U.S. Economic Outlook: What s Ahead for Mark Vitner, Managing Director & Senior Economist June 20, 2014

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1 U.S. Economic Outlook: What s Ahead for 2014 Mark Vitner, Managing Director & Senior Economist June 20, 2014

2 Key Macroeconomic Trends Economic Growth Reduced Policy Uncertainty Policy Adjustments Global Economy Improvement is Broadening Economic activity slowed substantially in the first quarter, as exceptionally cold and snowy weather cut into housing and consumer spending. Less inventory building and pull back in trade also cut into growth. Policy uncertainty has fallen sharply this year, following deals on the budget and debt ceiling. The reduction in policy uncertainty should bolster business confidence, investment and hiring, although other risks have risen. So far, the winding down of QE has gone well stock prices have risen and interest rates have fallen. A few cracks have emerged, however, most notably in some emerging markets and parts of the stock market. Stronger growth in Europe and the U.S. is being offset by a slowing in China and many emerging economies. On net, growth outside the U.S. & Europe is slowing. Energy and technology, and regions where these industries are clustered continue to be notable bright spots. We see economic growth broadening this year, as conditions improve in long-moribund sectors. Economic Outlook 2

3 U.S. GDP 8% U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change GDP - CAGR: -1. GDP - Yr/Yr Percent Change: 2. 8% Although first quarter GDP will likely be revised even lower, we expect economic growth to regain momentum as homebuilding gradually gains momentum, commercial construction improves and the drag from state and local government spending cuts continues to diminish. 2% -2% % Forecast 2% -2% % Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 3

4 Consumer Inequality is the new buzz word. Rising stock prices have helped bolster household finances at a time when real incomes are barely growing. The underlying problem is sluggish income growth, particularly for mid-skilled and lower skilled workers. Household Wealth Personal Income $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 Household Assets Trillions of Dollars Financial Assets: $67.2 Trillion Household Real Estate Holdings: $20.2 Trillion Other Tangible Assets: $8.2 Trillion $0 $ $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 8% 2% -2% - PI vs. PI Less Transfer Payments Year-over-Year Percent Change, 3-Month Moving Average - PI Less Transfer Payments: 2. Personal Income: 3. -8% % 2% -2% % Source: U.S. Department of Commerce, Conference Board and Wells Fargo Securities, LLC Economic Outlook 4

5 Percent Change in Personal Income PACIFIC AK 1.7 PACIFIC CA 2.8 HI 2.8 WA 3.2 OR 3.5 NV 3.0 ID 3.7 UT 4.0 AZ 2.7 WEST MT 2.7 WY 0.6 NM 1.7 CO 3.4 ND 7.6 SD 1.8 NE 3.0 KS 2.4 TX 3.7 MIDWEST OK 3.3 MN 2.8 IA 3.2 MO 2.3 AR 2.2 LA 2.1 WI 1.8 IL 2.1 MS 2.7 MI 2.5 IN 2.3 TN 2.1 AL 1.9 SOUTH OH 2.3 KY 2.0 GA 2.7 NORTHEAST WV 0.9 SC 2.2 FL 2.9 PA 2.0 VA 1.5 NC 2.4 NY 2.0 VT 2.9 ME 2.2 NH 2.3 RI CT 2.6 NJ DE 2.9 MD 1.6 DC 1.9 MA 2.4 U.S. =2. Less than 2% % 2.3% 2.7% 2.7%-3.1% Greater than 3.1% Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 5

6 Housing Market Metrics Despite some recent setbacks, we continue to look for a gradual recovery in homebuilding. Home prices have risen ahead of the fundamentals, however, bolstering apartment demand. Housing Starts Home Prices Multifamily Starts Multifamily Forecast Single-family Starts Single-family Forecast Housing Starts Millions of Units Forecast % 12% S&P Case-Shiller National Home Price Index vs. Homeownership Rate 7 69% 68% % % % % National Home Price Index: 11.3% (Left Axis) 63% Homeownership Rate: 64.8% (Right Axis) -2 62% Source: U.S. Department of Commerce, CoreLogic Case Shiller and Wells Fargo Securities, LLC Economic Outlook 6

7 Treasury Yields 18% 10-Yr Treasury and Baa Corporate Bonds Yield 18% 15% 15% 12% 12% Long-term interest rates remain extraordinarily low. 9% 9% 3% Baa Yield: 4.2% 10-Year Treasury Yield: % Source: Bloomberg LP and Wells Fargo Securities, LLC 7

8 North Carolina Labor Market North Carolina s unemployment rate has plummeted over the past year. Employment Unemployment North Carolina Nonfarm Employment 3-Month Moving Averages 12% North Carolina vs. U.S. Unemployment Rate Seasonally Adjusted Unemployment Rate: 6. United States: 6.3% 12% 2% 2% 8% 8% -2% -2% Month Annual Rate: 2. -8% Nonfarm: Yr/Yr Pct. Change: 1.8% Household: Yr/Yr Pct. Change: % - 2% % Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 8

9 North Carolina Labor Market North Carolina has seen broad-based employment gains. Stronger job growth has led to increased population growth. Employment Unemployment North Carolina Employment Growth By Industry Year-over-Year Percent Change, 3-MMA Total Nonfarm May North Carolina Population Growth In Thousands 240 Trade, Trans. & Utilities Government More Educ. & Health Services Prof. & Bus. Svcs. Manufacturing Number of Employees Leisure and Hospitality Less Financial Activities Construction Other Services Information -2% -1% 1% 2% 3% 5% Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 9

10 North Carolina 1. North Carolina Employment Growth: April Month Moving Averages Recovering Expanding Raleigh-Cary 3-Month Percent Change 0.5% % Fayetteville Jacksonville Greensboro Burlington Winston-Salem Durham- Chapel Hill Hickory Greenville Asheville Goldsboro Charlotte Wilmington Rocky Contracting Mount Decelerating % 1% 2% 3% Year-over-Year Percent Change Population Size Less than 200, , ,000 More than 500,000 Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 10

11 North Carolina 8% 7% North Carolina Employment Growth by Industry 3-Month Moving Averages, May 2014 Recovering Leisure and Hospitality Expanding 3-Month Annualized Percent Change 5% 3% 2% 1% Manufacturing Financial Activities Trade, Trans. & Utilites Other Services Information Prof. & Bus. Svcs. -1% Educ. & Health Svcs. Percent of Total Employees Less than 5% -2% Government 5 % to More than 5% -3% Construction Contracting Decelerating - -1% 1% 2% 3% 5% Year-over-Year Percent Change Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 11

12 North Carolina Employment Much of the state s recent job growth has been centered in the state s largest three metros- Charlotte, Raleigh and Durham. Employment Gains Employment Share 8 7 Share of Employment Gains in North Carolina Percent Durham, NC Raleigh, NC Charlotte, NC Share of Total North Carolina Employment Percent Durham, NC Raleigh, NC Charlotte, NC July Feb 2001 Aug 03 - Feb 08 Mar Present Feb 01 Feb 08 April 14 Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 12

13 North Carolina Housing Market Home prices have picked up in past months, and now remain close to their prerecession peak. Employment Home Prices North Carolina Housing Permits Thousands of Permits, Seasonally Adjusted Annual Rate Single-Family: 38,412 Single-Family, 12-MMA: 34,274 Multifamily, 12-MMA: 14,570 Single-Family Average ( ): 62, % Core Logic HPI: NC vs. U.S. Year-over-Year Percent Change % % 8% % -8% % -1 United States: 10.5% North Carolina: 6.1% % -1-2 Source: U.S. Department of Commerce, CoreLogic and Wells Fargo Securities, LLC Economic Outlook 13

14 Issues to Watch Manufacturing Competitiveness Credit Availability & Financial Reform Drought in the Western States Geopolitical Events China Slowdown Deleveraging Immigration Reform Energy/Commodity Price Swings Economic Outlook 14

15 Our Forecast Wells Fargo U.S. Economic Forecast Actual Forecast Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Actual Forecast Real Gross Domestic Produc t Personal Consumption Inflation Indicators 2 PCE Deflator Consumer Price Index Industrial Production Corporate Profits Before Taxes Trade Weighted Dollar Index Unemployment Rate Housing Starts Quarter-End Interest Rates 5 Federal Funds Target Rate Conventional Mortgage Rate Year Note Forecast as of: June 11, Compound Annual Growth Rate Quarter-over-Quarter 2 Year-over-Year Percentage Change 3 Federal Reserve Major Currency Index, 1973=100 - Quarter End 4 Millions of Units 5 Annual Numbers Represent Averages Economic Outlook 15

16 Appendix

17 Wells Fargo Economics Group Publications A Sampling of Our Recent Special, Regional & Industry Commentary To view any of our past research please visit: economics To join any of our research distribution lists please visit: economics Recent Special Commentary Date Title Authors June-16 New Jersey Economic Outlook: June 2014 Vitner, Wolf & Miller June-16 Information: Past Imperfect, Present Incomplete, Future Uncertain Silvia June-13 Global Chartbook: June 2014 Quinlan & Miller June-13 Labor Force Participation: A Cross-Country Analysis Bryson, House & Griffiths June-11 Mexican Industry: Still No Signs of Improvement Alemán June-11 The Highway Trust Fund Is Expected to Run out of Gas Khan & Zachary June-11 Housing Chartbook: May 2014 Vitner & Khan June-11 GDP Growth in Q1 Overstates Momentum in Turkish Economy Bryson June-09 Brazilian Economic Problems Not All About China Alemán June-06 Power Outlays Pull Structure Investment Lower in Q1 Khan June-05 ECB Announces a Package of Policy Changes Bryson June-04 Predicting the Probability of FOMC Rate Decisions: An Ordered Probit Approach Silvia, Iqbal & Zachary June Federal Fiscal Policy Outlook Part II: Outlays Shift Toward Mandatory Spending Silvia, Brown & Zachary June-03 Are We There Yet? Dynamic Adjustment in the U.S. Economy Silvia June-02 America's Income Composition: The Rise of Non-Labor Income Silvia & House May-30 Brazilian Economy Remained Weak in Q1 Alemán May-30 Structure Investment Post Second Quarterly Decline Khan, Iqbal & Zachary May-30 Japanese Economy Absorbs the Consumption Tax Hike Quinlan May-30 Outlook for Swedish Economy is Solid Despite Stall in Q1 Bryson May-29 Swiss Real GDP Continues to Expand at Modest Pace Bryson May-28 Commercial Real Estate Chartbook: Q1 Vitner & Khan May-27 Florida Consumer Sentiment Declines but Not All Bad Vitner & Wolf May-27 Labor Market Remains Challenging for Hispanics Alemán May-23 Mexican Economy: Still Weak in Q Alemán May-23 Baltimore's Growth: Slow and Steady, Not Divine Vitner & Wolf May-22 Labor Market Slack Diminishing? Fed to Follow? Silvia & House May-19 Chilean Economy Slows Down Further in Q Alemán May-19 Russian GDP Growth Remains Very Weak Bryson May-16 California Employment Conditions: April 2014 Vitner & Wolf May-16 Texas Employment Gains Strongest in the Nation Vitner & Wolf May-16 Florida Employment Shines in April Vitner & Wolf May-12 Corporate Profits and the Business Cycle: A Preliminary Review of the Data Part 1 Silvia, Brown & Griffiths May-08 Housing Data Wrap-Up: April 2014 Vitner & Khan May-08 Continued Job Growth in Australia Quinlan May-06 San Francisco Bay Area Real Estate Outlook Vitner, Wolf & Miller May-06 Short- and Long-Term Unemployment: A Labor Market Divided Silvia & House May-02 Will the ECB Ease Policy Further at Next Week's Meeting? Bryson May-02 Inflation Chartbook: May 2014 Bullard & House May-01 Recession Memories Fade as Credit Card Usage Nudges Up Silvia & Zachary April-30 Modest Pace of Expansion Continues in Taiwan Bryson April-29 Mexican Auto Sector Sourcing Turns Inward Alemán & Griffiths Economic Outlook 17

18 Wells Fargo Securities, LLC Economics Group Global Head of Research and Economics Diane Global Head of Research & Economics Chief Economist John E. Silvia... Mark Vitner, Senior Jay H. Bryson, Global Sam Bullard, Senior Economist Nick Bennenbroek, Currency Strategist Eugenio J. Alemán, Senior Anika R. Khan, Senior Economist Senior Economists. Economists Azhar Iqbal, Econometrician Tim Quinlan, Eric J. Viloria, Currency Strategist Sarah Watt House, Economist Michael A. Brown, Economist Michael T. Wolf, Economic Analysts Zachary Griffiths, Economic Analyst Mackenzie Miller, Economic Analyst Blaire Zachary, Economic Analyst Administrative Assistants Donna LaFleur, Executive Assistant. Cyndi Burris, Senior Administrative Assistant 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 2014 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 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. Client/Prospect Name 18