Economic Conditions and Outlook

Eric Robbins, Regional ManagerFDIC Division of Insurance and ResearchChicago Region

1

The views expressed are those of the presenter and do not necessarily reflect official positions of the Federal Deposit Insurance Corporation. Some of the information used in the preparation of this presentation was obtained from publicly available sources that are considered reliable. However, the use of this information does not constitute an endorsement of its accuracy by the Federal Deposit Insurance Corporation.

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Outline

• National Economic Outlook

• Regional Economic Outlook– Labor Markets– Manufacturing– Real Estate Markets

• Residential and Commercial

3Source: Bureau of Economic Analysis , Blue Chip Consensus Forecast October 2013.

GDP growth continues along its moderate path: Real GDP increased 2.8 percent in 2012 and is projected to be 1.6 percent in 2013.

Consumer spending and a rebound in inventory accumulation led third quarter growth.

4Source: Bureau of Economic Analysis, advance estimate.

5

Residential investment has been a positive contributor to growth since mid-2011...

6Source: Census Bureau/Haver Analytics. Chicago Region totals.

…but has yet to contribute to job growth.

7

REGIONAL ECONOMIC OUTLOOK

WISCONSIN LABOR MARKETS

8

Wisconsin state employment levels remain below national employment levels.

Source: Bureau of Labor Statistics.

9

But Wisconsin is third among Midwestern states in regained jobs.

10

Unemployment rates remain elevated and much higher than the seven-year low.

11

The size of the labor force has declined in most metros, contributing to improving unemployment rates.

Source: Bureau of Labor Statistics.

Appl

eton

Eau

Clai

re

Fond

du

Lac

Gree

n Ba

y

Jane

svill

e

La C

ross

e

Mad

ison

Milw

auke

e

Oshk

osh-

Neen

ahRa

cine

Sheb

oyga

n

Wau

sau

Min

neap

olis

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

-2.70%

-1.90%

-3.20%-2.60%

-5.40%

-2.10% -1.80%-2.60%

-2.00%-2.60%

-3.80%

-3.10%

8.1%

Percentage Point Decline in Unemployment Percent Decline in Labor Force

Recession era peak to current decline in unemployment rates and labor forcePeak Unemployment rate listed below

Note: The labor force in Eau Claire, Green Bay, and LaCrosse has exceeded the prior peak at 1.2%, 0.57% and 0.13%, respectively.

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Unemployment rates have fallen considerably but remain high.

Source: Bureau of Labor Statistics.

13

Year-over-year job growth varies by metro…

Source: Bureau of Labor Statistics, August 2013.

Year-over-year percent change

Milwaukee (42%)

Madison (18%)

Green Bay (9%)

Appleton (6%)

Oshkosh-Neenah (5%)

Eau Claire (4%)

Racine (4%)

Wausau (3%)

Janesville (3%)

Sheboygan (3%)

Fond du Lac (2%)

Minneapolis

-2.00% -1.00% 0.00% 1.00% 2.00% 3.00% 4.00%

1.31%

1.17%

2.30%

2.46%

1.96%

2.71%

-0.79%

0.15%

1.94%

0.00%

3.06%

1.17%

14Source: Bureau of Labor Statistics, August 2013.Sector jobs as a share of total metro jobs is listed after each sector (Milwaukee, Madison)

…And by industry sector, with strong gains in the professional/business services and leisure/hospitality sectors.

Year-over-year percent change in jobs, by sector

Education & Health (18%, 11%)

Transportation/Utilities (17%, 16%)

Manufacturing (14%, 8%)

Prof. & Business Services (14%, 13%)

Leisure & Hospitality (9%, 10%)

Local Government (8%, 7%)

Financial Activities (7%, 8%)

Logging/Mining/Construction (4%, 4%)

Information (2%, 4%)

State Government (1%, 13%)

Federal Government (1%, 1%)

-10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%

0.73%

2.16%

-1.16%

1.63%

1.34%

-2.28%

1.09%

17.58%

0.00%

14.71%

-0.95%

0.00%

-3.49%

-0.34%

9.09%

5.76%

0.38%

-1.37%

0.00%

1.63%

2.14%

-5.56%

Madison

Milwaukee

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MANUFACTURING

16Source: ISM Manufacturing Index, Index values above 50 indicate expansion.

Manufacturing growth has slowed, after being a driver of job growth early in the recovery.

17Source: ISM Manufacturing Index, Index values above 50 indicate expansion

Despite a slowdown, manufacturing production and employment is still in expansionary territory.

18

Automotive sales are approaching pre-recession levels.

Source: Bureau of Economic Analysis and Bureau of Labor Statistics. Notes: Data through September 2013. Data are seasonally adjusted.

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RESIDENTIAL REAL ESTATE MARKETS

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Nationally, foreclosure inventory peaked in early 2012.

21Source: Moody’s Analytics Case-Shiller Home Price Index SA; 2000Q1=100.

Home price index value

Housing markets are likely stabilizing, with home values finally rising in most markets.

22

On a statewide basis, prices are increasing, according to multiple indexes.

Sources: Federal Housing Finance Agency, Moody's Analytics 2nd quarter 2013.

23

Many Wisconsin metros remain well below peak levels.

Source: Federal Housing Finance Agency all transactions index Q2-2005 through Q2 2013, Q1 2000=100.

8 year high-low house price index value

Appleton

Eau Clai

re

Fond du La

c

Green Bay

Janesv

ille

Madiso

n

Milwau

kee

Oshkosh-N

eenah

Racine

Sheb

oygan

Wausau

Non-Metr

o Areas

Minneapolis

110

120

130

140

150

160

170

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COMMERCIAL REAL ESTATE MARKETS

CMBS delinquency rates indicate CRE stress in many states.

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26

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Madison and Milwaukee CRE sales have rebounded.

Commercial Property Sales ($ millions)

Note: Sales totals are 4 quarter moving sums from Costar/PPR.

2006Q3

2007Q1

2007Q3

2008Q1

2008Q3

2009Q1

2009Q3

2010Q1

2010Q3

2011Q1

2011Q3

2012Q1

2012Q3

2013Q1

2013Q30

100

200

300

400

500

0

300

600

900

1200

1500Madison (left) Milwaukee (right)

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Rents improve for a number of Midwest markets.

MarketPercent Change in Rents from 3Q-12 to 3Q-13

Apartment Industrial Office Retail

Chicago 2.9 3.4 1.0 0.5

Cincinnati 2.0 0.0 1.5 2.1

Cleveland 3.1 4.2 1.6 -0.1

Columbus OH 2.8 3.0 1.9 -1.1

Detroit 2.8 3.2 -1.1 0.7

Indianapolis 1.9 3.5 0.1 2.8

Louisville 4.6 -1.8 0.8 2.3

Madison 3.4 -1.8 -0.4 -1.9

Milwaukee 1.0 -1.2 0.4 -3.6

Nation 3.0 3.9 2.5 0.7

Source: Costar/PPR.

National Banking Conditions

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The three-year trend in year-over-year earnings improvement continues.

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Failures have fallen to the lowest level since 2008.

32

The number of institutions on the FDIC’s “Problem List” fell for the ninth consecutive quarter in 2Q 2013.

33

The Deposit Insurance Fund increased by $2.1 billion during the second quarter to $37.9 billion

34

Earnings are nearing pre-recession levels for some Midwest banks.

Pre-Tax Return on Assets (%)

Source: FDIC Call Report Data.Note: Median annual ratios among insured institutions by state. H-1 figures are 6-month annualized values.

IL OH KY IN MI WI0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.19

1.23

1.49

1.17

1.38

1.48

0.51

0.59

0.87

0.59

0.25

0.60

0.85

0.88

1.00

1.03

1.03

1.14

2005 2006 2007 2008 2009 2010 2011 2012 H1-12 H1-13

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Past-due ratios have declined among Midwest banks.

IN OH WI KY MI IL0

1

2

3

4

5

6

7

4.38

4.83

5.58

3.78

6.18

6.38

2.56

2.76

3.14

3.17

3.45

3.99

2Q-102Q-13

Loan Past-Due Ratio (%)

Source: FDIC Call Report Data.Note: Aggregate quarterly data among insured institutions with under $10 Billion in assets by state.

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Distressed assets remain elevated among Midwest banks…

IN OH KY MI WI IL0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2.56

2.74

2.37

4.20

3.76

4.02

1.59

1.67

2.17

2.30

2.46

2.71

J-10 S-10 D-10 M-11 J-11 S-11 D-11 M-12 J-12 S-12 D-12 M-13 J-13

Noncurrent Loans and ORE to Assets (%)

Source: FDIC Call Report Data.Note: Aggregate quarterly data among insured institutions with under $10 Billion in assets by state.

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Summary: Economic Outlook

Factors to consider…

Positive contributors? Uncertain

- Employment growth continues, albeit slowly

- Housing markets are stabilizing

- Manufacturing led recovery, now slowing growth

- Energy prices moderating / U.S. energy independence?

- Income growth is weakly positive

- Federal fiscal debate continues- Sequestration continues- Unfunded pension / healthcare liabilities- Eurozone slowdown / recovery- Future of Fannie / Freddie uncertain- Long-term unemployed find their footing?- China growth stabilizing- Demographic challenges are persistent

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Consensus forecasts call for continued growth below trend in 2014.

2012 Actual

2013 Forecast

2014 Forecast

Real GDP Growth 2.8% 1.6% 2.6%

Unemployment Rate (Avg.) 8.1% 7.5% 7.0%

Real Disposable Personal Income 2.0% 0.6% 2.5%

Consumer Price Index 2.1% 1.5% 1.9%

Yield on 10-Year UST (Avg.) 1.8% 2.4% 3.1%

Corporate Profits (Nominal) 6.8% 3.5% 4.9%

Source: Blue Chip Economic Indicators, October 2013.

ContactsEric Robbins, Regional Manager, DIR Chicago312-382-7545erobbins@fdic.gov

Stefan Spong, Economic Analyst312-382-7582sspong@fdic.gov

Miguel Hasty, Senior Financial Analyst (IL,KY,WI)312-382-7581fhasty@fdic.gov

Rob Vilim, Senior Financial Analyst (IN,MI,OH)312-382-6547rvilim@fdic.gov

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