economic outlook michael wolf, economist september 12, 2014

Economic Outlook

Michael Wolf, EconomistSeptember 12, 2014

Economics 22

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2000 2002 2004 2006 2008 2010 2012 2014

U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change

GDP - CAGR: Q2 @ 4.2%

GDP - Yr/Yr Percent Change: Q2 @ 2.5%

Forecast

Gross Domestic Product

Real GDP declined in the first quarter, but those contractionary forces

should prove to be temporary

Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Government

Economics 4

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2000 2002 2004 2006 2008 2010 2012 2014

Real Government Purchases Bars = CAGR Line = Yr/Yr Percent Change

Government Purchases-CAGR: Q2 @ 1.4%

Government Purchases-Yr/Yr: Q2 @ -0.8%

Forecast

Government Purchases

The public sector has remained a weight on the

overall economy, but should soon move back into being a minor contributor to overall

growth


Economics 5

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$400

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$400

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Federal Budget Surplus or Deficit12-Month Moving Sum in Billions of Dollars

Surplus or Deficit: J ul @ -$533 Billion

U.S. Budget Deficit

Deficit is shrinking, but not nearly fast enough

Source: U.S. Department of the Treasury and Wells Fargo Securities, LLC

Economics 6

14%

16%

18%

20%

22%

24%

26%

14%

16%

18%

20%

22%

24%

26%

2013 2015 2017 2019 2021 2023

U.S. Budget GapCBO Baseline Scenario Projections, Percent of GDP

Outlays: 2024 @ 22.1%

Revenues: 2024 @ 18.3%

U.S. Budget Gap

The larger problem is that there is still no credible plan to move back into a

surplus

Source: Congressional Budget Office and Wells Fargo Securities, LLC

Economics 77

Federal Government Spending: Entitlements in the Driver’s Seat

Entitlement programs are the main drivers of growing

expenditures

Source: Congressional Budget Office and Wells Fargo Securities, LLC

$0.0T

$0.5T

$1.0T

$1.5T

$2.0T

$2.5T

$3.0T

$3.5T

$4.0T

$0.0T

$0.5T

$1.0T

$1.5T

$2.0T

$2.5T

$3.0T

$3.5T

$4.0T

2013 2015 2017 2019 2021 2023

U.S. Federal Government Mandatory OutlaysTrillions of U.S. Dollars, Projections Begin in 2014

Other Programs: 2024 @ $0.2TIncome Security: 2024 @ $0.3TSocial Security: 2024 @ $1.5THealthcare Programs: 2024 @ $1.6T

Business Investment

Economics 9

-40%

-30%

-20%

-10%

0%

10%

20%

30%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

2000 2002 2004 2006 2008 2010 2012 2014

Real Business Fixed InvestmentBars = CAGR Line = Yr/Yr Percent Change

Non-Res Fixed Invest - CAGR: Q2 @ 8.4%

Non-Res Fixed Invest - Yr/Yr Percent Change: Q2 @ 6.4%

Forecast

Business Investment

Business investment looks to be strengthening after a hiccup earlier in the year


Economics 10

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

U.S. Nonfin. Corporate Cash HoldingsTotal Assets Market Value, U.S. Nonfinancial Corporations

Cash Ratio: Q1 @ 4.3%

4-Q Moving Average: Q1 @ 4.4%

Corporate Cash

The financial health of the corporate sector is very strong and should allow

corporations to spend more going forward

Source: Federal Reserve Board and Wells Fargo Securities, LLC

Economics 11

-30%

-20%

-10%

0%

10%

20%

30%

40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

90 92 94 96 98 00 02 04 06 08 10 12 14

Commercial and Industrial LoansAt Commercial Banks in the United States

Year-over-Year Change: J ul @ 10.9%

3-Month Annualized Rate: J ul @ 11.9%

Business Lending

Commercial and industrial lending has surged over the

past quarter, helped by easier credit and increased

demand


Economics 12

30

35

40

45

50

55

60

65

30

35

40

45

50

55

60

65

90 92 94 96 98 00 02 04 06 08 10 12 14

ISM Manufacturing Composite IndexDiffusion Index

ISM Manufacturing Index: Aug @ 59.0

12-Month Moving Average: Aug @ 55.5

Manufacturing

Large, Global Businesses:Recent pickup in activity

Source: Institute for Supply Management and Wells Fargo Securities, LLC

Economics 13

-80

-60

-40

-20

0

20

40

60

80

4%

5%

6%

7%

8%

9%

10%

11%

12%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Industrial Supply & DemandPercent, Millions of Square Feet

Industrial Net Completions: Q2 @ 20.2M SF (Right Axis)

Industrial Net Absorption: Q2 @ 30.7M SF (Right Axis)

Industrial Vacancy Rate: Q2 @ 7.2% (Left Axis)

CRE: Industrial

A rise in manufacturing and energy production has fueled growth in the industrial real estate

market

Source: PPR and Wells Fargo Securities, LLC

Economics 14

10

12

14

16

18

20

20

40

60

80

100

120

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Production & J obs in Manufacturing SectorIndex, 2007=100 on Left Axis, Right Axis in Millions

Manufacturing Production: J ul @ 100.7 (Left Axis)Manufacturing Employment: Aug @ 12.2 Million (Right Axis)

NAFTA China J oins WTO

Manufacturing: Production and Jobs Gap

Rising manufacturing production has not led to

huge job gains

Source: Institute for Supply Management and Wells Fargo Securities, LLC

Economics 15

-40

-30

-20

-10

0

10

20

30

0%

3%

6%

9%

12%

15%

18%

21%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Office Supply & DemandPercent, Millions of Square Feet

Office Net Completions: Q2 @ 4.3M SF (Right Axis)Office Net Absorption: Q2 @ 3.0M SF (Right Axis)Office Vacancy Rate: Q2 @ 16.8% (Left Axis)

CRE: Office

Improvement in the office sector has been more

modest despite strong gains in office-using employment

Source: Reis, Inc. and Wells Fargo Securities, LLC

Economics 16

0%

4%

8%

12%

16%

20%

24%

0%

4%

8%

12%

16%

20%

24%

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Commercial Real Estate Vacancy RatesPercent

Office Vacancy Rate: Q2 @ 16.8%Industrial Vacancy Rate: Q2 @ 7.2%Retail Vacancy Rate: Q2 @ 10.3%Apartment Vacancy Rate: Q2 @ 4.1%

Commercial Real Estate

The recovery has been uneven across property

types

Source: Reis, Inc., PPR and Wells Fargo Securities, LLC

Economics 17

70

75

80

85

90

95

100

105

110

115

-60

-40

-20

0

20

40

60

80

100

120

04 05 06 07 08 09 10 11 12 13 14

Wells Fargo Small Business Survey & NFIBOverall Situation, NFIB Small Business Optimism 1986=100

Wells Fargo Overall Situation: Q3 2014 @ 49.0 (Left Axis)

Small Business Optimism: Q2 2014 @ 95.6 (Right Axis)

Small Businesses

Small Businesses:A full recovery in small

business optimism is still distant, with taxes and

regulation remaining the two big issues

Source: National Federation of Independent Businesses, Gallup, Wells Fargo Bank and Wells Fargo Securities, LLC

Consumption

Economics 1919

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2000 2002 2004 2006 2008 2010 2012 2014

Real Personal Consumption ExpendituresBars = CAGR Line = Yr/Yr Percent Change

PCE - CAGR: Q2 @ 2.5%PCE - Yr/Yr Percent Change: Q2 @ 2.3%

Forecast

Personal Consumption Expenditures

Consumption should rebound during the forecast period but growth is likely

to remain somewhat subdued


Economics 20

-1,000

-800

-600

-400

-200

0

200

400

600

-1,000

-800

-600

-400

-200

0

200

400

600

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Nonfarm Employment ChangeChange in Employment, In Thousands

Monthly Change: Aug @ 142K

Employment

Total employment finally breached its prerecession

peak…

Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Economics 21

110

113

116

119

122

125

128

125

128

131

134

137

140

143

2007 2008 2009 2010 2011 2012 2013 2014

Full-Time vs. Total EmploymentMillions

Total Employees: Aug @ 139.1 M (Left Axis)Total Full-Time Employees: Aug @ 118.6 M (Right Axis)

Full Time: 3.3 M Below Prerecession Peak

Total: 0.8 M Above Prerecession Peak

Employment: Structural

We still have a ways to go before recovering all of the

full-time jobs lost in the most recent recession


Economics 22

2%

4%

6%

8%

10%

12%

14%

16%

18%

2%

4%

6%

8%

10%

12%

14%

16%

18%

94 96 98 00 02 04 06 08 10 12 14

Unemployment Measures

Unemployment Rate: Aug @ 6.1%

U-6 Unemployment Rate: Aug @ 12.0%

Unemployment

…but the unemployment rate overstates the health of

the labor market. Discouraged workers and an abundance of part-time

work rein in spending


Economics 23

1%

2%

3%

4%

1%

2%

3%

4%

2002 2004 2006 2008 2010 2012 2014

Employment Cost Index Year-over-Year Percent Change

Wages and Salaries: Q2 @ 1.8%

Total Compensation: Q2 @ 2.0%

Wages and Salaries

In addition, wage growth has been relatively slow to

pick up, while inflation begins to pull away


Economics 24

0%

50%

100%

150%

200%

250%

0%

50%

100%

150%

200%

250%

Lowest 20percent

Second 20percent

Third 20percent

Fourth 20percent

Highest 20percent

Income Growth by QuintilePercent Change from 1984 to 2012, After-Tax Income

Income Growth: Different Rates

After-tax nominal income has increased the most for

the lowest and highest income households since

the mid-1980s


Economics 25

-3.4%

1.2%

3.5%

5.6%

4.7%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Lowest 20percent

Second 20percent

Third 20percent

Fourth 20percent

Highest 20percent

Income Growth by QuintilePercent Change in Nominal After-Tax Income 2007-2012

Income Growth: Rising at Different Rates

Since 2007, income growth has been clearly

concentrated in the upper quintiles


Economics 26

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

60 65 70 75 80 85 90 95 00 05 10

Household Debt - Consumer & MortgageAs a Percent of Disposable Personal Income

Household Debt: Q1 @ 97.9%

Consumer Balance Sheet

Although consumer leverage remains elevated,

it is off its prerecession high

Source: Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities, LLC

Economics 27

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Household Debt Service RatioDebt Payments as a Percent of Disposable Personal Income

DSR: Q1 @ 9.9%

Debt Service Ratio

And the debt service ratio has fallen to historical lows

Source: Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities, LLC

Economics 2828

Household Debt

Rising student loan debt is crowding out other borrowing, particularly for autos and credit cards


20132003

Mortgage, 70.2%

Student Loans, 3.1%

Auto Loans, 8.7%

Credit Card, 8.7%

HE Revolving, 3.7%

Other, 5.6%

Household Debt - 2003

Mortgage, 70.0%

Student Loans, 9.1%

Auto Loans, 7.5%

Credit Card, 6.0%

HE Revolving, 4.7%

Other, 2.7%

Household Debt - 2013

Housing Market

Economics 30

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

04 05 06 07 08 09 10 11 12 13 14

Existing Home Sales Seasonally Adjusted Annual Rate, In Millions

Existing Home Sales: J ul @ 5.2 M

Housing Market: Existing Home Sales

Existing home sales have started to rebound but

remain lower than a year ago


Economics 31

30

50

70

90

110

130

150

30

50

70

90

110

130

150

04 05 06 07 08 09 10 11 12 13 14

Existing Home SalesExisting Homes Sold During Month, 2002=100

Northeast: J ul @ 64.0Midwest: J ul @ 87.8South: J ul @ 100.0West: J ul @ 87.3

Housing Market: Home Sales

The recent weakness was seen across regions


Economics 32

100

300

500

700

900

1,100

1,300

1,500

100

300

500

700

900

1,100

1,300

1,500

89 91 93 95 97 99 01 03 05 07 09 11 13

New Home SalesSeasonally Adjusted Annual Rate, In Thousands

New Home Sales: J ul @ 412,000

3-Month Moving Average: J ul @ 429,333

Housing Market: New Home Sales

New home sales have seen only modest improvement


Economics 33

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Conventional 30-Year Mortgage RatePercent, FHLMC Fixed-Rate Mortgage

Conventional 30-Year Fixed Mortg. Rate: Sep-10 @ 4.10%

Mortgage Rates

Although mortgage rates remain low by historical

standards, the rise over last year has had a negative effect on homebuying

Source: Freddie Mac and Wells Fargo Securities, LLC

Economics 34

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

2007 2008 2009 2010 2011 2012 2013 2014

Residential Loan Standards and DemandPrime Mortgages, Net Percent of Banks Reporting Change

Tightening Standards: Q3 @ -18.3%

Reporting Stronger Demand: Q3 @ 45.1%

Residential Loan Standards

Demand appears to be strengthening as tightening

standards decrease


Economics 35

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Confidence: Plans to Buy a HomePercent of Consumers, Conference Board

Plans to Buy a Home Within Six Months: Aug @ 4.9%

12-Month Moving Average: Aug @ 5.5%

Home Purchase Expectations

But other indicators show that demand remains soft

Source: The Conference Board and Wells Fargo Securities, LLC

Economics 36

-32%

-24%

-16%

-8%

0%

8%

16%

24%

-32%

-24%

-16%

-8%

0%

8%

16%

24%

04 05 06 07 08 09 10 11 12 13 14

Home PricesYear-over-Year Percentage Change

Median Sale Price: J ul @ $223,900Median Sales Price 3-M Mov. Avg.: J ul @ 4.4%FHFA (OFHEO) Purchase Only Index: J un @ 5.1%S&P Case-Shiller Composite 10: J un @ 8.1%

Home Prices

Home price gains have moderated considerably

Source: Federal Housing Finance Agency, National Association of Realtors, S&P Corp. and Wells Fargo Securities, LLC

Economics 37

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

04 05 06 07 08 09 10 11 12 13 14

Single-Family Home InventoryMillions of Units

New Homes: J ul @ 0.21MExisting Homes: J ul @ 2.09M

Housing Market: Inventories

Low inventories have applied upward pressure on

price


Economics 38

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

2009 2010 2011 2012 2013 2014

U.S. Distressed Home SalesPercent of Total Sales

Total Distressed: J ul @ 9.0%

Housing Market: Distressed Home Sales

Fewer distressed homes available at a discount also keep prices moving higher


Economics 3939

Housing Market Fundamentals Are Changing

Household formations remain well below their historical norms, and a larger proportion of new households are choosing to rent


Owners vs. RentersHousehold Formation

0.0

0.5

1.0

1.5

2.0

2.5

0.0

0.5

1.0

1.5

2.0

2.5

65 69 73 77 81 85 89 93 97 01 05 09 13

Household FormationMillions of Households Formed

Household Formation: 2013 @ 0.45 Million1965-2001 Average: 2013 @ 1.28 Million

* 1982 and 2001 replaced with previous and prior year average to account for series breaks

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

66 70 74 78 82 86 90 94 98 02 06 10

U.S. Homeowners vs. RentersAnnual Change in Occupied Units, In Thousands

Renters: 2013 @ 525.5 ThousandHomeowners: 2013 @ -76.5 Thousand

Series Break 1981

Economics 40

0

10

20

30

40

50

60

70

80

90

100

0

150

300

450

600

750

900

1,050

1,200

1,350

1,500

90 92 94 96 98 00 02 04 06 08 10 12 14

New Home Sales vs. Wells Fargo NAHB IndexThousands of Units, Index

New Home Sales: J ul @ 412,000 (Left Axis)

Wells Fargo NAHB Index: Aug @ 55.0 (Right Axis)

Housing Market: Home Sales

Despite slow growth in new home sales, homebuilders

remain a bit more optimistic

Source: U.S. Department of Commerce, National Association of Home Builders and Wells Fargo Securities, LLC

Economics 41

-75

-50

-25

0

25

50

75

100

2%

3%

4%

5%

6%

7%

8%

9%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Apartment Supply & DemandPercent, Thousands of Units

Apartment Net Completions: Q2 @ 34,431 Units (Right Axis)

Apartment Net Absorption: Q2 @ 35,539 Units (Right Axis)

Apartment Vacancy Rate: Q2 @ 4.1% (Left Axis)

Housing Market: Apartments

Some builders are likely benefitting from growth in

the multifamily market, where apartment demand and construction remains

strong

Source: Reis and Wells Fargo Securities, LLC

Economics 42

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Existing Condominium Resales Seasonally Adjusted Annual Rate - In Millions

Condo Sales: J ul @ 600,000

Housing Market: Condos

Existing condo sales had also slipped recently but the

upward trajectory is clear


Economics 43

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Thousa

nds

Housing StartsMillions of Units

Multifamily StartsMultifamily ForecastSingle-family StartsSingle-family Forecast

Forecast

Housing Market: Residential Construction

We expect residential construction to continue to

advance, though a full recovery in the housing market is a long way off


Economics 44

U.S. Forecast

Wells Fargo U.S. Economic Forecast

2011 2012 2013 2014 2015

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Real Gross Domestic Product 1 2.7 1.8 4.5 3.5 - 2.1 4.2 2.0 2.8 1.6 2.3 2.2 2.0 2.9

Personal Consumption 3.6 1.8 2.0 3.7 1.2 2.5 2.1 2.5 2.3 1.8 2.4 2.2 2.5

Inflation Indicators 2

PCE Deflator 1.4 1.1 1.2 1.0 1.1 1.6 1.6 1.9 2.5 1.8 1.2 1.6 2.0

Consumer Price Index 1.7 1.4 1.5 1.2 1.4 2.1 2.1 2.3 3.1 2.1 1.5 2.0 2.3

Industrial Production 1 4.2 1.9 2.5 4.9 3.9 5.3 4.4 4.3 3.3 3.8 2.9 4.1 4.8

Corporate Profits Before Taxes 2 3.1 3.9 4.9 4.7 - 4.8 - 0.3 3.8 4.0 4.0 11.4 4.2 0.7 4.3

Trade Weighted Dollar Index 3 76.2 77.5 75.2 76.4 76.9 75.9 77.3 77.5 70.9 73.5 75.9 76.9 78.7

Unemployment Rate 7.7 7.5 7.2 7.0 6.7 6.2 6.1 5.9 8.9 8.1 7.4 6.2 5.7

Housing Starts 4 0.95 0.86 0.88 1.03 0.93 1.00 0.99 0.98 0.61 0.78 0.92 0.97 1.10

Quarter- End Interest Rates 5

Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.63Conventional Mortgage Rate 3.57 4.07 4.49 4.46 4.34 4.16 4.04 4.25 4.46 3.66 3.98 4.20 4.3910 Year Note 1.87 2.52 2.64 3.04 2.73 2.53 2.44 2.70 2.78 1.80 2.35 2.60 2.92

Forecast as of: August 29, 20141 Compound Annual Growth Rate Quarter-over-Quarter2 Year-over-Year Percentage Change3 Federal Reserve Major Currency I ndex, 1973=100 - Quarter End4 Millions of Units5 Annual Numbers Represent Averages

ForecastActual

2014

ForecastActual

2013

Client/Prospect Name

Wells Fargo Securities, LLC Economics Group

45

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Donna LaFleur, Executive Assistant.

[email protected]

Cyndi Burris, Senior Administrative Assistant [email protected]

economic outlook michael wolf, economist september 12, 2014

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