2018 Annual Economic Outlook. A cautious tale for an optimistic outlook. John Silvia, Chief Economist. Mark Vitner, Senior Economist

Transcription

1 2018 Annual Economic Outlook A cautious tale for an optimistic outlook John Silvia, Chief Economist Mark Vitner, Senior Economist Jay Bryson, Global Economist December 14, 2017

2 U.S. Outlook

3 Sustained Growth Ahead We expect real GDP growth to average 2.6 percent over the forecast period. 1 8% 6% % -8% U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change GDP - CAGR: 3.3% GDP - Yr/Yr Percent Change: 2.3% Forecast 1 8% 6% % -8% Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 3

4 Employment Situation: Labor Market Tightening Hiring is improving across a broadening assortment of industries and the unemployment rate continues to trend lower. Wage increases remain curiously modest. Nonfarm Employment Unemployment and Wages 600 Nonfarm Employment Change Change in Employment, In Thousands Unemployment and Wage Rates Wages for Production & Nonsupervisory Workers, SA % 8% % 6% Monthly Change: 228K -1, ,000 Unemployment Rate: 4.1% Hourly Earnings - Yr/Yr % Change: 2.3% Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 4

5 Credit Markets in Focus Retail sales continue to outpace wage and salary growth, which means consumers are utilizing credit to finance spending. Delinquency rates have held steady for the most part. Salaries and Sales Debt Delinquencies 1 8% Retail Sales vs. Wages & Salaries 3-Month Moving Average, Year-over-Year Percent Change Wages & Salaries Disbursements: 2.9% Retail Sales: 4.3% 1 8% 18% 16% 1 Household Debt Delinquencies Percent of Balance 90+ Days Past Due Credit Card: 7.5% Other: 6.7% Student Loans: 11. Mortgage: 1. Auto: 4. HELOC: 1.5% 18% 16% % 8% - - 6% 6% -8% -8% Source: U.S. Department of Commerce, Federal Reserve Board, Federal Reserve Bank of New York and Wells Fargo Securities Economic Outlook 5

6 Rebound in Fixed Investment Equipment spending has been gaining momentum, reflecting stronger global growth. Accelerating Growth Price Rebound Driving Investment Real Business Fixed Investment, Equipment Bars = Compound Annual Rate Line = Yr/Yr % Change Fixed Investment Spending on Energy As Percent of Total BFI 45% 45% 8% Energy: 3.8% 8% 3 3 7% 7% 6% 6% 15% 15% 5% 5% -15% -15% 3% 3% -3 Equipment Investment: % 1% Equipment Yr/Yr: 6.3% -45% % Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 6

7 Small Business Optimism Business owners have become much less worried about the regulatory environment. Sales and earnings trends also look more positive. Tax reform will be a positive. Small Business Optimism Small Business Concerns 110 NFIB Small Business Optimism Overall Index 1986 = % Small Business Most Important Problems Single Most Important Problem Facing Firms, SA 3-MMA 35% % 25% % 15% Small Business Optimism: % Taxes: 21. 5% Regulations: Source: National Federation of Independent Business (NFIB) and Wells Fargo Securities Economic Outlook 7

8 Consistent Rent Growth Apartment Effective Rent Growth Quarter-over-Quarter Percent Change % 1. Effective rents have risen nationally every quarter since the Great Recession % % Quarter-over-Quarter: 0.9% (Right Axis) Year-over-Year: 3.3% (Left Axis) % -2. Source: Reis, Inc. and Wells Fargo Securities Economic Outlook 8

9 Single and Multifamily Improvement Multifamily Starts Multifamily Forecast Single-Family Starts Single-Family Forecast Housing Starts Millions of Units Single-family construction is ramping up while apartment construction has begun to cool Forecast Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 9

10 Rents Cutting into Paychecks The proportion of income spent on rent has risen dramatically in many major cities. As a result, an increasing proportion of renters are seeking lower cost alternatives. Los Angeles, CA San Francisco, CA New York, NY San Jose, CA Riverside, CA Denver, CO Portland, OR Seattle, WA Tampa, FL Orlando, FL Dallas, TX Austin, TX Nashville, TN Houston, TX Jacksonville, FL San Antonio, TX Las Vegas, NV Phoenix, AZ Charlotte, NC Atlanta, GA Raleigh, NC United States Rental Affordability Major Apartment Markets Median Rent as Share of Median Income, Zillow Average Q Source: Zillow Real Estate Research and Wells Fargo Securities Economic Outlook 10

11 Property Price Divide 175 Commercial Property Price Index Index December 2006 = 100, All Property Types Major Markets (All Property): Non-Major Markets (All Property): Property prices in major markets have grown at a faster clip than those located in nonmajor markets Source: Reis Inc. and Wells Fargo Securities Economic Outlook 11

12 Global Outlook

13 Global Economic Indicators 25% 2 15% World Export & IP Volume Year-over-Year Percent Change 25% 2 15% There is a synchronous global upswing underway following last year s slowdown. 1 5% -5% -1-15% -2 World Export Volume: 5.7% World Industrial Production: % % -5% -1-15% -2-25% Source: IHS Global Insight, International Monetary Fund and Wells Fargo Securities Economic Outlook 13

14 Global GDP Growth 7.5% Real Global GDP Growth Year-over-Year Percent Change, PPP Weights 7.5% 6. Period Average 6. We look for the global economy to expand near its long-run average over the next two years. 4.5% 3. WF Forecast 4.5% % 1.5% % % Source: IHS Global Insight, International Monetary Fund and Wells Fargo Securities Economic Outlook 14

15 International Outlook (Year-over-Year Percent C hange) Wells Fargo International Economic Forecast GDP CPI Global (PPP Weights) 3.5% % 3.5% 3.5% Global (Market Exchange Rates) 3.3% 3.3% % 3.5% 3.5% Advanced Economies % 1.9% 2. United States 2.3% 2.7% 2.5% 2.1% % Eurozone % 1.9% 1.5% 1.6% 1.8% United Kingdom 1.5% % 2.7% 2.3% 2. Japan 1.5% 1.1% % 1.1% Korea 3.3% % % 2.1% Canada 2.9% % 1.6% Developing Economies 1 4.7% 4.5% 4.5% % China 6.6% % India 2 7.1% 6.7% 7.1% 3.3% % Mexico % 2.9% 5.9% % Brazil % % 3.8% 4. Russia 1.8% 2.1% % % Forecast as of: December 14, Aggregated Using PPP Weights ²Forecast Refers to Fiscal Year Source: International Monetary Fund and Wells Fargo Securities Economic Outlook 15

16 Trade-Weighted Value of the U.S. Dollar Trade Weighted Dollar Major Curency Index, 1973 = We forecast that the dollar will decline broadly, albeit modestly, in coming quarters Forecast Trade Weighted Dollar: Source: Federal Reserve Board and Wells Fargo Securities Economic Outlook 16

17 Profits, Fiscal Policy & Interest Rates

18 Encouraging Trend In Profits $500 Corporate Profits USD Millions $2250 $450 $2000 $400 $1750 Corporate balance sheets are in good shape and profits are improving. $350 $300 $250 $1500 $1250 $1000 $200 $750 $150 $100 $500 Foreign Profits: $434.1 (Left Axis) Domestic Profits: $1,781.0 (Right Axis) $ Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 18

19 Costly Interest 1 1 Average Annual Net Outlay Growth By Spending Category, CBO's Projections Average Annual Net Outlay Growth Average Annual Revenue Growth 1 1 Spending on mandatory programs will likely squeeze the resources available for discretionary spending on defense, infrastructure or other similar forms of spending. 1 8% 6% 1 8% 6% Major Health Programs Social Security Net Interest Nondefense Discretionary Defense Discretionary Source: Congressional Budget Office and Wells Fargo Securities Economic Outlook 19

20 Historical Perspective Tax Legislation: A Comparison 1986 Tax Reform Act 2001/2003 Bush Tax Cuts Outlook for Today Revenue Neutral Not Revenue Neutral Likely Not Revenue Neutral Permanent Individual Tax Cut of $120 Billion Over 5 Years Corporate Tax Increase of $120 Billion Over 5 Years Divided Government (Democratically Controlled House) Revenue Neutral Design Made the Impact on Future Surpluses/Deficits Less of a Factor Temporary Individual Tax Cut of Roughly $1.5 trillion over 10 Y ears No Major Corporate Changes Single-Party Control Before the Tax Change, Projected Budget Balance Over 10 Years: Surplus of $5.6 Trillion Striving for Permanent, but Budget Obstacles Are Large Individual and Corporate Tax Cuts of Roughly $1.5 trillion Single-Party Control Before the Tax Change, Projected Budget Balance Over 10 Years: Deficit of $10.1 trillion Source: Congressional Budget Office, Joint Committee on Taxation and Wells Fargo Securities Economic Outlook 20

21 Lower Taxes, Less Revenue $700B Senate GOP Tax Plan Reduction in Revenues from , JCT Estimate $700B $600B $600B On net, the Senate plan cuts taxes by just 0.2 percent of GDP in 2018 but roughly one percent in $500B $400B $300B $500B $400B $300B $200B $200B $100B $100B $0B Individual Side Pass-Throughs Corporate Side $0B Source: Joint Committee on Taxation and Wells Fargo Securities Economic Outlook 21

22 Debt Woes 10 9 U.S. Debt Held By The Public CBO Baseline Projections Begin in 2017, Percent of GDP Baseline Debt: The debt-to-gdp ratio for the federal government is more than double today than what it was on the eve of the Great Recession Source: Congressional Budget Office and Wells Fargo Securities Economic Outlook 22

23 Will Inflation Pick Up Alongside Economic Growth? 5% PCE Deflator & "Core" PCE Deflator Line = Yr/Yr Percent Change 5% Eight and a half years into the expansion, core PCE inflation has been 2.0 percent or higher for only five months. 3% 1% Forecast 3% 1% -1% PCE Deflator - Yr/Yr Percent Change: 1.5% "Core" PCE Deflator - Yr/Yr Percent Change: % - Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 23

24 Stubbornly Low Inflation Core PCE continues to remain below the Fed s two percent target. Price inflation for services remains above 2 percent, while goods prices are experiencing deflation. Inflationary Pressures? Inflationary Pressures in Services 5% PCE Deflator vs. Core PCE Deflator Year-over-Year Percent Change 5% 7% 6% 5% Core Goods vs. Core Services CPI Year-over-Year Percent Change Core Services CPI: 2.7% Core Goods CPI: -1. 7% 6% 5% 3% 3% 3% 3% 1% 1% 1% 1% -1% PCE Deflator: 1.6% -1% "Core" PCE Deflator: 1. Long-Run Inflation: 1.87% % - -3% % - -3% Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 24

25 Steepening of the Short End We expect the policy-sensitive 2-year yield to increase as the Fed continues to tighten policy through % 1.6% % 0.6% Year and Federal Funds Rate FFR: Year Yield: % 1.6% % 0.6% Source: Bloomberg LP and Wells Fargo Securities Economic Outlook 25

26 Dot Plot: Reliable? The Fed has consistently overforecasted their rate hike path. Will this trend continue? % % % % % 0. Appropriate Pace of Policy Firming Target Federal Funds Rate at Year-End December 2017 Median Response September 2017 Median Response December 2016 Median Response December 2015 Median Response Futures Market: December Longer Run % % % % % 0. Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities Economic Outlook 26

27 Portfolio Projections The FOMC began slowing the pace of reinvestment in September with a $6 billion cap on Treasuries and a $4 billion cap for MBC, increasing every three months. $80 $70 $60 $50 $40 $30 $20 Projected SOMA Treasury Securities Maturity Profile Billions of U.S. Dollars Reinvestments Redemptions Runoff Cap $80 $70 $60 $50 $40 $30 $20 $10 $10 $ $0 Source: Federal Reserve Bank of New York and Wells Fargo Securities Economic Outlook 27

28 No Clouds on Immediate Horizon 10 Recession Probability Based on Probit Model Model with LEI Two-Quarter Ahead Recession Probability: 0.2 Threshold: Two-Consecutive Quarters > 5 10 Our model predicts a low change of a U.S. recession during the next six months Source: IHS Global Insight and Wells Fargo Securities Economic Outlook 28

29 Long in the Tooth? 6% 10-Year Minus Federal Funds Policy Rate 10 Year - FFR: 1.2 6% Our proposed framework identifies a threshold between the fed funds rate and the 10- year Treasury yield as a leading indicator of a recession % -6% -8% % Source: Federal Reserve Board, IHS Global Insight and Wells Fargo Securities Economic Outlook 29

30 U.S. Economic Forecast q Wells Fargo U.S. Economic Forecast Actual Forecast Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Actual Forecast Real Gross Domestic Product Personal Consumption Business Fixed Investment Equipment Intellectual Property Products Structures Residential Construction Government Purchases Net Exports Inventories Nonfarm Payroll Change Unemployment Rate Consumer Price Index Quarter-End Interest Rates 5 Federal Funds Target Rate Conventional Mortgage Rate Year Note Year Note Forecast as of: December 14, Compound Annual Growth Rate Quarter-over-Quarter 4 Year-over-Year Percentage Change 2 Percentage Point Contribution to GDP 5 Annual Numbers Represent Averages 3 Average Monthly Change Source: IHS Global Insight and Wells Fargo Securities Economic Outlook 30

31 2018 Annual Economic Outlook A cautious tale for an optimistic outlook Q&A

32 Appendix

33 Wells Fargo Economics Group Publications Recent Special Commentary Date Title Authors U.S. Macro December-05 Are Millennials Moving Out and Settling Down? House & Vaisey December-04 Understanding the Senate Tax Plan's Dynamic Score Brown, Pugliese & Kinnaman December-04 Tax Package Next Steps: Reconciling Differences Brown, Pugliese & Kinnaman November-27 Capitol Hill Update: Funding Deadline Looms Brown, Pugliese & Kinnaman November-27 Five Potential Inflation Surprises for 2018 House & Vaisey To join any of our research distribution lists please visit our website: U.S. Regional November-30 Western Economic Outlook: Fall 2017 Vitner & Feik November-17 California Employment Conditions: October 2017 Vitner, Feik & Carmichael November-17 Texas Payrolls Gain 71,500 Jobs in October Vitner, Feik & Carmichael November-17 North Carolina Unemployment Still Stuck at 4.1 Percent Vitner, Feik & Carmichael November-17 Florida Payrolls Rebound after Hurricane Irma Vitner, Feik & Carmichael Global Economy December-12 Mexican Industrial Production Weakens Further in October Alemán December-11 Turkish GDP Growth Surges in Q3 Bryson & Pugliese December-06 Australian Q3 GDP Results Just Shy of Expectations Quinlan & Seery December-04 Brazilian Economy Back from the Brink Alemán, Nelson & Seery December-01 Canadian Growth Slows, but Not as Much as Expected Quinlan Interest Rates/Credit Market December-13 Household Balance Sheets Continue to Improve in Q3 Silvia & Kinnaman December-06 Profits and Financing in the Nonfinancial Sector Silvia & Pershing November-29 Mixed Credit Trends Among Businesses and Consumers Silvia & Seery November-15 Continuity Doesn't Work When the Road is Changing Silvia November-08 Monetary Policy Convergence: What About the ECB? Silvia & Kinnaman Real Estate & Housing December-12 Construction Costs Continue to Increase Vitner December-06 The State of CRE: Q3 Chartbook Vitner, Carmichael & Vaisey November-06 Return of the Affordability Migration Vitner & Carmichael November-02 A Primer on the Architectural Billings Index Vitner & Vaisey October-10 Housing Chartbook: October 2017 Vitner & Carmichael Economic Outlook 33

34 Wells Fargo Securities Economics Group John E. Silvia Global Head of Research, Economics & Strategy Diane Global Head of Research, Economics & Strategy Mark Vitner, Senior Economist Jay H. Bryson, Global Economist Sam Bullard, Senior Economist Nick Bennenbroek, Currency Strategist Eugenio J. Alemán, Senior Economist Azhar Iqbal, Econometrician Tim Quinlan, Senior Economist Eric J. Viloria, Currency Strategist Chief Economist Senior Economists Economists Sarah House, Economist Michael A. Brown, Economist Jamie Feik, Economist Erik Nelson, Currency Strategist Economic Analysts Michael Pugliese, Economic Analyst Harry Pershing, Economic Analyst Hank Carmichael, Economic Analyst Ariana Vaisey, Economic Analyst Abigail Kinnaman, Economic Analyst Shannon Seery, Economic Analyst Administrative Assistants Donna LaFleur, Executive Assistant Dawne Howes, 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 Clearing Services, 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 2017 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. Economic Outlook 34