The U.S. Economy: Bracing for Higher Interest Rates
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1 The U.S. Economy: Bracing for Higher Interest Rates Eugenio J. Alemán, Ph.D. Director and Senior Economist June 9, 2016
2 Real GDP Growth 1 8% 6% 4% U.S. Real GDP Bars = Compound Annual Rate Line = Yr/Yr % Change 1 8% 6% 4% The U.S. economy has slowed down but continues to grow 2% -2% -4% -6% 2% -2% -4% -6% -8% -1 Real GDP: 0.8% Real GDP: % -1 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 2
3 Real Disposable Income 8% Real Disposable Income vs. Real PCE Both Series are 3-Month M.A., Year-over-Year Percent Change 8% 6% 6% Strong growth in disposable income is helping to support growth in consumer spending 4% 2% 4% 2% -2% -2% -4% Real Personal Consumption Expenditure: 2.8% Real Disposable Income, Yr/Yr % Change: 3.4% -6% % -6% Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 3
4 U.S. Nonfarm Employment 600 Nonfarm Employment Change Change in Employment, In Thousands Employment growth remains solid Monthly Change: 38K -1, ,000 Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 4
5 U.S. Employment By Industry Trade, Trans. & Utilities U.S. Employment by Industry Year-over-Year Percent Change of 3-M Moving Average Total Nonfarm Employment growth is positive almost across the board Government Educ. & Health Svcs. Prof. & Bus. Svcs. Leisure & Hospitality Manufacturing Financial Activities Construction Other Services Information More Number of Employees Less May % 1% 2% 3% 4% 5% Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 5
6 Government Employment U.S. Government Employment Composition State Government, 23% It is not the Federal Government! Federal Government, 13% Local Government, 64% Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 6
7 Unemployment Rate 12% Unemployment Rate Seasonally Adjusted 12% 1 1 The rate of unemployment is closing in on what is called fullemployment 8% 6% 8% 6% 4% 4% Unemployment Rate: 4.7% 2% % Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 7
8 The Employment Situation 68% Labor Force Participation Rate 16 Years and Over, Seasonally Adjusted 68% 67% 67% 66% 66% Labor force participation has improved somewhat 65% 65% 64% 64% 63% 63% Labor Force Participation Rate: 62.6% 62% % Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 8
9 Mean Duration of Unemployment Mean Duration Unemployment Average Weeks Unemployed Average Duration of Unemployment: The mean duration of unemployment has come down but remains high compared to history Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 9
10 Unemployment by Education Level 1 9% 8% 7% Unemployment Rate by Education Level May % 8% 7% Unemployment continues to come down, especially for those with education 6% 5% 4% 3% 2% 1% 6% 5% 4% 3% 2% 1% No High School Diploma High School Diploma Some College College Degree Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 10
11 Consumer Price Index 9% U.S. Consumer Price Index Both Series are 3-Month Moving Averages 9% 6% 6% 3% 3% Inflation? What inflation? -3% -3% -6% -6% -9% -9% -12% CPI 3-Month Annual Rate: 0. CPI Year-over-Year Percent Change: % % -15% Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 11
12 Federal Reserve Target Rate U.S. Federal Reserve Target Rate U.S. Target Rate: Monetary policy remains extremely expansive Source: Federal Reserve Board and Wells Fargo Securities, LLC Economics 12
13 Federal Reserve Balance Sheet $4.5 $4.0 $3.5 $3.0 Federal Reserve Balance Sheet Trillions Other: $199.7B Foreign Swaps: $0.1B PDCF & TAF Commercial Paper & Money Market Repos & Dis. Window: $0.0B Agencies & MBS: $1,782.3B Treasuries: $2,461.3B $4.5 $4.0 $3.5 $3.0 The Fed s balance sheet is no longer growing $2.5 $2.0 $2.5 $2.0 $1.5 $1.5 $1.0 $1.0 $0.5 $0.5 $ $0.0 Source: Federal Reserve Board and Wells Fargo Securities, LLC Economics 13
14 New Home Sales 1,500 New Home Sales Seasonally Adjusted Annual Rate, In Thousands 1,500 1,300 1,300 1,100 1,100 New home sales are improving but remain weak New Home Sales: 619,000 3-Month Moving Average: 562, Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 14
15 Housing Starts 2.4 Housing Starts Seasonally Adjusted Annual Rate, In Millions Housing starts continue to recover Housing Starts: 1.17M Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 15
16 Existing Home Sales 7.0 Existing Single-Family Home Resales Seasonally Adjusted Annual Rate - In Millions Existing home sales remain strong SF Existing Home Sales: 4.8 Million Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 16
17 Home Prices 3 Home Prices Year-over-Year Percentage Change Home price growth has stabilized somewhat Median Sale Price: $233,700 Median Sale Price, 3-M Mov Avg: 5.5% -3 FHFA Purchase Only Index: 6.1% S&P/Case-Shiller Composite-10: 4.7% Zillow: Source: National Association of Realtors, FHFA, S&P Case-Shiller and Wells Fargo Securities, LLC Economics 17
18 Home Mortgages 25% Real Estate Lending By Commerical Banks, Year-over-Year Percent Change 25% % 15% Mortgage lending is still weak but has improved over the past several years 1 5% 1 5% -5% Year-over-Year Change: 6.6% % -1 Source: Federal Reserve Board and Wells Fargo Securities, LLC Economics 18
19 Negative Equity Negative Equity by State Percent of Mortgages Outstanding Negative equity continues to improve North Carolina New Jersey New Hampshire Illinois Rhode Island Ohio Maryland Virginia Georgia California Michigan Florida Arizona Nevada 6.4% 11.6% 9.7% 14.6% 13.5% 13.1% 13.1% 9.1% 9.7% 6.7% 10.9% 17.1% % 10.5% 15.2% 17.7% 19.4% % % 37.6% 45.5% 48.6% Q Q % United States 8.5% 22.5% Source: CoreLogic and Wells Fargo Securities, LLC Economics 19
20 ISM Manufacturing Index 65 ISM Manufacturing Composite Index Diffusion Index Manufacturing has come back to expansion but remains weak ISM Manufacturing Index: Month Moving Average: Source: Institute for Supply Management and Wells Fargo Securities, LLC Economics 20
21 ISM Non-Manufacturing Index 65 ISM Non-Manufacturing Composite Index ISM Non-Manufacturing Index SA: The service economy continues to move along Source: Institute for Supply Management and Wells Fargo Securities, LLC Economics 21
22 Consumer Credit $20 $16 Revolving & Nonrevolving Debt Change in Billions of Dollars, 3-Month Moving Average Revolving: $4.6B Nonrevolving: $14.4B $20 $16 $12 $12 $8 $8 Credit card lending is improving $4 $4 $0 $0 -$4 -$4 -$8 -$8 -$ $12 Source: Federal Reserve Board and Wells Fargo Securities, LLC Economics 22
23 Household Debt 13 Household Debt - Consumer & Mortgage As a Percent of Disposable Personal Income Households continue to deleverage Household Debt: 95.9% Source: Federal Reserve Board and Wells Fargo Securities, LLC Economics 23
24 Household Debt 13.5% 13. Household Debt Service Ratio Debt Payments as a Percent of Disposable Personal Income DSR: 10.1% 13.5% % 12.5% Households are feeling pretty good today! % % % 10.5% % % Source: Federal Reserve Board and Wells Fargo Securities, LLC Economics 24
25 Consumer Confidence 160 Consumer Confidence Index Conference Board Consumer confidence has started to weaken Confidence Yr/Yr % Chg: -2.1% Confidence: Month Moving Average: Source: The Conference Board and Wells Fargo Securities, LLC Economics 25
26 Mortgage and Treasury Rates Conventional Mortgage Rate vs. 10-Year Treasury Yield Percent 7% 7% 6% 6% 5% 5% Mortgage interest are still at almost historic lows 4% 3% 4% 3% 2% 2% 1% 1% Conventional 30-Year Fixed Mortg. Rate: 3.64% 10-Year Yield: 1.88% Source: Freddie Mac, Federal Reserve Board and Wells Fargo Securities, LLC Economics 26
27 The San Francisco Economy
28 Population Growth 30 San Francisco DMSA Population Growth In Thousands San Francisco population growth continues to drive growth Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 28
29 Employment 1,200 1,000 San Francisco DMSA Nonfarm Employment Thousands of Employees, SA Nonfarm Employment: 1,072K 1,200 1, Employment levels today are higher than during the pre-dot Com bubble years Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 29
30 Employment San Francisco Nonfarm Employment Indexed to Previous Peak; Months Following Peak Recession 2001 Recession Recession Employment recovery after the Great Recession has been impressive Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 30
31 Tech Employment 24% San Francisco Technology Employment Information Plus Prof. & Tech. Svcs; Percent of Total Payrolls 24% % 16% Tech employment growth seems very different today than during the Dot Com period 12% 8% 12% 8% 4% Tech Employment Share: 22.4% % Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 31
32 Tech Employment 3 2 San Francisco Employment Growth Year-over-Year Percent Change; Info. Plus Prof. & Tech. Svcs. Total Nonfarm Employment: 4.3% Technology Employment: 8.6% 3 2 Tech sector employment continues to drive SF employment but the process is very different than during the Dot Com boom Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economics 32
33 Global Forecast (Year-over-Year Percent Change) Wells Fargo International Economic Forecast GDP CPI Global (PPP Weights) % 3.1% 2.6% 3.2% 3.5% Global (Market Exchange Rates) 2.8% 2.5% 2.9% n/a n/a n/a U.S. economic growth will remain range-bound Advanced Economies 1 1.9% 1.7% 2.1% 0.3% 0.8% 1.8% United States 2.4% 1.6% 2.2% 0.1% 1.3% 2.2% Eurozone 1.5% 1.7% % 1.2% United Kingdom 2.3% 1.7% 1.9% % 1.5% Japan 0.5% % 0.8% 0.3% 1. Korea 2.6% 2.6% 2.9% 0.7% 0.9% 1.9% Canada 1.2% 1.9% 2.4% 1.1% 1.3% 1.9% Developing Ec onomies % % 5.5% 5.1% China 6.9% 6.4% 5.8% 1.4% % India 2 7.2% 7.5% 7.2% % 4.7% Mexico 2.5% 2.8% 3.1% 2.7% 2.9% 2.8% Brazil -3.9% % % Russia -3.7% -0.6% 2.1% 15.6% 7.2% 5.9% Forecast as of: May 11, Aggregated Using PPP Weights 2 Forecasts Refer to Fiscal Year Source: IMF and Wells Fargo Securities, LLC Economics 33
34 Wells Fargo Securities, LLC Economics Group Global Head of Research and Economics Diane Global Head of Research & Economics Chief Economist John E. Silvia... Economists Azhar Iqbal, Econometrician Eric J. Viloria, Currency Strategist Sarah House, Economist Michael A. Brown, Economist Economic Analysts Mark Vitner, Senior Economist..... Jay H. Bryson, Global Sam Bullard, Senior Economist Nick Bennenbroek, Currency Strategist Anika R. Khan, Senior Economist Senior Economists Erik Nelson, Economic Analyst Eugenio J. Alemán, Senior Economist Tim Quinlan, Senior Alex Moehring, Economic Analyst Misa Batcheller, Economic Analyst Michael Pugliese, Economic Analyst Julianne Causey, Economic Analyst 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 2016 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE Important Information for Non-U.S. Recipients Donna LaFleur, Executive Assistant. Dawne Howes, Administrative Assistant donna.lafleur@wellsfargo.com dawne.howes@wellsfargo.com 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. Economics 34
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