U.S. & Charlotte Economic Outlook. Sarah House, Economist January 5, 2017

Transcription

1 U.S. & Charlotte Economic Outlook Sarah House, Economist January 5, 2017

2 Expectations U.S. Growth Outlook Labor Market & Inflation GDP around 2.2 percent in 2017 and 2018 historically disappointing, but above potential Late cycle signs from weaker profits, tighter credit Sustained but slower job growth; rising wages Rising wages and low productivity push up unit labor costs, generating inflation especially in the service sector Monetary Policy Tightening in the labor market and stronger inflation supportive of two fed fund rate hikes in 2017 Upside Risks Fiscal stimulus and reduced regulation boost GDP growth Business tax reform lifts capital spending, productivity Downside Risks Trade war or tariffs hit real U.S. incomes; immigration policy hurts labor supply Stronger growth at full employment sets off inflation, leading the Fed to tighten more rapidly Economic Outlook 2

3 Real GDP 1 8% U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change GDP - CAGR: 3.5% GDP - Yr/Yr Percent Change: 1.7% Forecast 1 8% Our baseline forecast looks for growth to return to around 2 percent in 2017 and % % -1 Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 3

4 Business Activity 65 ISM Manufacturing & Non-Manufacturing Composite Index Manufacturing activity has improved over the past year, but remains noticeably weaker than the service sector ISM Manufacturing Index SA: 54.7 ISM Non-Manufacturing Index SA: Source: Institute for Supply Management and Wells Fargo Securities Economic Outlook 4

5 Global Growth Weak global growth and the stronger dollar are weighing on exports. The further appreciation of the dollar will be watched closely by the Fed. Global Growth The Dollar 7.5% Real Global GDP Growth Year-over-Year Percent Change, PPP Weights 7.5% 115 Trade Weighted Dollar Major Curency Index, 1973 = % Period Average WF Forecast % Forecast % 1.5% % % 70 Trade Weighted Dollar: Source: IMF, Federal Reserve Board and Wells Fargo Securities Economic Outlook 5

6 Investment Business investment is expected to pick up as commodity-related spending stabilizes and could get a further boost under the Trump administration Business Investment Investment Share of GDP 3 Real Business Fixed Investment Bars = CAGR Line = Yr/Yr Percent Change 3 1 Capital Investment as a Share of GDP Percent % 15% 1 Forecast % 13% % 11% Non-Res Fixed Invest - CAGR: 1. Non-Res Fixed Invest - Yr/Yr Percent Change: -1.1% % Business Fixed Investment: 12. 8% % 8% Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 6

7 Housing Starts Multifamily Starts Multifamily Forecast Single-Family Starts Single-Family Forecast Housing Starts Millions of Units The mix of new construction is shifting back toward singlefamily construction, but the jump in mortgage rates could weigh on activity this year Forecast Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 7

8 Real Consumer Spending 8% Real Personal Consumption Expenditures Bars = CAGR Line = Yr/Yr Percent Change 8% Forecast Consumer spending will remain a key driver of growth over PCE - CAGR: 3. PCE - Yr/Yr Percent Change: 2.8% -8% % Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 8

9 Household Balance Sheets 18.5% 18. Financial Obligations Ratio-Total As a Percent of Disposable Personal Income Total: % % 17.5% Household debt has returned to more sustainable levels 16.5% % % 15.5% % % Source: Federal Reserve Board and Wells Fargo Securities Economic Outlook 9

10 Labor Market: Slack Job growth has slowed closer to its underlying trend as the labor market is around full employment Job Growth Unemployment Rate Nonfarm Employment Growth Yr/Yr Percent Change vs. 3-Month Annualized Rate 1 U.S. Unemployment Rate Seasonally Adjusted FOMC Central Tendency for Longer Run 1 Unemployment Rate: % 8% Month Annualized Rate: 1.5% Year-over-Year Percent Change: 1. -8% -8% Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 10

11 Labor Market: Wages Average Hourly Earnings vs. Atlanta Fed Wage Growth Tracker; YoY % Chg. of 3-MMA 5% 5% Average hourly earnings growth has picked up modestly but remains limited by lower-skilled workers entering the workforce and Baby Boomers beginning to retire 3% 1% Atlanta Fed Wage Growth Tracker: 3.9% Average Hourly Earnings (Prod. & Supervisory): % 1% Source: Federal Reserve Bank of Atlanta, U.S. Department of Labor and Wells Fargo Securities Economic Outlook 11

12 Productivity 5% 3% Productivity & Unit Labor Costs: Nonfarm Year-over-Year Percent Change, Four-Quarter Moving Average 5% 3% Weaker productivity is limiting real wage growth and potential GDP 1% -1% - -3% Nonfarm Productivity: 0. Nonfarm Unit Labor Cost: 2.8% % -1% - -3% - Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 12

13 Inflation 5% PCE Deflator vs. Core PCE Deflator Year-over-Year Percent Change 5% 3% 3% Inflation is slowly moving back toward the Fed s target as the drag from energy fades and slack continues to diminish 1% 1% -1% PCE Deflator: 1. "Core" PCE Deflator: 1. FOMC's 2. Inflation Target % - Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 13

14 Monetary Policy 4.5% % Appropriate Pace of Policy Firming Target Federal Funds Rate at Year-End December 2016 Median Response September 2016 Median Response Futures Market: January % % After four years of revising down its projections for the fed funds rate this cycle, the FOMC raised its expected rate path in December 2.5% % % 2.5% % % Longer Run 0. Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities Economic Outlook 14

15 Charlotte Metro Area

16 Charlotte: Labor Market Charlotte MSA Nonfarm Employment Year-over-Year Percent Change of a 3-MMA 3% 3% Employment growth in the Charlotte metro has moderated over the past year, but continues to outpace the nation -3% -3% - Charlotte: 2. United States: 1. North Carolina: 2. -9% % Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 16

17 Charlotte: Labor Market The local labor market has tightened in line with the nation. Labor force participation remains a challenge for the region, however. Unemployment Rate Labor Force Participation Rate Charlotte MSA Unemployment Rate Seasonally Adjusted Charlotte: 4.7% United States: 4. North Carolina: % 68% 67% 6 Labor Force Participation Rate 3-Month Moving Averages, Seasonally Adjusted 7 69% 68% 67% 6 8% 8% 65% 65% % 63% 6 61% 6 61% North Carolina: 61.3% 59% United States: 62.8% 58% % 58% Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 17

18 Charlotte: Labor Market Charlotte MSA Employment Growth By Industry Year-over-Year Percent Change, 3-MMA Total Nonfarm November 2016 Trade, Trans. & Utilities Similar to the nation, manufacturing in the region has struggled over the past year, while service sector employment remains strong Prof. & Bus. Svcs. Government Leisure & Hospitality Educ. & Health Services Manufacturing Financial Activities Nat. Res. & Construction Other Services Information More Number of Employees Less -1% 1% 3% 5% 7% 8% Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 18

19 North Carolina: Building Permits Recent gains in building permits have been driven by activity in the single-family home market as the apartment cycle has peaked North Carolina Permits Permits by Metro North Carolina Housing Permits Thousands of Permits, Seasonally Adjusted Annual Rate Single-Family: 36,936 Single-Family, 12-MMA: 40,803 Multifamily, 12-MMA: 15,799 Single-Family Average ( ): 62, Greenboro Durham Total Residential Building Permits Year-over-Year Percent Change of 12-Month Moving Averages Nov % North Carolina 9.8% Raleigh 7.8% Charlotte United States 1.9% Wintson-Salem Source: CoreLogic and Wells Fargo Securities Economic Outlook 19

20 Charlotte: Home Prices Home price appreciation has remained in line with the national average over the past year, but local prices are already above their pre-recession peak Home Price Growth Home Price Levels 2 15% CoreLogic Home Price Index Year-over-Year Percent Change 2 15% Home Price Index: Charlotte MSA Index, 2000=100, Not Seasonally Adjusted United States: Charlotte: North Carolina: % 5% % -5% United States: 6.7% -15% North Carolina: 5. Charlotte, NC: 6.1% % Source: CoreLogic and Wells Fargo Securities Economic Outlook 20

21 Charlotte: Renting vs. Buying 4 35% Charlotte Mortgage & Rent Affordability As a Percent of Income, Median Mortgage: 12.7% Rent: 26.7% Mortgage Historical Average: 18.9% Rent Historical Average: % Renting has become relatively expensive compared to historical standards, while home buying remains historically affordable 3 25% % 2 15% 15% Source: Zillow and Wells Fargo Securities Economic Outlook 21

22 Charlotte: Apartment Market Rent growth has been strong in the Charlotte metro in recent years, but is expected to slow in 2017 amid another year of strong deliveries Supply & Demand Rent Growth 1 Charlotte Apartment Supply & Demand Percent, Thousands of Units Charlotte Apartment Effective Rent Growth Quarter-over-Quarter Percent Change % 1.5% % % 0.5% % -0.5% Apartment Completions: 1265 Units (Right Axis) Apartment Net Absorption: 1,441 Units (Right Axis) Apartment Vacancy Rate: 5.8% (Left Axis) Apartment Effective Rent Growth: 1.1% -1.5% -1.5% Source: REIS, Inc. and Wells Fargo Securities Economic Outlook 22

23 Charlotte: Commercial Real Estate Market 21% 18% Charlotte Commercial Real Estate Vacancy Rates Apartment Vacancy Rate: 5.8% Retail Vacancy Rate: 9. Office Vacancy Rate: 15.5% Warehouse Vacancy Rate: 4.9% 21% 18% While the local apartment market is beginning to cool, the office, retail and industrial market continue to improve 15% 1 9% 15% 1 9% 3% % Source: REIS, Inc., Costar and Wells Fargo Securities Economic Outlook 23

24 North Carolina: Population Growth North Carolina continues to attract new residents, with Charlotte and Raleigh seeing the greatest influx Net Migration Population Growth International Domestic North Carolina Net Migration In Thousands North Carolina Population Growth by MSA Number of People Added ( ), in Thousands Other Domestic Series Break Series Break Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 24

25 U.S. Economic Forecast q Actual Wells Fargo U.S. Economic Forecast Forecast 1Q 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 23, 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 25

26 Global Forecast (Year-over-Year Percent Change) Wells Fargo International Economic Forecast GDP CPI Global (PPP Weights) 2.9% % Global (Market Exchange Rates) % % Growth in the global economy likely will grind closer to long term trend Advanced Economies 1 1.7% 1.9% 2.1% 0.7% 1.8% 2. United States 1.5% % 2.5% 2. Eurozone % 1.5% United Kingdom % 2.1% % 1.7% Japan % 0.7% -0.1% 0.9% 0.7% Korea 2.9% 3.1% 2.3% % 2. Canada % 1.9% 1.5% 1.3% 1.8% Developing Economies 1 4.1% 4.1% 4.3% 5.5% 4.9% 5.1% China 6.7% 6.3% % 1.8% India % 7.7% % 5.3% Mexico % % Brazil -3.5% 0.8% 2.1% 8.8% % Russia -0.3% 1.5% 2.1% 7.1% Forecast as of: December 08, Aggregated Using PPP Weights 2 Forecasts Refer to Fiscal Year Source: International Monetary Fund and Wells Fargo Securities Economic Outlook 26

27 Wells Fargo Securities Economics Group John E. Silvia Global Head of Research and Economics Diane Global Head of Research & Economics Chief Economist Economists Eric J. Viloria, Currency Strategist Sarah House, Economist Michael A. Brown, Economist Jamie Feik, Economist Economic Analysts Senior Economists Erik Nelson, Currency Analyst Mark Vitner, Senior Economist Jay H. Bryson, Global Economist Sam Bullard, Senior Economist Nick Bennenbroek, Currency Strategist Anika R. Khan, Senior Economist Eugenio J. Alemán, Senior Economist Azhar Iqbal, Econometrician Tim Quinlan, Senior Economist Misa Batcheller, Economic Analyst Michael Pugliese, Economic Analyst Julianne Causey, Economic Analyst E. Harry Pershing, 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 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 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 27