john e. silvia, chief economist february 12, 2015 the great inflation: once in a lifetime the...

John E. Silvia, Chief EconomistFebruary 12, 2015

The Great Inflation: Once in a LifetimeThe Economic Club of Las Vegas

Las Vegas 2

Where Are We Now?

Source:

Five benchmarks for good decision making

Inflation Interest Rates

Growth

Profits The Dollar

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Expectations for the Future

Wells Fargo vs. Consensus

How do we differ from consensus?

Sustained-trend growth

Employment—cyclical and structural change

Still cautious on consumer segments

Housing improving—multifamily especially

State and local governments—still restructuring

Unsustainable long-run fiscal policy

Europe weak growth path

China growth sub 7 percent

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-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 2016

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

GDP - CAGR: Q4 @ 2.6%

GDP - Yr/Yr Percent Change: Q4 @ 2.5%

Forecast

Sustained Growth in 2015

Following a poor start to the year, GDP growth has

rebounded smartly. Solid growth prospects in the

year ahead.

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

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25

30

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45

50

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60

65

25

30

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45

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55

60

65

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

ISM Manufacturing & Non-Manufacturing Composite Index

ISM Non-Manufacturing Index SA: Dec @ 56.5

ISM Manufacturing Index SA: J an @ 53.5

Manufacturing & Services

Indexes on business activity suggest an improving near-

term outlook

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

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70

75

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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: Q4 @ 58.0 (Left Axis)

Small Business Optimism: Q4 @ 98.2 (Right Axis)

Small Businesses

Small Businesses:A full recovery in small

business optimism is still distant, taxes and

regulation the two big issues

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

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250

300

350

400

450

500

550

600

650

700

250

300

350

400

450

500

550

600

650

700

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

Initial Claims for UnemploymentSeasonally Adjusted, In Thousands

Year-over-Year Percent Change: J an-31 @ -15.2%Initial Claims: J an-31 @ 278.0 Thousand4-Week Moving Average: J an-31 @ 292.8 Thousand52-Week Moving Average: J an-31 @ 304.8 Thousand

Initial Unemployment Claims: Cyclical

Signaling continued, moderate job gains ahead

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

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0%

1%

2%

3%

4%

5%

6%

7%

-9%

-6%

-3%

0%

3%

6%

9%

12%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Labor Income and Consumer SpendingYear-over-Year Percent Change of 3-MMA

Real Consumer Spending: Dec @ 2.8% (Left Axis)Wages & Salaries: Dec @ 5.2% (Left Axis)Average Hourly Earnings: J an @ 2.0% (Right Axis)

Wages & Salaries

Wages & salaries are best associated with consumer

spending

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

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1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Wages vs. Quit Rate Year-over-Year Percent Change, Rate; All Series are 3-MMA

Wages & Salaries: Dec @ 4.6% (Left Axis)Average Hourly Earnings: J an @ 2.0% (Left Axis)Quit Rate: Dec @ 1.9% (Right Axis)

Wages vs. Quit Rate

The rising quit rate indicates that workers are

feeling confident about opportunities available in

the labor market


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-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 2016

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

PCE - CAGR: Q4 @ 4.3%PCE - Yr/Yr Percent Change: Q4 @ 2.8%

Forecast

Consumer Spending

Faster job growth, asset appreciation and more

access to credit are supportive to the consumer

spending outlook


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0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

2005 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Bloomberg Consumer Comfort by Income12-Week Moving Average

Income Between $25K and $39.9K: Feb-01 @ 35.2Income Between $50K and $74.9K: Feb-01 @ 50.1Income Between $75K and $99.9K: Feb-01 @ 55.0Income Over $100K: Feb-01 @ 66.9

Consumer Confidence: By Income Group

Confidence improves with income, but remains

historically low across all income ranges

Source: Bloomberg LP and Wells Fargo Securities, LLC

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2006 2007 2008 2009 2010 2011 2012 2013 2014

0%10%20%30%40%50%60%70%80%90%100%110%

New Auto SalesAs Percent of Total New Auto Sales by FICO Scores

Sub Prime (619 and below): Aug @ 19.7%

Near Prime (620-679): Aug @ 20.7%

Prime (680 and above): Aug @ 59.6%

Auto Lending: Slippery Slope

There has been an increase in auto sales to sub and

near-prime buyers

Source: CNW Research and Wells Fargo Securities, LLC

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0%

10%

20%

30%

40%

50%

60%

70%

2006 2007 2008 2009 2010 2011 2012 2013 2014

Used Auto SalesAs Percent of Total Used Sales By FICO Scores

Sub-Prime: Aug @ 26.0%

Near Prime: Aug @ 33.7%

Prime: Aug @ 40.3%


The rise in sub-prime auto sales has been most

prevalent in the used auto sales market

Source: CNW Research and Wells Fargo Securities, LLC

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0%

1%

2%

3%

4%

0%

1%

2%

3%

4%

81 84 87 90 93 96 99 02 05 08 11 14

Auto Delinquency RatesBalance Past Due 30+ Days

Auto Indirect Loans: Sep @ 1.05%

Auto Direct Loans: Sep @ 0.56%


Auto delinquency rates remain at historically low

levels, but have seen a recent uptick

Source: American Bankers Association and Wells Fargo Securities, LLC

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0%

2%

4%

6%

8%

10%

12%

14%

16%

J an-03Apr-04

J ul-05Oct-06J an-08Apr-09

J ul-10

Oct-11

J an-13

Apr-14

Household Debt DelinquenciesPercent of Balance 90+ Days Past Due

Auto: Q3 @ 3.1%HELOC: Q3 @ 3.3%Mortgage: Q3 @ 3.2%Student Loans: Q3 @ 11.1%Other: Q3 @ 8.0%Credit Card: Q3 @ 7.5%

Household Debt Delinquencies: Student Loans the Exception

Tighter credit standards and a strengthening

economy have helped to improve the credit position of households over the past

3 years

Source: Federal Reserve Bank of New York and Wells Fargo Securities, LLC

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Inflation & Interest Rates

Inflation Interest Rates

Growth

Profits The Dollar

Core Inflation

MonetaryPolicy

YieldCurve

Real Interest Rates

Wage-Price Spiral

MarketExpectations

Key Driver

s

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-2%

-1%

0%

1%

2%

3%

4%

5%

-2%

-1%

0%

1%

2%

3%

4%

5%

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

PCE Deflator vs. Core PCE DeflatorYear-over-Year Percent Change

PCE Deflator: Dec @ 0.7%"Core" PCE Deflator: Dec @ 1.3%

Inflation: Rising – Not Low

Inflation remains historically low, but has

picked up as growth accelerates and excess

slack lessens


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100

120

140

160

180

200

220

100

120

140

160

180

200

220

2010 2011 2012 2013 2014 2015

Industrial Metals Index Includes Aluminum, Copper, Nickel and Zinc

Bloomberg Industrial Metals Index: Feb-6 @ 119.1

Prices - Industrial Metals

Falling oil prices have spilled over into other

commodity prices, notable industrial metals


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Inflation

Services continue to underpin overall inflation, led by rising shelter costs as the housing market has recovered. Between 2008 and 2013, total prices are up 8.2

percent vs. 16.8 percent for medical care.

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

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

U.S. "Core" CPI - Services vs. Goods Year-over-Year Percent Change

Core Services CPI : Dec @ 2.4%Core Goods CPI : Dec @ -0.8%


Shelter CostsServices vs. Goods

-1%

0%

1%

2%

3%

4%

5%

6%

7%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

88 90 92 94 96 98 00 02 04 06 08 10 12 14

Shelter, OER & Rent CostsYear-over-Year Percent Change

Shelter: Dec @ 2.9%

Rent: Dec @ 3.4%

OER: Dec @ 2.6%

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1.1%

1.4%

2.1%

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%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

PCE Deflator ForecastFed Central Tendency Forecast vs. Wells Fargo Forecast

Central Tendency Forecast Range

Historical PCE Deflator

Wells Fargo Economics Forecast FOMC Dec. Forecast

Q4-over-Q4 Percent Change

Inflation

The Fed anticipates a gradual firming of inflation,

but for slack in the labor market to keep inflation from overshooting in the

medium term

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

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0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Appropriate Pace of Policy FirmingTarget Federal Funds Rate at Year-End

December 2014 Median Response

September 2014 Median Response

2015 2016 Longer Run2017

Pace of Policy Firming

The FOMC Committee downshifted its expectations for the Federal Funds rate path in the recent meeting, but still expects a fed funds rate of above 1 percent at

the end of 2015

Source: Federal Reserve Board and Wells Fargo Securities, LLC

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0

10

20

30

40

50

60

70

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

12M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y

U.S. Treasury Curve Roll ChartYield (Left); Basis Points (Right)

1Y Roll - 12/31/2013 (Right Axis)1Y Roll - 12/31/2014 (Right Axis)1Y Roll - 1/30/2015 (Right Axis)Yield Curve 12/31/2013 (Left Axis)Yield Curve 12/31/2014 (Left Axis)Yield Curve 1/30/2015 (Left Axis)

Treasury Curve

The short-end remains the steepest part of the curve,

while the long-end has flattened considerably


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Yield Curve: Rates Rise Without Fed

The Fed will begin to raise the funds rate in mid-2015


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%

Yield CurveU.S. Treasuries, Active Issues

February 4, 2015

J anuary 7, 2015

February 5, 2014

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Yield Spread

Flight to safety and search for yield from foreign

investors has caused the 10-year yield to drop to

historical lows


1.0%

1.3%

1.6%

1.9%

2.2%

2.5%

2.8%

1.0%

1.3%

1.6%

1.9%

2.2%

2.5%

2.8%

J an-12 J ul-12 J an-13 J ul-13 J an-14 J ul-14 J an-15

U.S. Treasury 10-Year - 2-Year Spread

10-Year - 2-Year: Feb @ 1.30%

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0

100

200

300

400

500

600

700

0

100

200

300

400

500

600

700

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Aaa and Baa Corporate Bond SpreadsOver 10-Year Treasury, Basis Points

Baa Spread: J an @ 257 BpsAaa Spread: J an @ 158 Bps

Bear StearnsMarch 2008

Corporate Spreads: Positive for Issuance

Spreads have returned to a more normal level; bond

issuance is strong


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Easier Lending Standards

More than a third of firms eased lending standards for student and auto loans last

year.

Source: Office of the Comptroller of the Currency and Wells Fargo Securities, LLC

0%

10%

20%

30%

40%

50%

60%

70%

0%

10%

20%

30%

40%

50%

60%

70%

Firms Easing Lending StandardsPercent of Firms, By Loan Type

2014

2006

Commercial Loans Retail Loans

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Interest Coverage Ratio

Small manufacturers are most able to cover their debt obligations, while

mining corporations exhibit the lowest coverage ratio.


0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

Interest Coverage RatioOperating Income/Interest Expense, 4-Q Mov. Avg.

Q3 2014

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Debt Financing

Nonfinancial corporations are exposed to rising short-term interest rates as the

Fed rate hike draws nearer


24%

28%

32%

36%

40%

44%

48%

24%

28%

32%

36%

40%

44%

48%

70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15

Nonfinancial Corporate Debt FinancingShort-Term Debt As a Share of Total Credit Market Debt

Short Term Financing/Total Debt: Q3 @ 26.7%

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$0

$3

$6

$9

$12

$15

$18

$21

$24

$27

$30

$0

$3

$6

$9

$12

$15

$18

$21

$24

$27

$30

04 05 06 07 08 09 10 11 12 13 14

Investment Grade Corporate Issuance3-Month Moving Average, Billions of USD

Investment Grade Corporate: J an @ $18.9 Billion

Investment Grade Corporate Bonds

Businesses are taking advantage of low interest

rates

Source: IFR Markets and Wells Fargo Securities, LLC

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$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

04 05 06 07 08 09 10 11 12 13 14

High Yield Corporate Issuance3-Month Moving Average, Billions of USD

High Yield Corporate I ssuance: Dec @ $21.2 Billion

High Yield Corporate Bonds

As investors search for yield among exceptionally low

interest rates, bond issuance has gained

momentum

Source: IFR Markets and Wells Fargo Securities, LLC

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1000

1200

1400

1600

1800

2000

$0

$100

$200

$300

$400

$500

2010 2011 2012 2013 2014

U.S. M&A Volume and S&P 500 IndexBillions of Dollars; Index

U.S. M&A Volume: Q3 @ $476.4B (Left Axis)S&P 500 Performance: Q3 @ 1972.3 (Right Axis)

M&A Volume

U.S. M&A and the S&P 500 remain correlated over time

Source: Thomson Reuters, Capital IQ and Wells Fargo Securities, LLC

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-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: Dec @ 13.3%

3-Month Annualized Rate: Dec @ 12.0%

Business Lending

Commercial and industrial lending has surged over the

past quarter, helped by easier credit and increased

demand


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0%

2%

4%

6%

8%

10%

12%

14%

0%

2%

4%

6%

8%

10%

12%

14%

47 51 55 59 63 67 71 75 79 83 87 91 95 99 03 07 11

Corporate ProfitsAs a Percent of GDP

Rest of World: Q3 @ 2.3%

Domestic: Q3 @ 10.0%

NAFTA

China J oins WTO

Corporate Profits: Increasing Role of Global Profits

Profits as a percentage of GDP are historically high and are being boosted by

profits earned abroad post NAFTA


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-9.0

-6.0

-3.0

0.0

3.0

6.0

9.0

12.0

-9.0

-6.0

-3.0

0.0

3.0

6.0

9.0

12.0

96 98 00 02 04 06 08 10 12 14

Manufacturing After-Tax ProfitsPer Dollar of Sales, in Cents

After-Tax Profits: Q3 @ 9.4 Cents

After-Tax Profits

Profit margins continue to improve


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0%

20%

40%

60%

80%

100%

120%

0%

20%

40%

60%

80%

100%

120%

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

Non-Fin. Corporate Business: Corporate Interest As a Percentage of Pre-Tax Profits

Corporate Interest: Q3 @ 18.0%

Interest Expense

Corporate interest expenses remain low amid the low-

rate environment


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Net Interest Margin v. Yield Curve

Net interest margin has followed a secular decline

and has decoupled from the yield curve in recent years.

Source: Federal Financial Institutions Examination Council, Federal Reserve Board and Wells Fargo Securities, LLC

-100

0

100

200

300

400

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

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

Net Interest Margin v. Yield Curve SpreadAnnualized Percent NSA; Basis Points

10-Year-2-Year Spread: Q4 @ 174 bps (Right Axis)Net Interest Margin: Q3 @ 3.1% (Left Axis)

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-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

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

After-Tax Corporate Profit GrowthYear-over-Year Percent Change, 2-Year Moving Average

After-Tax Profits: Q3 @ 5.3%

Corporate Profit Growth

Corporate profit growth remains firm—typical mid-

cycle slowdown


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-$200

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

-$200

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

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

Domestic ProfitsFinancial and Nonfinancial Corporations, Billions of Dollars

Nonfinancial Corporations: Q3 @ $1,292.2B

Financial Institutions: Q3 @ $468.1B

Corporate Profits: Domestic Profits

Big gains in profits have been from nonfinancial

corporations


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0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

2007 2008 2009 2010 2011 2012 2013 2014 2015

Federal Reserve Balance Sheet vs. S&P 500 Index Trillions, Index

Agencies & MBS: Feb @ $1,776.3B (Left Axis)Treasuries: Feb @ $2,460.7B (Left Axis)Other Securities: Feb @ $224.5B (Left Axis)S&P 500 Index: Feb @ 2,054.9 (Right Axis)

Fed Balance Sheet: Challenge to Asset Values

We have seen a strong correlation in the expansion of the Fed’s balance sheet

and the rise in the S&P 500


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Economic Conditions in the Eurozone

The Eurozone Economy

What can we expect moving forward?

Growth Exports via euro depreciation Companies, not countries

Euro Stoxx: up since 2012

Potential Growth Long-term: weaker Labor force growth Productivity

Eurozone share of Global GDP: 12% in 2014

Risks Russia: Service external debt Greece: Cash

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1500

2000

2500

3000

3500

4000

4500

5000

1500

2000

2500

3000

3500

4000

4500

5000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

European Equity Index

Euro Stoxx: J an-30 @ 3351.44

Global Economies: European Equity

The anticipation of the ECB’s policy move may

have helped to life equity prices in Europe in recent

months.


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40

60

80

100

120

140

160

180

200

2200.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2.20

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Euro, Pound & Yen Exchange RatesUSD per Euro, USD per Pound Yen per USD

Dollars per Euro: Feb @ 1.14 (Left Axis)Dollars per Pound: Feb @ 1.53 (Left Axis)Yen per Dollar: Feb @ 118.64 (Right Axis, Inverted)

Global Economies: A Stronger Dollar

The dollar has appreciated against the euro, pound and

yen recently.


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0.85

0.95

1.05

1.15

1.25

1.35

1.45

9.50

10.70

11.90

13.10

14.30

15.50

16.70

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Dollar Exchange Rates: Canada & MexicoForeign Currency per U.S. Dollar

Mexican Pesos/U.S. Dollar: Feb @ 14.84 (Left Axis)Canadian Dollars/U.S. Dollar: Feb @ 1.25 (Right Axis)

Global Economies: A Stronger Dollar

The Canadian dollar and Mexican peso have both seen recent depreciation

against the U.S. dollar


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14%

16%

18%

20%

22%

24%

26%

14%

16%

18%

20%

22%

24%

26%

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

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

Outlays: 2025 @ 22.3%

Revenues: 2025 @ 18.3%

Avg. Outlays1965-2013

Avg. Revenues1965-2013

Forecast

Federal Fiscal Policy: When Will We Discount Future Liabilities?

The federal government faces some significant fiscal

challenges—the current path is not sustainable

Source: Congressional Budget Office and Wells Fargo Securities, LLC

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Federal Government Spending: Entitlements in the Driver’s Seat

The unfunded liabilities of the entitlement programs reflect a commitment to

spend in the future


$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

2014 2016 2018 2020 2022 2024

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

Other Programs: 2025 @ $0.3TIncome Security: 2025 @ $0.4TSocial Security: 2025 @ $1.6THealthcare Programs: 2025 @ $1.7T

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Federal Fiscal Policy

The composition of federal spending has shifted dramatically.The CBO projects that the debt-to-GDP ratio will reach nearly 80 percent by 2024.


Federal Debt Continues to RiseComposition of Federal Spending

18%

35%

62%

60%

59%

31%

22%

6%

7%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2050

2013

1970

Federal SpendingPercent of Total

Discretionary Mandatory Net Interest

Total Spending 1970: 19 percent of GDP



20%

30%

40%

50%

60%

70%

80%

20%

30%

40%

50%

60%

70%

80%

1974 1979 1984 1989 1994 1999 2004 2009 2014 2019 2024

U.S. Debt Held By The PublicCBO Baseline Projections Begin in 2014, Percent of GDP

Baseline Debt: 2025 @ 77.7%

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Potential Challenges to the Outlook

Outlook Risks

What are the primary risks to the outlook?

Fitful Fed exit brings questions for the dollar, inflation and interest rate outlook/ volatility/ confidence

Fiscal policy: tax increases and/or spending cuts face unsustainable long-run outlook

Housing: able to sustain growth on its own if rates rise?

European debt crisis weighs on global growth, interest rates and global credit stagnation over the long-run

China/global trade weakness hits U.S. exports, foreign earnings of U.S. corporations

Sustained lower oil prices– risk for overleveraged businesses and countries

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U.S. Forecast

2012 2013 2014 2015 2016

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

Real Gross Domestic Product 1 - 2.1 4.6 5.0 2.6 1.5 2.4 2.9 2.9 2.3 2.2 2.4 2.8 2.9

Personal Consumption 1.2 2.5 3.2 4.3 3.5 2.7 2.7 2.6 1.8 2.4 2.5 3.2 2.6

Inflation Indicators 2

PCE Deflator 1.1 1.6 1.5 1.1 0.5 0.3 0.5 1.1 1.8 1.2 1.3 0.6 2.0

Consumer Price Index 1.4 2.1 1.8 1.2 0.2 0.0 0.3 1.2 2.1 1.5 1.6 0.4 2.4

Industrial Production 1 3.9 5.7 4.1 5.6 4.7 4.9 3.5 3.1 3.8 2.9 4.3 4.6 3.6

Corporate Profits Before Taxes 2 - 4.8 0.1 1.4 2.2 2.6 2.7 3.5 4.6 11.4 4.2 - 0.2 3.4 5.8

Trade Weighted Dollar Index 3 76.9 75.9 81.3 85.1 88.5 89.8 91.0 92.3 73.5 75.9 78.5 90.4 94.7

Unemployment Rate 6.6 6.2 6.1 5.7 5.6 5.5 5.4 5.3 8.1 7.4 6.2 5.4 5.1

Housing Starts 4 0.93 0.99 1.03 1.07 1.06 1.13 1.21 1.24 0.78 0.92 1.01 1.17 1.31

Quarter- End Interest Rates 5

Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.50 0.75 1.00 0.25 0.25 0.25 0.63 2.00Conventional Mortgage Rate 4.34 4.16 4.16 3.86 3.36 3.32 3.56 3.70 3.66 3.98 4.17 3.49 4.1810 Year Note 2.73 2.53 2.52 2.17 1.85 1.92 1.98 2.07 1.80 2.35 2.54 1.96 2.54

Forecast as of: February 11, 20151 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

Forecast

2014

Actual

2015

ForecastActual

Wells Fargo U.S. Economic Outlook

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

Appendix

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Recent Special Commentary

Wells Fargo Economics Group Publications

To join any of our research distribution lists please visit

our website: http://www.wellsfargo.com/

economics

Date Title Authors

U.S. Macro

February- 06 Did They Get You to Trade Cold Comfort for Change? Quinlan & House

February- 05 Wells Fargo Small Business Survey: Q1 2015 Vitner

February- 04 Millennials in the Economy VI: Liabilities of Young People House, Nelson & Moehring

February- 03 Inflation Chartbook: Q4 2014 Bullard, House & Nelson

U.S. Regional

February- 03 Colorado's Oil Exposure Vitner, Wolf & Moehring

J anuary- 23 California Employment Conditions: J anuary 2015 Vitner & Wolf

J anuary- 23 Florida Employment: Strong Gains in 2014 Vitner & Wolf

J anuary- 23 Texas Holds Strong Despited Oil Prices Vitner & Wolf

Global Economy

February- 06 Chilean Economy Leading The Latin America Region Aléman & Griffiths

February- 05 The Eurozone: the Good, the Bad and the Ugly Bryson & Griffiths

February- 04 Mixed Results on Gross Investment in Mexico Aléman & Griffiths

February- 03 Australia's Reserve Bank J oins the Surprise Party Quinlan & Griffiths

Interest Rates/Credit Market

February- 05 Small Business Lending Gets Only a Modest Lift Silvia, Vitner & Brown

J anuary- 28 Sizing Up Sector- Level Exposure to the Fed Move Silvia, Vitner & Brown

J anuary- 21 Stronger Loan Demand: Where are the Higher Rates? Silvia, Vitner & Brown

J anuary- 14 Is Short- Term Corporate Debt a Cause for Concern? Silvia, Vitner & Brown

Real EstateJ anuary- 29 Nonresidential Construction Recap: J anuary 2015 Khan

J anuary- 12 Dodge Momentum Index Ends 2014 on Good Note Khan

J anuary- 08 Housing Data Wrap- Up: J anuary 2015 Vitner & Khan

December- 23 Nonresidential Construction Recap: December 2014 Khan

Las Vegas

Wells Fargo Securities, LLC Economics Group

51

John E. Silvia … ...................... . … [email protected]

Global Head of Research and Economics

Diane Schumaker-Krieg ………………… ………[email protected] Head of Research & Economics

Chief Economist

Mark Vitner, Senior Economist……………....………. . .

[email protected]

Jay H. Bryson, Global Economist …………………....…… ….

[email protected]

Sam Bullard, Senior Economist [email protected]

Nick Bennenbroek, Currency Strategist ……[email protected]

Eugenio J. Alemán, Senior Economist… ………….

[email protected]

Anika R. Khan, Senior Economist … . [email protected]

Senior Economists

Zachary Griffiths, Economic Analyst [email protected]

Mackenzie Miller, Economic Analyst [email protected]

Erik Nelson, Economic Analyst [email protected]

Alex Moehring, Economic Analyst [email protected]

Economists

Azhar Iqbal, Econometrician………………… ……………[email protected]

Tim Quinlan, Economist …………………… ……………[email protected]

Eric J. Viloria, Currency Strategist [email protected]

Sarah Watt House, Economist …………… …………[email protected]

Michael A. Brown, Economist ……………… … [email protected]

Michael T. Wolf, Economist ………………… … .

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Economic Analysts

Administrative Assistants

Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2015 Wells Fargo Securities, LLC.

SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

Important Information for Non-U.S. Recipients

For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority’s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only.

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