Evolution of San Francisco Over Time San Francisco. John E. Silvia, Chief Economist July 01, 2015

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1 Evolution of San Francisco Over Time San Francisco John E. Silvia, Chief Economist July 01, 2015

2 Sustained Growth in % 8% U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change GDP - CAGR: -0.2% GDP - Yr/Yr Percent Change: 2.9% 10% 8% Adverse winter weather and port disruptions have weighed on economic activity in Q Underlying fundamentals remain strong and second quarter GDP has picked up. 6% 2% 0% -2% - -6% Forecast 6% 2% 0% -2% - -6% -8% -8% -10% % Source: U.S. Department of Commerce and Wells Fargo Securities, LLC San Francisco 2

3 Manufacturing & Services: A Distinction 65 ISM Manufacturing & Non-Manufacturing Composite Index Indexes on business activity suggest continued growth for 2015 and 2016, services have been a bulwark ISM Manufacturing Index SA: 52.8 ISM Non-Manufacturing Index SA: Source: Institute for Supply Management and Wells Fargo Securities, LLC San Francisco 3

4 Consumer Spending: Better in % Real Personal Consumption Expenditures Bars = CAGR Line = Yr/Yr Percent Change 8% 6% Forecast 6% Faster job growth, asset appreciation and more access to credit are supportive to the consumer spending outlook 2% 0% -2% - 2% 0% -2% - -6% PCE - CAGR: 2.1% PCE - Yr/Yr Percent Change: 3.1% -8% % -8% Source: U.S. Department of Commerce and Wells Fargo Securities, LLC San Francisco 4

5 Inflation: Problems Ahead? PCE Deflator Forecast Fed Central Tendency Forecast vs. Wells Fargo Forecast 4.5% 4.0% 3.5% Central Tendency Forecast Range Historical PCE Deflator Wells Fargo Economics Forecast Q4-over-Q4 Percent Change FOMC Jun. Forecast 4.5% 4.0% 3.5% 3.0% 3.0% The Fed anticipates a gradual firming of inflation, but for slack in the labor market to keep inflation from overshooting in the medium term 2.5% 2.0% 1.5% 2.0% 2.5% 2.0% 1.5% 1.0% 0.8% 1.0% 0.5% 0.5% 0.0% % Source: U.S. Department of Commerce, Federal Reserve Board and Wells Fargo Securities, LLC San Francisco 5

6 Pace of Policy Firming 5.0% 4.5% 4.0% Appropriate Pace of Policy Firming Target Federal Funds Rate at Year-End; Market Data as June % 4.5% 4.0% The FOMC downshifted its expectations for the Federal Funds rate path in the recent meeting to bps at the end of 2015, which is more in line with market expectations 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% June 2015 Median Response March 2015 Median Response Futures Market Expectations Longer Run 0.5% 0.0% Source: Federal Reserve Board and Wells Fargo Securities, LLC San Francisco 6

7 Outlook Risks Potential Challenges to the Outlook Fitful Fed exit brings questions for the dollar, inflation and interest rate outlook/volatility/confidence Fiscal policy: tax increases and/or spending cuts face unsustainable long-run outlook What are the primary risks to the outlook? Housing: able to sustain modest growth on its own if rates rise? European debt crisis weighs on global growth, interest rates and global credit allocation over the long-run China/global trade weakness hits U.S. exports, foreign earnings of U.S. corporations Sustained lower oil prices risk for overleveraged businesses and countries San Francisco 7

8 Evolution of San Francisco

9 San Francisco Employment 1,200 San Francisco DMSA Nonfarm Employment Thousands of Employees Nonfarm Employment: 1,049K 1,200 1,100 1,100 Nonfarm employment only recently surpassed the peak experienced in the tech boom 1, , Source: U.S. Department of Labor and Wells Fargo Securities, LLC San Francisco 9

10 Employment Composition Professional & business services now accounts for a quarter of employment. This is where most of the high-tech jobs show up Financial Activities 11% Information 3% Other Services Construction 3% San Francisco DMSA Employment Composition Educ. & Health Services 9% Manufacturing 7% 1990 Government 15% Prof. & Bus. Svcs. 17% Leisure and Hospitality 10% Trade, Trans. & Utilities 21% Financial Activities 7% Information 5% Other Services San Francisco DMSA Employment Composition Educ. & Health Services 12% Construction Government 12% Manufacturing May 2015 Leisure and Hospitality 13% Trade, Trans. & Utilities 1 Prof. & Bus. Svcs. 25% Source: U.S. Department of Labor and Wells Fargo Securities, LLC San Francisco 10

11 Population Demographics San Francisco has gotten more diverse over the past decade. The Asian population has grown significantly San Francisco DMSA Population Demographics Asian 26% 2000 San Francisco DMSA Population Demographics 2013 Asian 31% White Hispanic 16% Black 6% Multiracial 3% Native Hawaiian & Pacific Islanders 1% Indian 1% White Non- Hispanic 47% White Hispanic 17% Black 5% Multiracial Native Hawaiian & Pacific Islanders 1% Indian 1% White Non- Hispanic 41% Source: U.S. Department of Commerce and Wells Fargo Securities, LLC San Francisco 11

12 Median Home Prices San Francisco: Oakland: California: National: Boston: Median Home Price Index, 2000 = Home prices have risen nationwide over the past decades, although the run-up during the housing boom should be considered an outlier Source: CoreLogic and Wells Fargo Securities, LLC San Francisco 12

13 Housing Affordability 14 Housing Affordability Median Home Price Divided By Per Capita Income Housing affordability in San Francisco never recovered from the housing boom San Francisco: Oakland: 8.05 California: 5.68 U.S.: Source: CoreLogic, U.S. Department of Commerce and Wells Fargo Securities, LLC San Francisco 13

14 Commercial Real Estate Trends Rents for both apartments and office space have increased steadily since the end of the recession Apartments Offices $2,500 Apartment Rents Dollars $2,500 $50 Office Rents Dollars $50 $2,000 $2,000 $40 $40 $1,500 $1,500 $30 $30 $1,000 $1,000 $20 $20 $500 $0 San Francisco: $2,341.0 Los Angeles: $1,537.0 National: $1, $500 $0 $10 $0 San Francisco: $47.3 Los Angeles: $34.4 National: $ $10 $0 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC San Francisco 14

15 U.S. Forecast Wells Fargo U.S. Economic Outlook 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: June 26, 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 Source: U.S. Department of Commerce, U.S. Department of Labor, Federal Reserve Board, Freddie Mac and Wells Fargo Securities, LLC San Francisco 15

16 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 House, Economist Michael A. Brown, Economist Michael T. Wolf, Economic Analysts Erik Nelson, Economic Analyst Alex Moehring, 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. San Francisco 16