2016 Economic Outlook Presentation

Welcome to theEconomic Outlook Luncheon

Mrs. Lori PiperSVP/Senior Commercial Lending Officer, Enterprise Bank

Today’s PanelistsMr. Steve Norton

Mr. Charlie Arlinghaus

Mr. Jeff McDonald

Executive Director, NH

Center for Public Policy

President of The Josiah Bartlett

Center for Public Policy

Chief Investment Officer, Enterprise

Investment Advisors

Mr. Steve NortonExecutive Director, NH Center for Public Policy

EconomicsShort and Long Term

NH’s Economy

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

New Hampshire Total Compensation Paid by Selected Industries(Thousands of Dollars)

Manufacturing + High Tech

HealthcareRetail Trade

Finance

ConstructionEducation

Real Estate

Local and State Government

Mfg Only

Short TermContinuing Uncertainty

NH – Less of a decline, but a slower recovery

00Index of Total NonFarm Employment

US NH MA

New Hampshire

United States

Massachusetts

Economic Forecast?NEEP Forecast Summary Comparisons

Average Annual Rates of Growth October 2015 Forecast Actual

2010-2014 Forecast

2014-2018 Gross State Product GSP-New Hampshire 3.3 2.5 GSP-New England 1.4 2.6 GDP-United States 1.9 2.8 Total Non-Farm Jobs Jobs-New Hampshire 0.9 1.4 Jobs-New England 1.2 1.4 Jobs-United States 1.6 2.1

Moderate Growth Anticipated

Economic Consequence of the Market Turmoil• Negative consequences

Lower stock prices impacts consumer spending through wealth effect and businesses’ cost of capital.

Stronger value of the $ weakens the trade balance. Emerging market economies struggle to adjust to lower

commodity prices.• Positive consequences

Lower oil prices is a net positive as stronger consumer spending more than offsets the hit to the energy industry.

Lower mortgage rates supports housing and refinancing activity.

Reduces over-valuation in asset markets and chances that a bubble will form. Allows Fed to raise rates more slowly.

Source: Moody’s Analytics, September 1, 2015

Overall Risk IndexWealth Effect 40%, trade 40%, energy 20%

Sources: BLS, Moody’s Analytics

Long Term Labor Force Challenges

Size of Labor ForceWorking-Age Population (Age 20-64)

• Assuming no migration the working-age population in New Hampshire will decline nearly 10% in the state.

• The northern rural counties will see larger declines.

• Carroll County sees the biggest declines.

% Change 2010-2030

US 1.0%NH -9.7%Strafford -2.4%Hillsborough -5.5%Cheshire -8.9%Merrimack -10.2%Grafton -11.2%Rockingham -12.3%Sullivan -14.7%Belknap -16.3%Coos -20.0%Carroll -24.4%

Source: Daniel Lee, Plymouth State University

New Hampshire’s Population Numbers Depend on Immigrants

New Hampshire County Net Migration from 2010 to 2014Census Estimates Net 2014County Foreign Born Domestic Migration ResidentsBelknap County, New Hampshire 293 292 585 60,305Carroll County, New Hampshire 81 82 163 47,399Cheshire County, New Hampshire 157 -1,193 -1,036 76,115Coos County, New Hampshire 77 -799 -722 31,653Grafton County, New Hampshire 1,105 -475 630 89,658Hillsborough County, New Hampshire 4,075 -5,413 -1,338 405,184Merrimack County, New Hampshire 871 -530 341 147,171Rockingham County, New Hampshire 844 2,937 3,781 300,621Strafford County, New Hampshire 531 505 1,036 125,604Sullivan County, New Hampshire 103 -530 -427 43,103

8,137 -5,124 3,013 1,326,813

13.9%12.9%

4.3%3.4%

Massachusetts Connecticut Rhode Island NewHampshire

Vermont Maine

Foreign Born Population in New England States (2013)Percent of Total Population

New Hampshire Share of Foreign Born Less than US, Regional

16.3%14.7%

1.9%0.5%

Under 5years

5 to 17years

18 to 24years

25 to 44years

45 to 54years

55 to 64years

65 to 74years

75 to 84years

85 yearsand over

New Hampshire Native and Foreign Born Population by Age, 2013

Native Foreign born

New Hampshire Foreign Born Concentrated in Prime Working Age

Immigrants and Native Education Patterns

29.80% 29.60%

22.10%

12.20%

19.20%

23.00%

19.20% 19.70% 18.90%

Less than highschool graduate

High schoolgraduate (includes

equivalency)

Some college orassociate's degree

Bachelor's degree Graduate orprofessional

degree

New Hampshire Native and Foreign Born Population Over 25 by Educational Attainment, 2013

Native Foreign born

2013 Foreign Born with Bachelors Degree or Better2013 ACS, , B06009 Foreign Born Foreign Born

Rank State Percentage BA or Better Population 25 and Over4 Vermont 41.5% 8,902 21,4599 New Hampshire 38.6% 24,395 63,196

13 Massachusetts 35.6% 319,823 898,58714 Maine 35.0% 12,646 36,17116 Connecticut 33.6% 145,832 434,63643 Rhode Island 22.0% 25,460 115,548

New England 34.2% 537,058 1,569,597

New Hampshire Foreign Born Highly Educated

Immigration Expands the Economy

• Immigrants increase economic efficiency by reducing labor shortages in low- and high-skilled markets because their educational backgrounds fill holes in the native-born labor market.

• Immigrants’ educational backgrounds typically complement, rather than displace, the skills of the native-born labor market.

THE ECONOMIC BENEFITS OF IMMIGRATION, Diana Furchtgott-Roth, Senior Fellow, Manhattan Institute for Policy Research, February 2013

New Hampshire foreign born Highly-Educated

• Four out of ten of New Hampshire’s foreign-born residents have a bachelor’s degree or better, ranking New Hampshire among the top ten states in the country in the education level of foreign-born residents.

• Despite accounting for less than 6 percent of the state population, the foreign born account for nearly one in ten New Hampshire residents with a graduate or professional degree.

• In 2013 New Hampshire foreign-born workers earned about $2 billion in wages working in New Hampshire industries, or about 6.4 percent of the $29 billion in wages earned in the state.

• Over one third of those earnings were in management, business, financial, computer and mathematical occupations.

New Hampshire Foreign Born Contribute to the Economy

• An expansion of the high-skilled visa program would create an estimated 2,000 new jobs in New Hampshire by 2020.

• By 2045, this expansion would add around $717 million to Gross State Product and increase personal income by more than $706 million.

Source: Frederick R. Treyz, Corey Stottlemyer, and Rod Motamedi, “Key Components of Immigration Reform: An Analysis of the Economic Effects of Creating a Pathway to Legal Status, Expanding High-Skilled Visas, and Reforming Lesser-Skilled Visas” (Amherst, MA: Regional Economic Models, Inc., 2013).

But they could contribute more…

National Research on Foreign Born Business Owners• Despite accounting for 13% of the

population, immigrants start one quarter of the new businesses in the US.

• Immigrant founders started 52% of all new Silicon Valley companies between 1995 and 2005.

• 21% of INC. 500 CEOs are foreign born.

• Source: INC. Magazine, “The Most Entrepreneurial Group in America Wasn’t Born in America”.

New Hampshire Center for Public Policy Studies

Want to learn more?• Online: nhpolicy.org• Facebook: facebook.com/nhpolicy• Twitter: @nhpublicpolicy• Our blog: policyblognh.org• (603) 226-2500

“…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

Board of DirectorsJames Putnam, ChairDavid AlukonisJohn HerneyEric HerrDianne MercierCatherine A. ProvencherTodd I. SeligMichael WhitneyDaniel WolfMartin L. Gross, Chair Emeritus

Directors Emeritus William H. Dunlap Sheila T. FrancoeurDonna SytekBrian F. Walsh

Mr. Charlie M. Arlinghaus

President of The Josiah Bartlett Center for Public Policy

Everything’s Better in TexasJob Growth Since the Recession:

2008 2009 2010 2011 2012 2013 2014 2015

-10.00%

-5.00%

10.00%

15.00%

-0.11%

11.75%

New Hampshire Texas US, less TX

Wrong Side of the Border

2008 2009 2010 2011 2012 2013 2014 201594

Mass. adding jobs almost twice as fast as NH

LocationTransport to Market

SupplierLaborCosts

State and

Local Taxes

Total Measured Costs

Nashville, TN $426 $159 $118 $703 Lexington, KY 423 186 106 715St. Louis, MO 419 172 134 725Bloomington, IL

417 202 162 781Kalamazoo, MI

430 244 116 790Terre Haute, IN

413 209 168 790Marysville, OH

427 219 169 815“Saturn and State Economic Development”,

Bartik et al

Leapfrogging MarylandTAX COMPETITION

Worst 10 8.50%New Hampshire #39 8.20%Massachusetts 8.00%Median State [TN] 6.50%Florida 5.50%Top 11 5.00%Texas

Who Pays Business Taxes?Employees Firms Employees Pct of Total20 or more 4,889 441,233 80.3%5 or more 13,501 59,236 94.5%Employers 30,522 548,985 100%Nonemployers 102,310Total 132,310

2014 BPT: 15,685 taxpayers10 year range: 11,375 - 15,685

Budget Considerations• Business Taxes

i. Rate reductionii. Up 15.5%

• HHS $27m behind and falling• Taxes up $37m over budget• New money means new ideas

Shockingly High 2015 2014New England 16.62 15.43New Hampshire 16.09 15.16Vermont 14.34 14.63Maine 12.96 12.60USA 10.49 10.50Tennessee 9.36 9.49Texas #11 8.72 8.97

The NH Penalty: 46%

2014201320122011201020092008200720062005200420032002$500

$1,100

$1,300

$1,500

$1,700

NH Pays $527m More Than if Ave

Charlie ArlinghausJosiah Bartlett Center for Public Policy

arlinghaus@jbartlett.org

Mr. Jeff McDonald

Chief Investment Officer, SVP for Enterprise

Investment Advisors

Market Update:

China, Oil & The Fed

Market Update:China

China is second largest economy in the world, with an expanding consumer class and is also a large consumer of energy and raw materials.

China’s economic decline will impact the overall global economy but that impact will vary from one country to another.

Today, Chinese economic growth has slowed from a historical 10% target to a revised 6.5% and may be as low as 4%.

In response to the economic slowdown, the Chinese government has allowed its currency to depreciate in order to make their exported goods more attractive to consumers outside of China.

Manufacturing growth has slowed to the lowest level since 2009.China

However, the depreciation of the Chinese Yuan sent a message to investors that growth in China is slowing more than the government has reported.

The lack of confidence in the Chinese government to orchestrate a solid recovery has diminished greatly (even after adding $30 billion to the market last month) causing the Shanghai Chinese market to fall 15% year-to-date. Now down 20%, it has entered a bear market for the 2nd time in 7 months.

Piling in: There are many new investors in China’s equity market.

The Chinese stock market has boomed as millions of citizens have taken up trading. Volume on the Shanghai and Shenzhen markets through May in 2015 has nearly equaled the trade volume in all of 2014.

But these new entrants are treating the equity market like a casino…China

…and borrowing large sums of money to buy stock to make their fortunes.China

China Syndrome: The Contagion EffectEmerging market countries have been negatively impacted as investors fear a contagion effect in those countries closely aligned with China, such as Singapore, which could see its growth decrease by 1.4% for every 1% decrease in China’s economy.

115 Thai baht/USD

Jan '15Source:

Bloomberg

Jul '15 Jan '16

Spot Exchange Rates

Malaysian ringgit/USD South Korean won/USD

Taiwan dollar/USD

Since China is the largest Asian exporter, a cheaper Chinese currency initiates a selloff in every other Asian export country’s currency.

China Syndrome: The Contagion Effect

-8.0% -7.0% -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0%

South African rand

Russian rouble

Mexican peso

Turkish lira

South Korean won

Taiwanese dollar

Malaysian ringgit

Singapore dollar

Chinese yuan

YTD performance against USD (1/15/16)

Asia is not alone: The Euro, Yen, Rand, Ruble and Peso are also weaker.

Source: Northern Trust

Some developed international countries depend greatly on China for a large percentage of their overall exports.

A slowdown in China will have a direct impact on the Eurozone region.

But the European Central Bank is committed to increasing growth and inflation in the Eurozone which is why it will continue to add liquidity to the market and keep interest low in order to make credit cheap and boost asset prices (sounds like what the Fed did in the US in the last 7 years).

Market Update:Oil

Commodity Rout: Oil

Oil has decreased dramatically due to the decline in the global economy driven by China’s economic slowdown.

Oil declines have been driven by over supply issues caused by increased production from new players such as US shale producers.

Oil continued to slide and breached the $30 barrel level, not seen since 2004. Currently, oil is at $29 a barrel, which is a 12-year low. This year alone oil has lost 20% and is off 52% from its 2015 peak.

Why?2 ReasonsDEMAND SUPPLY

In addition, Venezuela and Nigeria are adding to supply and now Iran is coming back online after the ban on its oil exports were lifted.

Also, OPEC (The Organization of the Petroleum Exporting Countries), lead by the Saudis, decided not cut production at its last meeting in order to eliminate competition and protect its market share. As a result, there is a dramatic imbalance between supply and demand.

Commodity Rout: Oil

Concerns with the decline in energy prices and its impact on highly levered energy companies has fanned the bankruptcy fires and the losses in banks’ loan portfolios (especially regional banks in energy producing areas), which could pressure bank earnings.

Source: Northern Trust, Bloomberg, Barclays. Monthly data through 12/31/2015. Averages of data over period charted.

Commodity Rout: Oil

Positives and negatives for lower oil prices:

POSTIVES

+ US consumers benefit directly because oil is priced in dollars and our dollar has strengthened which means the lower gas prices has added approximately

$700 billion in consumer’s pockets.

+ Other benefits from lower gas prices have been reported recently in stronger restaurant and beverage sales and home improvement revenue i.e. Home Depot, Lowe’s, etc.

NEGATIVES

− Since oil is priced in dollars, the effect of a stronger dollar has made oil/gas more expensive in those countries that have been reducing the value of their currency in order to remain export competitive.

− In this case, energy and gas prices acted like a tax increase at a time when consumers need a tax cut.

Commodity Rout: Oil

Domestic Front

Consumer balance sheet is in better shape today: Consumer debt loads as percentage of income are 30% lower today than they were in 2007.

Domestic Front

Consumer confidence and disposable income is still high:

Domestic Front

Business confidence is still strong:

Domestic Front

Market Update:The Fed

Domestic Front

The Fed raised the Fed Funds rate for the first time in 10 years, causing some concern because it makes the dollar stronger which makes our exports more expensive versus our trading partners.

Positives of higher rates:

Helps individuals dependent on fixed-income and adjusts risk-taking.

Higher short-term rates help bank net interest margins = ability to expand credit.

Higher interest rates = US dollar denominated assets more attractive = pushinglonger-term interest rates lower.

The Domestic Front: The Fed

US bank balance sheets are stronger than ever. They have double the reserve ratios to protect against crisis situations like 2008.

Opportunity???

Bank earnings have been good…Citigroup posted best annual profit in a decade, yet, financial shares index is down 13% year-to-date.

The Domestic Front

The slowdown in the global economy is impacting the US economy but not as much as other countries.

Why?US only exports about 15% of the goods produced but the stronger dollar has impacted

the manufacturing sector..

The Domestic Front

The US is mostly a service economy, not impacted by the strength of the dollar.

The Domestic Front

It’s NOT all a bed of roses…

US companies still face some headwinds in earnings growth.

Fourth quarter earnings declined from 1% to (3.7%) which explains why we saw flattish equity returns last year.

Earning growth estimates for 2016 have been ratcheted down from 10.3% to 7.6%due to the global slowdown..

Earnings

Currently, fear is driving stock prices lower…..CBOE (Chicago Board Options Exchange) volatility index often referred to as the fear gauge is above the its 10 year average.

As a result, fear has pushed all major US stock indexes into correction territory, which is reflecting declines of more than 10% from recent peaks.

Positives for continued growth in US:Positives

Unemployment Rate

Employment has remained strong…recent NFP was over $292k, which was above the average estimate.

Positives for Growth

Wage growth is still weaker than desired but was still positive at +2.5% year-over- year.

Already mentioned “cheap” oil/gas = savings for consumption. Remember consumer is 70% of GDP in U.S.

Strong corporate balance sheets and huge cash levels to the tune of estimated $1.7 trillion.

Plenty of firepower to buy equities.

Source: Bloomberg

Over $700 Billion inPersonal Savings

Over $2.7 Trillion inMoney Markets

Source: Northern Trust, Bloomberg. Weekly data through 1/1/2016 (*current).

Longer-term interest rates will probably remain range bound between 2% - 2.5%. Probably will stay at the lower end of the range due to the following:

Expectations of inflation remaining low for the foreseeable future.

Safe haven status of US treasury bonds during market turmoil/volatility.

Higher yields compared to global trading partners make US bonds more attractive and the demand pushes prices higher and bond yields lower.

10-YEARSOVEREIGNS

CURRENT*YIELD

12/31/14YIELD

YTD CHANGE(BPS)

CURRENT SPREADTO U.S. (BPS)

1YR FORWARDYIELD

5YR FORWARDYIELD

United States 2.27 2.17 10 - 2.50 2.88United Kingdom 1.96 1.76 20 -31 2.20 2.76Japan 0.27 0.33 -6 -200 0.37 0.94Canada 1.39 1.79 -39 -88 1.57 2.35Germany 0.63 0.54 9 -164 0.78 1.43France 0.99 0.83 16 -128 1.19 2.03Italy 1.60 1.89 -29 -67 1.85 2.74Spain 1.77 1.61 16 -50 2.07 3.20Switzerland -0.06 0.32 -38 -233 0.05 0.58

Although we have seen a huge improvement in real estate prices we have not benefited directly from an increase in new construction.

Every 250,000 homes built translates to approximately 1 million jobs created; we think that housing starts could end up at 2 million annually.

As the employment picture has continued to improve, we will see more demand (albeit slow) for housing and lower mortgage rates will aide first time home buyers and those looking to move up.

There is proof that young people are leaving the nest:

…and forming new households.Positives for Growth

• Lastly, although the Fed has increased the Fed Funds rate, it remains

• accommodative in its monetary policy.• It remains fully aware of the global macroeconomic

• picture and its impact on the US economy.

Thank you!Jeffrey McDonald

Chief Investment Officer Jeffrey.McDonald@ebtc.com

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