U.S. Economic Outlook. Mark Vitner, Managing Director & Senior Economist August 18, 2015

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1 U.S. Economic Outlook Mark Vitner, Managing Director & Senior Economist August 18, 2015

2 After a Slow Start, U.S. Growth Should Strengthen During the Second Half of the Year Overall Outlook U.S growth remains solid but unspectacular. Hiring is improving but wage growth is lacking and there are still huge pockets of underemployment. Monetary Policy The Fed is poised to raise interest rates later this year but monetary policy will remain expansionary for quite some time. We expect the Fed to move cautiously. Inflation Slowing growth in China is pulling commodity prices lower and will likely restrain consumer prices as well. Lower inflation will hold down long-term interest rates. Fiscal Policy The drag from government spending cuts is lessoning in the US and major decisions need to be made soon on the highway bill, corporate tax rates and federal budget. Global Economy Slower growth in China is weighing on growth in other emerging economies, pushing up the value of the dollar and slowing U.S. exports. Economic Outlook 2

3 Overall Growth

4 Economic Growth Revisions to previously published data slightly boosted estimates of economic growth for the first half of 2015 but lowered economic growth over the past three years. We look for real GDP growth to strengthen modestly over the next six quarters, with the improvement driven by stronger gains in consumer spending, homebuilding and commercial construction. 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change GDP - CAGR: 2.3% GDP - Yr/Yr Percent Change: 2.3% Forecast -10% % 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 4

5 Employment Situation The labor market has improved considerably over the past five years, but wage increases are suspiciously absent and the labor force participation rate remains exceptionally low. Nonfarm Employment Unemployment Rate 600 Nonfarm Employment Change Change in Employment, In Thousands % Unemployment and Wage Rates Wages for Production & Nonsupervisory Workers, SA 12% % 10% % 8% % 6% % 4% Monthly Change: 215K -1, ,000 2% Unemployment Rate: 5.3% Hourly Earnings - Yr/Yr % Change: 1.8% 0% % 0% Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 5

6 Unemployment Unemployment Rate Measures Percent The unemployment rate is slowly but steadily improving. 18% 12-Month Rolling Average (NSA): 5.6% Unemployment Rate (SA): 5.3% U6 (SA): 10.4% 18% The broader U6 unemployment rate has done a better job of capturing the excess slack in the labor market in this recovery. 14% 10% 14% 10% U6 improved relative to the overall unemployment rate during the past year, suggesting that some of the headwinds in the labor market are lessening 6% 2% % 2% Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 6

7 Employment: Structural Full-time employment has only recently risen back to its previous peak Full Time vs. Part Time Employment Millions, Seasonally Adjusted Total Employment: 146.4M (Left Axis) Full-Time: 120.7M (Right Axis) Total: 2.0M Above Prerecession Peak Full-Time: 0.0M Below Prerecession Peak Full-time jobs have been rising more rapidly over the past year and more part-time workers are seeing their hours increase Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 7

8 Energy Oil prices collapsed in late 2014 and early The number of active oil rigs has subsequently fallen sharply. While there are some tentative signs that the rig count has bottomed, another slide in energy prices and another downturn in the rig count cannot be ruled out. WTI Production & Employment 1,800 1,600 Baker-Hughes Rig Count vs. Oil Prices Oil Rotary Rigs; USD per Barrel Oil Rig Count: 670 (Left Axis) WTI: $44.9 (Right Axis) $180 $ Oil Production vs. Employment Thousands of Jobs, Million of Barrels per Day Oil & Gas Employment: 625.8K (Left Axis) Oil Production: 9.5M (Right Axis) 10 1,400 $ ,200 $120 1,000 $ $ $ $ $ $ Source: IHS Global Insight, Baker-Hughes, U.S. Department of Energy, U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 8

9 Inflation and Interest Rates

10 Inflation Global disinflation has led more aggressive easing moves by the ECB and BOJ. We expect the Fed to look through this transitory slowdown, however, and raise the federal funds rate. U.S. CPI Eurozone CPI 15% Headline CPI Year-over-Year Percent Change 15% 5% Eurozone Consumer Price Index Year-over-Year Percent Change 5% 12% 12% 4% 4% 9% 9% 3% 3% 6% 6% 2% 2% 3% 3% 1% 1% 0% 0% 0% 0% CPI: 0.1% -3% % CPI: 0.2% -1% % Source: U.S. Department of Labor, IHS Global Insight and Wells Fargo Securities, LLC Economic Outlook 10

11 Global Yields 3.5% 10-Year Government Bond Yields Percent 3.5% U.S. yields have tended to follow Eurozone yields. The bounce back from earlier lows reflects greater comfort with the growth and inflation outlooks. The latest iteration of the Greek crisis led to only a modest pullback in yields but growth and inflation prospects have been scaled back a bit. 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% United States: Aug 2.2% United Kingdom: Aug 1.9% Germany: Aug 0.7% 0.0% % 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Source: IHS Global Insight and Wells Fargo Securities, LLC Economic Outlook 11

12 FOMC The FOMC is slightly more optimistic about the economy s near-term prospects than the financial markets but has consistently expressed caution about long-term growth prospects. Fed s Dot Plot Long Term Forecast 5.0% 4.5% Fed Funds Target Rate Expectations Fed Projections as of June Meeting; Market Futures as of June 17 Median Fed Expectations Futures Market Rate 5.0% 4.5% 4.3% 4.2% FOMC Longer Term Fed Funds Rate Forecast Median of Dot Plot Fed Funds Rate: 3.75% 4.3% 4.2% 4.0% 3.5% 4.0% 3.5% 4.1% 4.1% 3.0% 3.0% 4.0% 4.0% 2.5% 2.5% 3.9% 3.9% 2.0% 1.5% 1.0% 2.0% 1.5% 1.0% 3.8% 3.7% 3.8% 3.7% 0.5% 0.5% 3.6% 3.6% 0.0% Longer Run 0.0% 3.5% % Source: Federal Reserve Board and Wells Fargo Securities, LLC Economic Outlook 12

13 Housing

14 Housing Mortgage purchase applications and pending home sales both point to further strengthening in new and existing home sales. Most other leading indicators also remain positive. New Home Sales Existing Home Sales 1,500 1,350 New Home Sales vs. Mortgage Applications Thousands, Index 1990=100; Seasonally Adjusted Pending vs. Existing Home Sales Index, Millions, 3-Month Moving Average Pending Home Sales: 111 (Left Axis) Existing Home Sales: 5.30M (Right Axis) 8 1, , New Home Sales: 482,000 (Left Axis) Mortgage Applications: (Right Axis) Source: U.S. Department of Commerce, MBA, National Association of Realtors and Wells Fargo Securities, LLC Economic Outlook 14

15 Housing We continue to look for a gradual recovery in homebuilding Multifamily Starts Multifamily Forecast Single-family Starts Single-family Forecast Housing Starts Millions of Units Forecast Apartment demand remains exceptionally strong but supply is catching up with demand Single-family housing starts are beginning to ramp back up. Gains will be more modest than in past building cycles Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 15

16 Home Prices Household formations have picked up in a significant way in recent quarters, likely reflecting improving labor market conditions. Stronger demand and tight inventories are resulting in higher home prices, at least as measured by median sales prices. Household Formation Home Prices 2.5 Household Formations Average of CPS/ ASEC and CPS/HVS, In Millions Survey Averages: 780K 1948 to 2014 Average % 20% Home Prices Year-over-Year Percentage Change 25% 20% % 15% 10% 10% % 0% 5% 0% % -10% -5% -10% -15% -15% % Median Sale Price: $237,700 Median Sale Price, 3-M Mov Avg: 8.2% -25% FHFA Purchase Only Index: 5.6% S&P/Case-Shiller Composite-10: 4.7% -30% % -25% -30% Source: U.S. Department of Commerce, National Association of Realtors, S&P and Wells Fargo Securities, LLC Economic Outlook 16

17 Stronger Dollar & Global Markets

18 A Stronger Dollar The dollar has appreciated versus most of our largest trading partners over the past year. That said, dollar appreciation has varied significantly by country. Dollar Appreciation Export Destinations 120 U.S. Trade Weighted Dollar Index January 1997= Canada U.S. Dollar Appreciation vs. Top Export Destinations Top 7 Trading Partners, Year-over-Year Percent Change 19.8% Jul Mexico 22.8% More China 0.2% U.S. Exports Japan 21.2% Less U.K. 9.7% Germany 23.1% Broad Currency Index: South Korea 12.3% -5% 0% 5% 10% 15% 20% 25% 30% 35% Source: Bloomberg LP, Federal Reserve Board and Wells Fargo Securities, LLC Economic Outlook 18

19 S&P Revenues Earned Abroad 60% Percent of S&P Revenues Earned Abroad By Sector, June, % 50% 55% 48% 50% 40% 43% 40% IT and Materials earn the highest share of their revenues abroad, making those industries the most at risk to the stronger dollar. 30% 20% 10% 0% 34% 32% 31% 26% 21% 8% 30% 20% 10% 0% Source: Bloomberg LP and Wells Fargo Securities, LLC Economic Outlook 19

20 China Slowdown 80% Chinese Trade Year-over-Year Percent Change, 3-Month Moving Average 80% 60% 60% 40% 40% Trade with China has slowed on both sides of the ledger. 20% 0% 20% 0% -20% Exports: -2.7% Imports: -10.6% -40% % -40% Source: IHS Global Insight and Wells Fargo Securities, LLC Economic Outlook 20

21 State Comparison: Percent Change In Trade-Weighted Value (June 2014 June 2015) HI 11.6 AK 10.1 CA 10.9 OR WA 7.8 MT 11.2 WY 10.3 ND ID NH 9.6 SD WI NY NV 7.2 AZ 12.9 UT 4.8 NM 13.3 CO 11.2 NE 12.7 TX 11.9 KS 11.4 OK 10.7 MN 12 IA 14.6 MO 12.5 AR 11.5 LA 8.5 IL 12.5 MS 9.8 MI 12.4 IN 14.4 KY 12.5 TN 12.6 AL 11.9 OH 12.7 GA 11.5 WV 14.5 VT 9.8 ME 12.3 RI PA CT 12.4 NJ 11.5 DE VA MD 11.1 NC 11.4 SC 10.4 MA 11.7 Percent Change in Trade-Weighted Value Measured in US Dollars FL 5.3 Less Than 9% % 11.0%-11.5% 11.5%-12.5% Greater Than 12.5% Economic Outlook

22 State Exports: Percent Change in Exports (June 2015 YTD vs June 2014 YTD) HI 46.2 CA -3.0 OR 2.9 WA -0.0 NV 0.4 ID AZ 15.3 UT 8.3 MT -6.2 WY NM 1.7 CO 4.1 ND -8.6 SD -5.6 NE TX KS -9.7 OK MN -3.3 IA MO 5.0 AR -6.6 LA WI -2.2 IL -7.0 MS -5.1 MI -6.9 IN 0.2 TN -1.4 AL 1.2 KY 9.5 OH -0.1 WV GA -1.9 SC 3.8 PA 4.7 NC 0.7 NY -5.5 DC VA -6.1 VT -2.4 NH -8.2 ME 1.3 NJ -6.9 DE -1.0 MD DC MA RI 1.5 CT -1.2 National: -4.9 AK 1.5 FL -1.1 Source: U.S. Census Bureau and Wells Fargo Securities, LLC Decline Growth Economic Outlook 22

23 Wood Exports $90 $75 U.S. Wood Chip Exports Millions of Dollars Wood in Chips or Particles: $64.9M Year-over-Year Pct. Chg.: -3.4% $90 $75 $60 $60 After a long run up, global exports in wood chips have slowed. $45 $30 $45 $30 $15 $15 $ $0 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 23

24 Wood Exports $3,000 $2,500 China Offshore Timber & Log Exports In Millions of Dollars Rest of World $3,000 $2,500 $2,000 $2,000 China has accounted for most of the growth in exports of timber and logs over the past decade. $1,500 $1,000 $1,500 $1,000 $500 $500 $ $0 Source: International Trade Administration and Wells Fargo Securities, LLC Economic Outlook 24

25 Housing Starts vs Industrial Production 100% 80% Single-Family Starts vs. IP Wood Products Year-over-Year Percent Change ( ) R² = Production of lumber and wood products is strong correlated with single-family homebuilding. Single-Family Housing Starts 60% 40% 20% 0% -20% -40% -60% -35% -25% -15% -5% 5% 15% 25% 35% Industrial Production of Wood Products Source: Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 25

26 Five Critical Key Takeaways Economic Outlook Weaker Global Growth is Weighing on Commodity Prices Interest Rates Will Rise This Year The economy should weather the recent slide in oil prices and turmoil in Europe. Look for real GDP to rise 2.1 percent in 2015 and 2.5 percent in The stronger gains seen in Europe earlier this year will likely give way as efforts to deal with the Greek debt crisis move forward. China s economy also appears to be slowing and will weigh further on commodity prices. We still look for the Fed to raise the federal funds rate this fall but the pace and ultimate magnitude of rate hikes now looks to be less than previously thought. The Housing Recovery Will Gain Momentum Forest Products Demand for single-family homes is reviving, with firsttime homebuyers finally coming back into the market. Apartment construction is close to peaking. Demand for forest products should improve, as the housing recovery gains momentum. The stronger dollar is likely to create a bit of a headwind, however. Economic Outlook 26

27 Our Forecast Wells Fargo U.S. Economic Forecast Actual Forecast Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Actual Forecast Real Gross Domestic Product 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: August 12, 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 27

28 Appendix

29 Economic Outlook 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 Selected Recent Economic Reports Date Title Authors U.S. Macro August-06 Wells Fargo Small Business Survey: Q Vitner & Wolf August-04 Case Study of the Taper Tantrum and Term Premiums Silvia & Moehring August-04 Presidential Elections in America: A Primer Silvia, Quinlan & Brown August-04 Inflation Charbook: August 2015 Bullard & House July Federal Long-Term Fiscal Outlook: How Dramatically Does Policy Have to Change? Silvia, Brown & Pugliese U.S. Regional August-06 Western Economic Roundup Vitner & Wolf July-21 A Strong First Half For North Carolina Vitner & Wolf July-17 California Employment Conditions: June 2015 Vitner & Wolf July-17 Florida's Unemployment Rate Continues to Trend Lower Vitner & Wolf July-17 Texas Labor Market Remains Resilient in June Vitner & Wolf Global Economy August-04 A Slightly More Upbeat RBA Keeps Rates on Hold Quinlan July-31 Taiwanese GDP Considerably Weaker Than Expected in Q2 Quinlan & Nelson July-30 Stronger-Than-Expected Q2 GDP Growth in Sweden Quinlan & Nelson July-28 U.K. GDP Growth Bounces Back in Q2 Quinlan & Nelson July-24 MENA: Got Oil? Bryson, Aléman & Nelson Interest Rates/Credit Market August-05 TIP: Pay Little Heed to Current TIPS Breakeven Inflation Silvia, Vitner & House July-29 Potential Fiscal Policy Challenges to Monetary Policy: Part II Silvia, Vitner & Brown July-22 Potential Fiscal Policy Challenges to Monetary Policy: Part I Silvia, Vitner & Brown July-15 A Closer Look at the 2-Year Treasury Silvia, Vitner & Brown July-08 Consumers Expect to Borrow More Silvia, Vitner & Brown Real Estate August-07 Commerial Real Estate Chartbook: Q2 Khan July-31 Housing Chartbook: July 2015 Vitner, Khan & Batcheller July-24 Nonresidential Construction Recap: July Khan June-30 Housing Data Wrap-Up: June 2015 Vitner, Khan & Moehring June-30 Nonresidential Construction Recap: June Khan Economic Outlook 29

30 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 Economist..... Jay H. Bryson, Global Sam Bullard, Senior Economist Nick Bennenbroek, Currency Strategist Eugenio J. Alemán, Senior Economist Anika R. Khan, Senior Economist Senior Economists. Economists Azhar Iqbal, Econometrician Tim Quinlan, Eric J. Viloria, Currency Strategist Sarah House, Economist Michael A. Brown, Economist Michael T. Wolf, Economic Analysts Erik Nelson, Economic Analyst Alex Moehring, Economic Analyst Misa Batcheller, Economic Analyst Michael Pugliese, 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 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 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 30