mo MA, % change from previous 3-mo period, Nov 2012 Private service- providing Current Change in Change in employment unemployment unemployment Residential Industrial Overall recent outlook from (annualized) rate rate permits production performance last month Honolulu -0.6 5.9 -0.0 83.3 0.9 ↑ ↔ Los Angeles 2.4 12.4 0.1 71.0 1.9 ↑ ↔ San Diego 3.2 10.8 0.2 26.8 2.7 ↑ ↔ San Jose 2.3 11.9 -0.2 -10.7 4.4 ↑ ↔ Seattle 3.6 8.7 -0.2 39.9 -0.4 ↑ ↔ Tacoma -1.5 10.2 0.5 -13.7 0.9 ↓ ↓ Albuquerque -3.3 9.0 0.8 0.6 2.8 ↔ ↓ Denver -2.0 7.9 0.2 75.2 1.2 ↔ ↓ Fresno -0.9 17.0 0.8 6.6 1.9 ↔ ↔ Las Vegas -2.4 13.8 0.6 69.5 0.9 ↔ ↑ Oakland 0.0 11.6 0.1 1.5 2.4 ↔ ↔ Oxnard -0.8 11.3 0.4 26.4 2.5 ↔ ↓ Phoenix 0.8 9.1 0.5 -4.2 2.3 ↔ ↔ Portland 1.4 10.6 -0.1 -11.5 3.2 ↔ ↔ Riverside 0.9 14.9 0.3 1.4 1.7 ↔ ↔ Sacramento -0.5 12.7 0.4 44.2 1.5 ↔ ↔ Salt Lake City -4.9 6.9 0.3 4.4 2.5 ↔ ↓ San Francisco -0.9 9.6 0.2 -56.5 2.6 ↔ ↔ Santa Ana 5.2 9.9 0.0 -29.7 2.1 ↔ ↑ Tucson 1.9 8.8 0.5 14.5 0.1 ↔ ↓ West 0.3 10.9 0.3 17.2 2.1 ↔ ↔ U.S. 0.6 9.7 -0.3 1.7 1.9 ↑ ↔ Sources: BLS, Census Bureau, Federal Reserve, Moody’s Analytics

MOODY’S ANALYTICS / Regional Financial Review / December 2012 111 STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

What We’re Watching

Fiscal Cliff Threatens the West… …But Homebuilding Is Close to Reviving Defense Department procurements, % of metro area GDP Housing market index, 3-mo MA 50 Tucson Midwest Northeast South West 45 Colorado Springs 40 >50 denotes more builders view sales conditions as San Diego 35 good than poor Ogden 30 Sacramento 25 Honolulu 20 San Jose 15 10 Provo 5 U.S. 0 0 2 4 6 8 10 12 14 16 07 08 09 10 11 12 Sources: BLS, Moody’s Analytics Sources: National Association of Home Builders, Moody’s Analytics

Cyclical Indicators

Employment Housing Starts Personal Income 1998=100 3-mo MA, 1998=100 Yr/Yr Growth Rate 120 180 15 118 160 116 140 10 114 112 120 5 110 100 108 80 106 0 60 104 40 102 -5 100 20 98 0 -10 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12

U.S. West U.S. West U.S. West Unemployment Rate (%) Median House Price (Existing) Personal Bankruptcy Filings 3-mo MA, Yr/Yr Growth Rate 1998=100 12 40 250 11 30 200 10 20 9 150 10 8 0 100 7 -10 6 50 5 -20 0 4 -30 3 -40 -50 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12 98 00 02 04 06 08 10 12

U.S. West U.S. West U.S. West

Sources: BEA, BLS, Federal District Courts, NAR, Moody’s Analytics

112 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

Arizona

Arizona had one of the better years in the West, leading the re- Second, Arizona has gotten its fiscal house in order, but a loom- gion in year-over-year payroll employment growth. A usual stalwart ing change in the tax code threatens to derail recent progress. In of growth, education/healthcare notched the largest payroll gains, May, a one-cent sales tax enacted in 2010 to curtail falling rev- despite weakness in the second half of the year. Commercial projects enues will expire, ending the flow of nearly $1 billion annually to have prompted construction, which was essentially halved during state coffers. Any fiscal tightening at the state level would be trou- the housing market collapse, to at last begin a rebound. Labor mar- blesome for Tucson, where state and local government employs ket fundamentals have improved only mildly. The unemployment nearly one-fifth of the workforce. The city is struggling to close a rate has fallen 0.5 percentage point, but discouraged workers have significant budget gap, and school closures are becoming a more yet to return to the labor force as they wait out the slow recovery. viable solution. Consumer conditions have continued to ease, as total personal bank- A final downside risk could affect what has been a leading growth ruptcies fell through the first half of this year. However, consumers driver for Phoenix in 2012. Professional/business services regained are still cautious, keeping retail trade employment and sales below 17% of positions lost during the recession over the past year through prerecession levels. October. Inc. magazine recently highlighted Arizona’s top 10 job The outlook for 2013 is less sanguine compared with that of this creators, several of which were in professional services; GoDaddy time last year. Payroll employment growth in 2012 exceeded expec- topped the list with more than 1,000 jobs created over the past tations, and this rate of growth will prove unsustainable considering three years. However, a potential merger with American Airlines the reluctance of businesses to hire amid concern surrounding the would likely relocate US Airways corporate headquarters to Dallas federal fiscal cliff and global economic slowdown. Regardless, Ari- and reduce some traffic through Phoenix Sky Harbor International zona’s economic diversity will allow its recovery to steadily outpace Airport. The North Scottsdale Chamber of Commerce estimates that of the U.S. next year. Close trade ties with Latin America have that the merger could cost the metro area 5,500 jobs at worst, partially insulated Arizona from falling demand in Europe. Low busi- which would constitute a tremendous blow to the still-recovering ness costs relative to California and a bustling tech sector will attract regional economy. business investment. Once the national and global recoveries build Flagstaff’s labor market performed well enough this year to ad- momentum, tourists will return to the state’s attractions. Robust in- vance to recovery status, but the outlook for vital tourism remains vestor interest led the Phoenix housing market to turn a corner this cloudy. Leisure/hospitality employment has become increasingly year, and strong demographic trends will support demand into 2013. volatile as business owners are hesitant to keep a full staff and now The first of several major downside risks facing Arizona this year is rests near a seven-year low. The metro area’s main attraction, Grand the fiscal cliff. Arizona’s high concentration of aerospace and defense Canyon National Park, relies heavily on visitors from across the contractors leaves the state heavily exposed to potential defense globe, and passenger traffic through Phoenix Sky Harbor through the procurement cuts. These would fall most heavily upon Tucson, third quarter was down compared with the same period last year. As where procurement contracts account for nearly 15% of total metro confidence continues to be strained from the fiscal cliff and global area GDP. Phoenix is also at risk, although Boeing and Honeywell economic slowdown, consumers will be hesitant to open their wal- head a sizable commercial aerospace sector that would help to at lets for extensive travel plans in the metro area and state. least partially ward off severe job losses. ——DANIEL CULBERTSON

Arizona’s 2013 Outlook Dampened Professional Services Pick Up the Slack Forecast vintages, total employment, % change yr ago Employment, % change yr ago, 3-mo MA 5 5 Nov 2012 Nov 2011 4 4

3 3

2 2

1 1 Total Professional services 0 0 Education/healthcare Leisure/hospitality -1 -1 11 12E 13F 14F 15F 11 12 Sources: BLS, Moody’s Analytics Sources: BLS, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 113 STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

California

California’s belated recovery gained momentum during most the statewide push by JPMorgan Chase & Co. The firm opened nine of 2012. Expenditures on technology, healthcare, and leisure and Los Angeles-area branches in the quarter as part of its goal to open hospitality by Californians, and by out-of-state and international 525 to 700 branches across the state by 2015. visitors, are driving the state’s recovery. Further, construction is The impact of the weeklong shutdown of the Ports of Long Beach now a positive contributor to recovery; construction employment and Los Angeles at the beginning of December will quickly dissipate. and residential construction permits are rising. As a result, the state Soon after an agreement between unionized clerical workers and has outpaced that of the West and the U.S. in job growth since the maritime operators was reached, terminals operated around the second quarter and the unemployment rate has fallen nearly a full clock to eliminate the queue of idled container ships off the South- percentage point since the beginning of 2012 to almost 10%. Some ern California coast. The possibility of a labor action that could shut weaknesses remain, primarily slowing exports as the global economy down ports on the East and Gulf coasts at the beginning of January cools and cuts to state and local spending and employment, particu- could cause some shippers to divert shipments through Long Beach larly at the local level. Also, the labor force is contracting, illustrating and Los Angeles, offsetting the diversions to other ports in early De- a lack of confidence among job seekers. cember along the East, Gulf and West coasts, including Oakland, as The outlook for the first half of 2013 is much more clouded now well as Canada and Mexico. Port workers in Oakland also ratified a than at the beginning of 2012, in large part because of the risk of the new contract in December following a one-day strike in November. federal fiscal cliff. The likely combination of limited tax increases, the Cuts in defense spending likely to be included in a fiscal com- end of the payroll tax holiday, and spending cuts will slow state GDP promise will create the biggest headwinds for Southern California, growth to 2% in the first quarter of 2013, slightly more than half the particularly San Diego, in 2013. While no specific cuts have been rate forecast in January. The forecast assumes policymakers avoid announced, recently announced procurement deals in the metro the full extent of the fiscal cliff, allowing California’s recovery to re- area could be among the cuts. BAE Systems and General Dynamics sume its acceleration by the middle of the year and to outpace the NASSCO have been awarded more than a $1 billion to build and U.S. into 2014. A failure by fiscal policymakers and the extension of modernize ships for the Navy, helping to stabilize often-volatile European weakness to California’s key Pacific Rim export markets are demand for shipyard workers. While the ratio of Pentagon procure- downside risks to the state’s outlook in 2013 and 2014. ments to metro area GDP has been nearly unchanged elsewhere in A strengthening U.S. recovery, international trade linkages, and Southern California since 2000, its share has more than tripled in resurgent real estate will drive Southern California in 2013, bringing San Diego. its pace of growth more in line with Northern California. Hard-hit Northern California economies will also encounter domestic by the financial and housing crashes, financial services are belatedly headwinds at the beginning of 2013 before resuming their recent ac- transitioning into a positive driver for Los Angeles and Santa Ana in celeration later in the year. Again, assuming a policy compromise on the near term as household balance sheets strengthen and housing the fiscal cliff and long-term budget control, technology will remain reaches its long-awaited recovery. Already in the third quarter, the the primary near-term driver for Bay Area economies. Evidence of metro areas combined led all others with a net increase of 11 bank the still-positive tech outlook can be seen in San Francisco’s office branches, in contrast to a nationwide net decline of 111 branches, ac- market. The metro division’s increase in occupancy costs—rents plus cording to SNL Financial. Helping to drive the increase in branches is local taxes and service charges—topped CBRE Group’s survey of

Risk of Fiscal Cliff Weighs on 2013 Outlook… …Particularly for San Diego Defense Firms California employment, % change yr ago, forecasts of: Defense Department procurements, % of metro area GDP 3.5 7 Nov 2012 Jan 2012 Los Angeles 3.0 6 Santa Ana 5 Riverside 2.5 San Diego 4 2.0 3 1.5 2

1.0 1

0.5 0 11 12E 13F 14F 15F 16F 00 02 04 06 08 10 Sources: BLS, Moody’s Analytics Sources: Census Bureau, Moody’s Analytics

114 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

global office markets with a 36% increase for the year ending Septem- Banking Re-Emerges in Southern California ber 30. Investment property sales are set to end the year at more than Credit intermediation employment, % change yr ago $6 billion, second only to the $8.5 billion in sales in 2007, according to Oakland Oct 2012 an analysis by the San Francisco Business Times. The uplift created by Sacramento 0 technology is also extending to visitor-dependent industries. With the U.S. number of airport travelers expected to increase 2% per year over the San Francisco next five years, San Francisco International Airport has proposed build- Los Angeles ing a 400-room on-site hotel by 2017. San Diego San Jose will move past one of its occasional but temporary lulls San Jose in 2013. Brightening the outlook for the metro area is an improving Santa Ana forecast among semiconductor firms, which have reduced shipments Riverside since the middle of year. Three-quarters of industry executives surveyed by KPMG expect revenues to increase next year, an increase -6 -4 -2 0 2 4 6 8 from 63% a year ago. Additionally, two-thirds of the executives expect Sources: BLS, Moody’s Analytics to increase their payrolls, up from 48% in 2012. Helping to fuel the recovery in semiconductor demand is a shift in business and consumer preferences’ from personal computers to tablets and mobile platforms. IDC has increased its forecast for global tablet sales for 2016 by 8% to more than 280 million units, more than doubling current sales and San Francisco Drives Bay Area Airport Recovery eclipsing PC sales by 2015. The Silicon Valley IPO market appears set Contribution to airport passenger growth, ppt change yr ago to thaw further in 2013 as evidenced by the solar financer and installer 10 Oct ytd SolarCity’s IPO in early December. The IPO also reflects a shift from 8 the manufacture of renewable energy equipment to the design, financ- 6 ing and construction of renewable systems amid competition with 4 low-priced Asian producers and dwindling federal subsidies. 2 Hard-hit inland metro areas will provide new momentum to Cali- 0 fornia’s recovery, fueled in part by warehouse investments. With its -2 dispute over the collection of state sales tax for internet sales resolved, -4 San Francisco Oakland San Jose Amazon.com is building distribution centers in Modesto and Riverside -6 and is negotiating to build a third center in Stockton. The push toward -8 increased internet sales by brick-and-mortar retailers will help to spur 09 10 11 12 more demand for distribution centers in inland and coastal metro Sources: Local aviation authorities, Moody’s Analytics areas. San Francisco and San Jose were among the markets included 4 in Walmart.com’s pilot same-day delivery program during this year’s holiday shopping season. The rollout of 4G cellular service is spurring additional demand for warehouse space. Total Service Logistics has more than tripled its footprint in Sacramento amid surging demand by Silicon Valley Hits Temporary Headwinds cellular providers to store equipment needed to convert their existing networks to 4G. 10 2.5 San Jose employment, semiconductor equip. The improving state outlook could still be not enough to avoid the & materials, % change yr ago (L) exit of one of the state’s newest entrants to its competitive grocery 5 U.S. semiconductor billings, $ bil (R) 2.0 markets. Fresh & Easy may completely close its 200 stores in Califor- 0 1.5 nia, Nevada and Arizona by the middle of 2013, hitting Southern Cali- fornia the hardest. The U.K.-owned chain’s headquarters is in El Segun- -5 1.0 do and its distribution center is in Moreno Valley. The chain has already closed several money-losing stores and halted construction of stores -10 0.5 in Northern California in recent months. The chain’s below-average square footage for the industry and self-checkout format could hinder -15 0.0 interest by other grocery retailers to acquire store locations. 07 08 09 10 11 12 ——Eduardo J. Martinez Sources: BLS, SEMI, Moody’s Analytics

MOODY’S ANALYTICS / Regional Financial Review / December 2012 115 STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

Colorado

Job gains in business/professional services are offering a shot in areas most affected would be different under each. If the Democrats’ the arm to Colorado’s recovery after hiring slowed in the late spring proposal becomes law, higher-income metro areas, such as Denver and summer. After rising for much of the year, the jobless rate has and Boulder, would bear the heaviest burdens; the Republican plan begun to recede. At close to 8%, it is on par with the U.S. rate, puts lower-income metro areas, such as Greeley and Pueblo, in a though labor force participation is high, signaling a fundamentally tougher position. Many low- and middle-income households rely on stronger labor market. Average earnings rest well above the U.S. level tax credits to lower their annual tax liabilities, and these households and are rising more quickly. Though this is offering little support to also spend a larger portion of their take-home pay. Consequently, consumer industry payrolls, households are getting ahead on debt higher tax payments in lower-income metro areas would induce payments; delinquent credit balances are now at a five-year low. a sharper drop in consumer spending, dollar for dollar, weigh- Demand for housing has risen substantially over the past year, and ing on growth. Further, any bargain will almost certainly include house prices are rising faster than elsewhere in the U.S. Homebuild- the expiration of the federal payroll tax holiday, which will shrink ing has picked up sharply since the beginning of 2012, but this has take-home pay by 2% at all income levels. All told, the net drag on not led to construction hiring. Colorado’s GDP under either tax plan would be about 0.9 percent- Colorado’s economy is on relatively steady footing, though a no- age point in 2013, slightly higher than that for the nation and many ticeable slowdown is expected during the first half of 2013 as a result surrounding states. of the looming federal fiscal cliff. That said, changes were not made Defense spending cuts also pose a threat, particularly in Colo- to the forecast; current projections already include some impact rado Springs, which is home to Fort Carson Army Base, Peterson from the fiscal cliff next year. Under current law, the full tax hikes and Schriever Air Force bases, the Air Force Academy, and private and spending cuts slated to take effect on January 1 would carve out defense contractors Northrop Grumman and SGIS, among others. a sizable chunk from state GDP in 2013 and sink the economy into Budget cuts appear unlikely at the military bases in 2013. Fort Car- recession during the first half of the year. This is a worst-case scenar- son was awarded nearly $30 million in federal contracts over the io and considered highly unlikely; our estimates place the probability past year, which will preserve nearly 30,000 jobs, or 12% of the local of this coming to pass at about 15%. More likely, a bargain to blunt workforce, and may even spur payroll expansion. The more immedi- the full impact of the fiscal cliff will include some combination of ate threat stems from cuts to defense procurement spending. Pro- revenue-seeking and cost-cutting measures. A likely bargain by law- curement contracts account for 11% of the metro area’s GDP—five makers will shave 1.5 to 1.7 percentage points off state GDP in 2013, times the national average—and accounts for an even larger share of on par with the estimated drag on U.S. GDP. wages. Under current law, defense spending will be cut to the tune Democrats and Republicans agree that tax revenues must be of $500 billion from 2013 to 2021. Consequently, Northrop Grum- raised to achieve fiscal sustainability in the coming years, but their man has already begun layoffs at its facilities around the U.S. Though plans to do so are quite different. Most Democrats support raising job cuts have not affected Colorado Springs yet, risks are weighted taxes on people earning more than $250,000 per year, while Repub- to the downside that the metro area’s job market will be affected licans wish to find deficit savings by closing federal tax loopholes by cuts and may lead to downgrades to the outlook over the next and spending cuts. The net economic impact to Colorado would be couple of years. roughly the same regardless of which plan is adopted, but the metro ——NATE KELLEY

Going off Fiscal Cliff Means Recession in 2013 Defense Spending Is Vital to Colorado Springs Real GDP, annualized % change Value of procurement contracts as a share of GDP, %, 2010 8 Colorado Springs 6 With a Colorado stronger 4 rebound Denver 2 Boulder

0 Pueblo Grand Junction -2 Baseline forecast Greeley -4 Fiscal cliff scenario Fort Collins -6 12E 13F 14F 15F 16F 17F 0 2 4 6 8 10 12 Sources: BEA, Moody’s Analytics Sources: Census Bureau, BEA, Moody’s Analytics

116 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

Hawaii

Strong visitor demand from Asia is sustaining Hawaii’s recov- in foreclosure proceedings in order to encourage nonforeclosure ery. While tourist numbers from the U.S. West Coast are slowly resolutions. Nevertheless, while foreclosure starts have rapidly recovering, international visitor days have risen by more than declined, the dollar balance of mortgages that are more than 20% since a year ago, as tourists from Australia, South Korea 120 days past due or are in a collection status rose in the first and Japan take full advantage of their stronger currencies. Con- half of 2012. Consequently, higher volumes of foreclosures will sequently, leisure/hospitality and retail trade have been the resume once lenders adopt new procedures to comply with the foremost job creating sectors. Meanwhile, increasing residential new legislation, likely extending the timetable for house prices construction permitting along with public investment in capital to fully correct. Finally, in the long run, house price appreciation improvement projects is finally aiding builder payrolls, which, typically follows household income growth. In the past few years, until now, have failed to recover any of the thousands of jobs lost wage and salary disbursements have been below average and are during the recession. Unfortunately, the recovery has not lifted all expected to be for the foreseeable future. Most of the new jobs sectors, as evident from the continued drag from the public sec- created during the recovery have been concentrated in either tor and financial services. tourism or administrative/support positions, which tend to be The near-term employment outlook is roughly unchanged from lower-wage positions. six months ago. Job growth will decelerate into early 2013 because Another change to future assumptions was raising Honolulu’s of a braking U.S. expansion amid the federal fiscal cliff, before quick- leisure and hospitality employment forecast over the medium term. ening in the second half of the year. While tourism-related busi- Though expected to be the metro area’s main economic driver, nesses will still drive most of the payroll growth, pent-up household sector job growth was anticipated to decelerate in 2013 and lag formation and public sector projects will help builders to aid the both national and state trends. Nevertheless, the continuing robust recovery. Most other private service sectors will expand, although at expansion in Hawaii’s tourism appears to be concentrated mainly a below-average pace as a result of below-average population and in Honolulu. Oahu will be the only island to meet its visitor distribu- wage/salary growth. tion target in 2012, as specified by the Hawaii Tourism Authority, as A recent forecast alteration was to dampen the house price well as the only island to experience double-digit growth in revenue outlook over the next few years. Previously, house prices were per available hotel room. A big headwind for the Neighbor Islands, expected to outpace the U.S. average starting in 2014, but this specifically the Big Island and Kauai, is ease of access, as many is unlikely for a couple of reasons. First, given underlying eco- visitors to those islands have to typically endure a long layover in nomic and demographic drivers, house prices in Honolulu, where Honolulu. Meanwhile, there is some additional upside risk with the about 70% of Hawaiian households live, appear properly valued already-strong outlook for Hawaiian tourism, as robust visitor num- whereas the vast majority of U.S. metro areas are significantly bers have garnered the attention of global investors and Southwest undervalued. Second, while house price appreciation has been Airlines. In September, Southwest’s flight attendants approved con- quite robust recently, according to CoreLogic, a substantial and tract changes that will allow the airline to operate flights that re- temporary decline in foreclosure starts is likely driving some of quire flying over the oceans, furthering the likelihood of flying from this momentum. Foreclosure activity has declined by nearly 50% the mainland to the islands. over the past year in response to Act 182, which adds extra steps ——Gregory Bird

Honolulu Banks Struggling to Recover Legislation Suspends Foreclosure Processing Depository credit intermediation employment, % change yr ago Foreclosures started, # per 1,000 households, NSA, 6-mo MA 1 3.0 Honolulu 0 2.5 U.S. -1 2.0 -2 1.5 -3 1.0 -4 0.5 -5 Hawaii U.S. -6 0.0 10 11 12 08 09 10 11 12 Sources: BLS, Moody’s Analytics Sources: RealtyTrac, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 117 STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

Nevada

Nevada’s recovery is progressing at a slightly more subdued of historic government layoffs over the past 18 months. Recovery pace than that of the U.S., but the forecast for above-average job has begun in Reno, but local government weakness persists. Goods gains by the end of next year remains unchanged. The pace of producers remain weak as well, leaving the heavy lifting up to private employment growth has fallen considerably since the end of last services to support the recovery. Controlling for some seasonal irreg- year because of increased uncertainty in the U.S. and global mac- ularities in the data, Reno private services are performing nearly in roeconomic outlooks. This is weighing on real recreational service line with the U.S. average. That marks the first time since early 2007 expenditures, fuel for the state’s all-important tourism industries. that the pace of growth in Reno’s private services has even flirted However, the magnitude of the slowdown in hiring has well sur- with the national average. The main driver behind this strength has passed that of the slowdown in underlying fundamentals, pointing been leisure/hospitality, where things have not fallen off as much as to uncertainty among employers as the key impediment to growth. they have statewide. This is because tourism in the northern part of This is most evident in private services employment, particularly the state is more reliant on regional visitors than visitors from other the state’s outsize leisure/hospitality industry. Growth in leisure/ parts of the U.S. or world. The disparity in the visitor bases is evident hospitality employment has fallen from a year-over-year pace of when comparing growth rates between Reno and Las Vegas-Par- more than 4% at the end of last year to being essentially flat in Oc- adise. The pace of growth in Reno leisure/hospitality employment tober. This has been enough to pull total employment growth back has been approximately halved in the past year, while growth in Las well below the national average. Vegas has nearly been wiped out entirely. Consequently, increased Also underperforming, personal income growth has yet to make national and global uncertainty will remain a disproportionate down- up any meaningful ground relative to the U.S. average. This is un- side risk to tourism in southern Nevada. surprising given the types of jobs regained since the Great Reces- Outside of the recent slowdown stemming from decreased sion. Most have been concentrated in low-wage services, with the confidence by employers, the main impediment to above-average exception of gains in mining and natural resources. This has resulted growth remains the housing sector. The fact that housing is strug- in higher income growth outside of the state’s three metro areas, gling so much makes the state’s recovery up to this point all the where personal incomes have been outperforming the U.S. thanks more remarkable, considering it has added nearly 25,000 jobs to relatively high prices for precious metals. In contrast, metro area back onto payrolls without one of its largest growth engines. incomes are growing much more slowly. Nowhere is this more true Housing has erased nearly a full percentage point from the year- than in Carson City, where the economy only recently pulled out of over-year pace of statewide job growth during the recovery. Thus, a more than four-year recession. Nominal personal income growth when housing and construction finally turn the corner, becoming has only just recently turned upward and remains extraordinarily tailwinds as opposed to headwinds, the recovery’s pace should weak as the state’s budget picture continues to find its footing. Nev- once again exceed the U.S. average. This turnaround may be in its ertheless, though recovery will be a prolonged battle, tax revenues nascent stages, as evidenced by recent small gains in construction have been rebounding healthily for more than a year now, and the activity and house prices. However, given the mountain of existing state capital’s worst days appear firmly behind it. foreclosure inventories, genuine improvement will remain elusive Nevada’s other northern metro area, Reno-Sparks, was not in re- until at least the end of next year. cession for as long as the capital but did suffer a double dip because ——Dan White

Uncertainty Constrains Tourism Hiring… …But Visitor Makeup Helps to Buoy Reno % change yr ago Leisure/hospitality employment, % change yr ago 6 7

5 U.S. recreation 6 service expenditures Reno 4 5 3 4 2 3 1 U.S. Nevada leisure/hospitality 2 0 employment Las Vegas -1 1 -2 0 10 11 12 Jan-12 Apr-12 Jul-12 Oct-12 Sources: BLS, BEA, Moody’s Analytics Sources: BLS, Moody’s Analytics

FROM MOODY’S ECONOMY.COM 1 FROM MOODY’S ECONOMY.COM 2

118 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

Oregon

Oregon’s recovery is largely playing out to script, and the Other metro areas will also begin to find their footing over the outlook has not changed appreciably since the summer. Though next few years. The recovery in Eugene is finally beginning to gain steadily improving, the economy still has a long way to go. The momentum. The unemployment rate there, which was more than service sector continues to do most of the heavy lifting, supported a percentage point higher than Oregon’s at its 2009 peak, is now by relatively broad-based hiring, and has added back nearly 60% slightly below the state’s. Early estimates of total payroll counts also of the jobs lost during the recession. However, this falls short of suggest upward revisions are in store for employment numbers from the 98% added back nationwide, as Oregon has had a larger hole the second half of 2011 through early 2012, reflecting more stable to climb out of. The unemployment rate has risen since May and employment growth since late 2009. Furthermore, hiring at the Uni- is the second highest in the Pacific West. Nevertheless, average versity of Oregon and Oregon State University in Corvallis will pick weekly earnings are climbing and gasoline prices are sharply falling up over the next few years thanks to improving state finances. The because problems earlier this year at West Coast refineries have proposed budget for the 2013-2015 biennium includes a 7% funding been resolved, freeing up more money for consumers to inject into increase for higher education. local businesses. Thanks to improving demand, the housing market is slowly shifting The recovery will gain more traction next year and into 2014 in to a support for the recovery. Foreclosure starts and inventories con- step with the West. Portland will lead the way, as expansion plans tinue to shrink and have returned to prerecession levels. In turn, prices by two of the state’s largest employers are better positioning the have started to rise. According to CoreLogic, house prices have risen area to outperform in the near term. Intel will finish work in early throughout 2012. As a result, residential construction is also picking 2013 on its $3 billion R&D facility and recently announced that it up; multifamily housing starts are hovering near the highest level in will double its investment by building a matching structure next more than four years. Even Oregon’s hardest-hit housing markets are door. The firm will also upgrade two production facilities. While turning the corner. The foreclosure rate in Bend was among the worst the near-term construction forecast has been upgraded to reflect nationally during the housing bust, but is rapidly improving, and has these projects, the number of high-tech jobs generated beyond dropped below the national rate for the first time since early 2008. the construction phase remains unclear, adding upside risk for the Meanwhile, the developing U.S. housing recovery is creating up- high-tech outlook. side risk for the state’s beleaguered wood products industry. Wood In addition, Portland-based Nike recently committed to a product manufacturing payrolls have shrunk by more than 40% over $150 million expansion that would create at least 500 jobs over the past decade. Yet the industry still accounts for more than four the next five years. The commitment does hinge on lawmakers times the average share of total manufacturing jobs. The industry is passing legislation that would keep the state’s current tax struc- dependent on U.S. demand as wood product manufacturing and log- ture for a set period. The company already employs about 8,000 ging make up just 4.5% of Oregon exports. While the industry will people in Portland, positions for which the average salary is more likely never return to its housing boom peak, increasing residential than double the statewide average. According to an economic im- construction bodes well for sawmill operations in Medford and Eu- pact analysis, the investment would inject $2 billion per year into gene. Rural counties, which remain among the most economically the economy and create as many as 12,000 direct and indirect depressed areas in Oregon, would also benefit. jobs by 2020. ——KELSEY HEIDER

Eugene Further Ahead Than Originally Thought Healthier U.S. Housing Market Adds Upside Risk Employment, % change yr ago Wood manufacturing, % of manufacturing employment, Oct 2012 3 Eugene Quarterly Census of 2 Employment and Wages Medford 1 Bend 0 Rural counties -1 Oregon -2 Salem Payroll survey Corvallis -3 Portland -4 U.S. -5 10 11 12 0 5 10 15 20 25 30 Sources: BLS, Moody’s Analytics Sources: BLS, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 119 STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

Utah

Utah’s payroll and production growth continues to be among the tions in Salt Lake City, Provo and Ogden points to excess demand strongest in the U.S., led by robust expansion in professional services, for healthcare workers. Aside from registered nursing jobs, industry education/healthcare, software and electronics. Professional service wages are well below average, especially for jobs requiring special- payrolls have grown faster in just one other state over the past three ized training. This gap is causing a shortage of qualified applicants months. The unemployment rate has fallen steadily since July and is and will put upward pressure on wages. Software developers also now less than 5.5%, even as the labor force is expanding. The upbeat are in high demand. The occupation’s vacancy rate is 3.9%; it has outlook is unchanged from last month, with output and employment more job openings than any other occupation requiring at least a outperforming the U.S. in the near term. bachelor’s degree, and wages are more than twice the average across Nevertheless, the near- and long-term employment growth fore- all industries. casts are lower than a year ago. State GDP is also expected to grow Alliant Techsystems in Ogden was recently contracted to begin slightly slower in the near term but will outpace last November’s manufacturing composite wings for a new suborbital aircraft, creat- outlook in the long term. The weaker near-term forecast is due to ing upside risk for a key manufacturing sector that relies heavily on the slower U.S. recovery, which will reduce demand for the high-tech government contracts. Production is expected to begin early next goods and services that are driving Utah’s recovery. Employment year. Aerospace manufacturing has been a key driver of Ogden’s growth in 2012 slightly outperformed expectations thanks to strong manufacturing base since mid-2011, but employment has plateaued growth in high tech and professional services. because of declining military subcontracting. One casualty of re- Statewide credit conditions are rapidly improving as a strong duced military spending has been Northrop Grumman, which is in labor market and income growth are driving mortgage and overall the midst of a voluntary buyout program for 200 employees, includ- delinquency rates down and will keep them low for the foreseeable ing its Salt Lake City locations. If enough employees do not take the future. Total delinquencies are near prerecession rates, and the num- buyout, layoffs will begin. Nearly all of the company’s sales come ber of credit lines has increased throughout 2012, boosting credit from defense, so fiscal belt-tightening may cause more layoffs in availability and consumer spending. Credit conditions will improve; the future. loans will quickly expand over the next five years as balances fall. In A new train line connecting Salt Lake City and Provo will soon be Salt Lake City, the delinquency rate will be higher than Utah’s, while fully operational, making the areas more accessible to each other Provo’s delinquency rate will fall below the state’s in the long term. and more attractive to prospective residents. The Utah Transit Au- This disparity is due to the better employment outlook and slightly thority estimates that the new line will have a weekday ridership of faster income growth expected in Provo. 8,600. Lehi, a small city that is already benefiting from its location Higher job vacancy rates indicate higher employment demand between Salt Lake City and Provo, will also get a boost from the line. around the state, fueling payroll growth and putting upward pressure It has experienced an influx of businesses and increased homebuild- on wages in the near term. Utah’s job vacancy rate is 2.5%, 1 per- ing, as people are drawn by the short commute to the state’s two centage point higher than it was in 2009, when the unemployment largest cities. Adobe’s new campus opened here recently as well as rate was above 8%. The increased vacancy rate indicates growing Xactware’s new building, driving developers to build 175 new dwell- labor demand, which has been reflected in the rapid employment ing units in the last three months. growth. At 5.6%, the high vacancy rate in healthcare-related occupa- ——Abraham Goldstein

U.S. Slowdown Weakens Near-Term Forecast Salt Lake City Credit Quality Lags Utah employment, annualized % change Credit delinquency rate, 3-mo MA, % change 5 3.8 Salt Lake City Nov 2012 Nov 2011 3.6 4 Provo 3.4 Utah 3 3.2 2 3.0 2.8 1 2.6 0 2.4 -1 2.2 10 11 12 13F 14F 15F 16F 10 11 12 13F 14F 15F Sources: BLS, Moody’s Analytics Sources: Equifax, Moody’s Analytics

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120 MOODY’S ANALYTICS / Regional Financial Review / December 2012 STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

Washington

Compared with most states, Washington has been less affected until the federal fiscal cliff is resolved. Consequently, the forecast an- by soft retail spending and the excessive inventory-building that ticipates sluggish growth in Seattle’s tech services in early 2013, and is weighing on factory production elsewhere. As a result, the state it may take until the late spring for spending to return to a healthy economy is expanding at a slightly faster rate than it was in the first pace. The risk of a period of prolonged weakness in Asia and Europe half of the year. Sales and use tax collections indicate household casts a shadow over the outlook for tech-producing employment. spending is rising steadily, and the ISM-Western Washington index Tacoma’s outlook has not changed significantly from the No- shows factory output is rising again at a rapid rate following a lull vember baseline forecast. The most dynamic segment of the local during the third quarter. The gap between the ISM survey’s orders economy has been trade, largely because Tacoma’s seaport picked and inventories indexes—a proxy for future production—is at its wid- up three major shippers from the Port of Seattle over the summer. est since July. The statewide housing inventory has decreased from Despite the shift, combined container traffic at the ports increased, a year ago while foreclosures have moderated, allowing the modest lifted by trade with Asia. Trade is positioned to remain a strong force increase in home sales during the third quarter to lift existing-house for the local recovery in 2013. prices. Meanwhile, apartment rents are rising at a slower rate than A 1.7% increase in military pay slated to take effect in January earlier in the year. This has also contributed to a slower pace of over- will boost consumer spending in the Puget Sound, which supports a all inflation in the Seattle-Tacoma-Bremerton region. sizable defense presence. Meanwhile, Tacoma’s exposure to the fiscal Aircraft manufacturing will be an important growth driver for cliff is higher than average, but other long-term reductions in federal Seattle and the surrounding region through 2014. Boeing’s produc- defense spending remain a concern. The Department of Defense’s tion schedule calls for monthly aircraft production to ramp up 8% five-year defense plan calls for a 5% reduction in the number of mili- by the end of the first quarter of 2013, and then by an additional tary personnel through 2017. It is unclear to what extent Joint Base 10% through mid-2014, when production will average 42 planes Lewis-McChord in Tacoma, Bremerton’s naval stations, or Fairchild per month. Despite slower global economic growth, few airlines Air Force Base in Spokane may share in the reduction. are packing it in. Boeing’s commercial backlog rose to 4,100 aircraft The business climate in Olympia is headed south. According at the end of the third quarter, and foreign aircraft orders remain to the Thurston Economic Vitality Index, local consumers’ bleaker strong. The baseline forecast calls for the metro area’s manufactur- assessment of the labor market caused overall sentiment to drop ing output to grow at least twice as fast as the national average in the third quarter from the second. Business confidence also de- in 2013. creased, which appears to reflect increased worry about the fiscal Seattle’s important tech industries will add less to growth in 2013 cliff. Although state tax revenues have generally come in on the than they did in 2012. The slowdown in orders for and shipments of strong side of expectations in the last few months, the risk of a computers and electronics nationally has weighed on job growth for decrease in federal funding for state and local governments leaves information services, software publishing, and computer systems the state capital more exposed to public sector cuts than other design. Amazon.com is expanding locally, and anecdotal reports in- metro areas. Local government budget woes also plague Spokane, dicate demand for vacant office space remains strong, aided by busi- where the city budget eliminates 100 positions, although most are nesses such as Google, Facebook and Zynga. However, investment in already vacant. computers and related equipment is unlikely to pick up meaningfully ——alexander miron

Manufacturing Will Stay at the Helm in 2013 Puget Sound Exposed to Long-Term Military Cuts Employment change, ths, Seattle-Bellevue-Everett metro division Military employment, % of total, 2011 Fairbanks AK Retail 2013 Construction 2012 Colorado Springs CO Bus./prof. Hanford CA Tacoma WA Leis./hosp. Bremerton WA Educ./health Honolulu Government Great Falls MT Other San Diego Manufacturing Yuba City CA

-2 0 2 4 6 8 10 12 7 8 9 10 11 12 13 14 15 16 Sources: BLS, Moody’s Analytics Sources: BLS, Moody’s Analytics

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MOODY’S ANALYTICS / Regional Financial Review / December 2012 121 STATE AND METROPOLITAN AREA FORECAST REVIEW �� West

Wyoming

After weakening in the first half of 2012, Wyoming’s recovery coal prices, and now sits just below the post-recession high it at- has stabilized faster than expected. Initial claims for unemployment tained in late 2011. That said, shipments of Powder River Basin coal insurance have increased after bottoming in the first quarter, but the by Burlington-Northern and Union Pacific are still below 2011 year- modest rise remains a downside risk to the state’s recovery, rather to-date levels. than an immediate threat. Sales and use tax revenue collections Tourism has steadied Wyoming’s recovery, as energy extraction have weakened in recent months, and year-to-date collections are industries faced several headwinds earlier this year. Both Yellowstone now 1.2% below year-ago levels. and Grand Teton National parks have had more visitors thus far in Data from the Quarterly Census of Employment and Wages show 2012 than they had in 2011. Additionally, lodging tax receipts are that the state performed better than previously thought from the 5.6% above year-ago levels so far in fiscal 2013, which started in July. middle of 2011 through the first quarter of 2012. This will likely re- Though payroll surveys indicate that leisure/hospitality employment sult in upward revisions to payroll employment data, and show that has plummeted after spiking in the middle of 2012, the reality is Wyoming grew faster than the national average in the second half of more likely somewhere between the summer’s overstated strength 2011 and early 2012, rather than more slowly. Casper will not have and recent weakness. Slower income growth in Wyoming will largely major revisions, but the full count data show that Cheyenne experi- bypass tourism, which is more sensitive to nationwide income enced weaker job growth than initial readings suggested. growth. Rising tax rates present a salient downside risk to the fore- Active rotary rigs have stabilized slightly below peak recovery cast for Wyoming’s tourism. Nationwide disposable income growth level, conserving mining jobs in western Wyoming and drilling ser- will stagnate in early 2013 if the payroll tax holiday is allowed to vices in Casper. The rebound is welcome after a steep dive in drill- expire and marginal tax rates rise on all households. Less disposable ing in the first half of 2012. The bounce is the result of rising natu- income will quickly translate into reduced demand for leisure and ral gas prices, which have moved toward $3.50 per million BTUs, hospitality services in and around Wyoming’s national parks. high enough to support additional drilling. The Bureau of Land Absent a full drop over the fiscal cliff, federal fiscal challenges Management has proposed 1.1 million acres in additional leases will largely bypass Wyoming, which has a lower concentration of in South-Central Wyoming, which would further bolster Casper’s income derived from transfer payments than the national average. drilling services and support industries, presenting an upside risk to The state’s proportion of income from transfers is only three-quar- the forecast for professional and business services, manufacturing ters of that of the nation, below the West average. Defense cuts and construction. will barely be felt, as the state ranks 45th in federal procurements Nationwide year-ago railroad carloads have maintained mid- as a percentage of output and facilities such as Warren Air Force single digit growth over the past three quarters. Cheyenne has Base, with vital and high-profile national security missions, do not benefited greatly from the recent moderate growth in railroad face much danger of reductions in pay or manpower. Though the carloads, as the local transportation industry has grown about 1.5 state ranks near the top in terms of federal payouts to the state times faster than the U.S. level industry. Powder River Basin coal per capita—largely funding highway construction and Medicaid— prices have recovered to long-term historical averages, but remain reductions in this funding will not immediately impair the state’s below the price level that prevailed throughout 2010 and most of economic prospects. 2011. Mining employment in Casper has recovered in lockstep with ——Tyler Case

Wyoming Metro Labor Markets Outperform… …Attracting Migration Into the Cowboy State Payroll employment, % change yr ago Population, % change yr ago 6 3.0 Wyoming 4 2.5 West U.S. 2 2.0

0 1.5 Wyoming -2 1.0 Cheyenne -4 Casper 0.5 U.S. -6 0.0 10 11 12 00 01 02 03 04 05 06 07 08 09 10 11 12 Sources: BLS, Moody’s Analytics Sources: Census Bureau, Moody’s Analytics

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122 MOODY’S ANALYTICS / Regional Financial Review / December 2012 About Moody’s Analytics Economic & Consumer Credit Analytics

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Moody’s Analytics added Economy.com to its portfolio in 2005. Its economics and consumer credit analytics arm is based in West Chester PA, a suburb of Philadelphia, with ofﬁ ces in London and Sydney. More information is available at www.economy.com.

© 2012, Moody’s Analytics, Inc. and/or its licensors and affi liates (together, “Moody’s”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by Moody’s from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall Moody’s have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of Moody’s or any of its directors, offi cers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profi ts), even if Moody’s is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The fi nancial reporting, analysis, projections, observations, and other information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell, or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation prior to investing.

MOODY’S ANALYTICS / Regional Financial Review / December 2012 123 MOODY’S ANALYTICS �� Economic and Consumer Credit Analytics

Events

Moody’s Analytics conferences keep you abreast of current and expected economic conditions. Topics to be discussed include the U.S. macro, regional, industry and global outlooks. These conferences, held in major cities across the U.S., also give you the opportunity to meet with our experts and discuss the issues that are critical to your organization. Executive Briefings are about four hours. Outlook Conferences run over three days and include guest speakers, roundtable discussions and concurrent seminars. These conferences are open to both Moody’s Analytics clients and nonclients and are designed to offer you the analysis you need in a cost- and time-efficient manner. For more details on any of those conferences, please go to www.economy.com. If you have any questions or if you would like to register for any of these conferences, please contact Client Services at 866.275.3266.

Outlook Conferences Outlook conferences examine the outlook for the U.S. economy and financial markets, the global economy, and credit risk. They include seminars, guest speakers, roundtable discussions and dinner.

Upcoming Events Date Moody’s Analytics Spring Economic Outlook Conference: Malvern PA (Philadelphia PA area) May 2013

Executive Briefings Executive briefings by Moody’s Analytics keep you abreast of current and expected economic conditions and provide insight on the planning issues, risks, and opportunities organizations face in today’s economic climate. Topics include the U.S. macro, regional, industry and global outlooks. The briefings are designed to offer the analysis you need in a cost- and time-efficient manner. Executive briefings are held in major cities across the U.S. and are open to both Moody’s Analytics clients and nonclients.

Consumer Credit Briefings Consumer credit briefings by Moody’s Analytics discuss advances in modeling methodologies used to forecast and stress-test consumer credit portfolios and assess the health of household balance sheets and the impact of these and other factors on the outlook for the global economy. Discover how our cutting-edge approach to credit modeling can help you better understand the drivers of your portfolio and forecast performance. Learn the scope of how our services to help retail lenders, risk managers, and regulatory compliance teams implement a consistent stress-testing platform that explicitly includes macroeconomic and regional drivers. REGIONAL FINANCIAL REVIEW / SEPTEMBER 2010 9 TIONS 29 .5 OCA 35 .2 .610 THER L O +1 77 1.30 CIFIC A 55 .3 52 +8 ASIA/P

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