U.S. Economic Outlook. Mark Vitner, Managing Director & Senior Economist May 5, 2016

Transcription

1 U.S. Economic Outlook Mark Vitner, Managing Director & Senior Economist May 5, 2016

2 Economic Growth Remains Relatively Sluggish Overall Outlook We are now looking for the U.S. economy to grow just 1.7 percent in Domestic demand remains strong, which is helping offset the effects of sluggish global growth. Monetary Policy The Fed continues to move cautiously. The Fed s initial interest rate hike came late in the cycle amid circumstances more consistent with a rate cut. Inflation Commodity prices are showing some tentative signs of bottoming. While prices will remain volatile for some time, the downward pull on inflation is ending. Fiscal Policy Last year s federal budget deal is providing a slight boost to economic growth. State and local governments are also lifting spending, with the exception of energy states. Global Economy Slower growth in China is weighing on other economies, pushing the value of the dollar higher and presenting a threat to U.S. exports and corporate earnings. Economic Outlook 2

3 Economic Growth Real GDP growth has been disappointing throughout most of this recovery and has also been unusually volatile. Much of the recent volatility is due to swings in international trade and business inventories. Private final domestic demand is growing more solidly and consistently. Real GDP Forecast Real Private Final Sales 1 U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change GDP - CAGR: 0.5% GDP - Yr/Yr Percent Change: 1.9% 1 Real Private Final Sales to Domestic Purchasers Bars = CAGR Line = Yr/Yr Percent Change Forecast Forecast Real Priv Fin Sales to Dom. Purch. - CAGR: 1. Real Priv Fin Sales to Dom. Purch. - Yr/Yr Pct Chg: Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 3

4 Employment Situation Solid month to month job gains have largely put recession fears to rest. Unemployment continues to trend lower and is close to most measures of full employment. The Fed is taking its queue from the strengthening labor market but taking a big picture view. Nonfarm Employment Unemployment Rate 600 Nonfarm Employment Change Change in Employment, In Thousands Unemployment and Wage Rates Wages for Production & Nonsupervisory Workers, SA Monthly Change: 215K -1,000-1, Unemployment Rate: 5. Hourly Earnings - Yr/Yr % Change: 2.3% Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 4

5 Employment Situation Job growth has picked up across most industries. Construction is seeing the strongest percentage gains, but hiring in education & health services, professional & business services and the hospitality sector is also rising solidly. The unemployment rate is leveling off. Nonfarm Employment by Industry Unemployed by Reason Total Nonfarm Trade, Trans. & Utilities Government Educ. & Health Svcs. Prof. & Bus. Svcs. Leisure & Hospitality Manufacturing Financial Activities U.S. Employment by Industry Year-over-Year Percent Change of 3-M Moving Average Construction Other Services Information More Number of Employees Less March % 1% 3% 5% 11% 1 9% 7% 5% 3% Unemployed by Reason for Unemployment As a Percent of the Civilian Labor Force New Entrants: 0.5% Reentrants: 1. 1% Job leavers: 0.5% 1% Job losers: % 1 9% 7% 5% 3% Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 5

6 3-Month Annualized Percent Change Employment Growth of U.S. MSAs U.S. Employment Growth by MSA 3-Month Moving Averages, March 2016 Percent of Total Employees Expanding Less than 3% to More than Minneapolis Baltimore Detroit Las Vegas Seattle San Francisco Washington, D.C. 1% Chicago St. Louis Philadelphia Los Angeles San Diego Atlanta Dallas Phoenix San Jose New York Charlotte Tampa Richmond Houston Miami -1% % % % % % Year-over-Year Percent Change Decelerating Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook

7 Manufacturing Surveys Part of the widening divide between the employment data and GDP data is due to the substantial weakening in manufacturing and mining activity, both of which are high value added industries. Somewhat surprisingly, manufacturing activity turned back up in March. ISM Manufacturing vs. Non-Manufacturing Regional Surveys ISM Surveys of Business Activity Diffusion Indices, 3-Month Moving Averages U.S. Regional Fed Surveys Diffusion Index, 3-Month Moving Averages Philly Fed: General Business Conditions: 2.0 Empire State Manuf.: General Business Conditions: Richmond Fed: Manufacturing Index: 6.7 Texas Manuf. Survey: General Business: (L) ISM Manufacturing Index: 50.7 ISM Non-Manufacturing Index: Source: Institute for Supply Management, Federal Reserve Board and Wells Fargo Securities, LLC Economic Outlook 7

8 Oil Prices Lower oil prices and a surge in crude oil inventories have cut into exploration activity. There was some hope that prices would rebound if Saudi Arabia and Russia agreed to restrain output. Such hopes appear premature and Iranian output is likely to add to the global oil glut. Oil Prices Oil Inventory 1,800 1,600 Baker-Hughes Rig Count vs. Oil Prices Oil Rotary Rigs; USD per Barrel Oil Rig Count: 343 (Left Axis) WTI: $42.4 (Right Axis) $180 $ U.S. Crude Oil Inventory 4-Week Moving Average, Millions of Barrels Oil Inventory: Million Barrels ,400 $ ,200 $ ,000 $ $ $ $ $ $ Source: Institute for Supply Management, Federal Reserve Board and Wells Fargo Securities, LLC Economic Outlook 8

9 Gradual Recovery in Homebuilding 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 Single-family construction has been slow to come back on track with long-held norms relative to population and employment growth. We look for stronger gains this year, but improvement will remain excruciatingly slow Forecast Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 9

10 Interest Rates Even after scaling back its expectations, the FOMC still has much more tightening in 2016 and 2017 than the financial markets expect % % % Appropriate Pace of Policy Firming Target Federal Funds Rate at Year-End March 2016 Median Response December 2015 Median Response December 2014 Median Response Futures Market: April % % % We continue to look for two quarter-point rate hikes this year but the timing will be tricky for the Fed, depending on swings in economic data in the U.S. and overseas as well as geopolitical events % % Longer Run % % 0. Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities, LLC Economic Outlook 10

11 Probability of Recession 12 Recession Probability Based on Probit Model Model with LEI Two-Quarter Ahead Recession Probability: 25.7% According to our preferred model, the probability of a recession has ticked up. That said, the level still suggests very little possibility of a recession in the near term Source: Wells Fargo Securities, LLC Economic Outlook 11

12 The Consumer Millions Consumer spending has been driven by a rebound in household wealth and gradual recovery in employment and income growth. Wages and salaries have risen faster than average hourly earnings, reflecting gains in hours worked and innovative employment options. Household Net Worth Income & Consumer Spending $105 $90 Household Net Worth In Trillions of Dollars and Percent of Disposable Income Net Worth: $86.8T (Left Axis) Net Worth Pct. Of Dis. Inc.: 639. (Right Axis) % Labor Income and Consumer Spending Year-over-Year Percent Change of 3-MMA Real Consumer Spending: 2.7% (Left Axis) Aggregate Wages & Salaries: 4. (Left Axis) Average Hourly Earnings: 2. (Right Axis) 7% $ % $ % $ % $ % $ % $ % Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 12

13 Household Debt Delinquencies: Student Loans the Exception Tighter credit standards and a strengthening economy have helped to improve the credit position of households over the past 3 years Household Debt Delinquencies Percent of Balance 90+ Days Past Due Credit Card: 7.7% Other: 7. Student Loans: 11.5% Mortgage: 2. Auto: 3. HELOC: Student loan debt has trended higher, however Source: Federal Reserve Bank of New York and Wells Fargo Securities, LLC Economic Outlook 13

14 Global Economy

15 Global Forecast 7.5% Real Global GDP Growth Year-over-Year Percent Change, PPP Weights 7.5% 6. Period Average 6. Growth in the global economy remains below its long-run average. 4.5% % WF Forecast 4.5% % % % Source: International Monetary Fund and Wells Fargo Securities, LLC Economic Outlook 15

16 Global Exports 25% 2 15% 1 5% Global Export Volumes Year-over-Year Percent Change 25% 2 15% 1 5% Global trade has slowed over the past year. -5% -1-15% -2 Real Exports: -0. Average 1992-Present: 5.5% -25% % -1-15% -2-25% Source: IHS Global Insight and Wells Fargo Securities, LLC Economic Outlook 16

17 Negative Rates 3-Month Interbank Offered Rates Negative rates have become more prevalent over the past year Eurozone: -0.25% Denmark: Sweden: -0.45% Switzerland: -0.73% Source: Bloomberg LP and Wells Fargo Securities, LLC Economic Outlook 17

18 Foreign Purchases of U.S. Securities: Still Solid $600 Foreign Private Purchases of U.S. Securities 12-Month Moving Sum, Billions of Dollars $600 $500 $500 $400 $400 $300 $300 Capital flows and asset allocation by global investors plays a strong role in rate determinations $200 $100 $0 $200 $100 $0 -$100 -$200 -$300 Treasury: $308.1 Billion Equity: -$123.6 Billion Agency: $124.8 Billion Corporate: $138.5 Billion $100 -$200 -$300 Source: U.S. Department of the Treasury and Wells Fargo Securities, LLC Economic Outlook 18

19 China Real GDP 1 Chinese Real GDP Forecast Year-over-Year Percent Change We forecast that growth in China will slow further, but we do not expect the economy to completely fall apart. 1 WF Fcst. 1 Year-over-Year Percent Change: 6.7% Source: Bloomberg LP and Wells Fargo Securities, LLC Economic Outlook 19

20 State & Local Government Outlook

21 State & Local Employment Government employment growth at the state level continues to lag. Local government employment growth has picked up. State Employment Local Employment 3% State Employment Ex. Education Yr/Yr Percent Change vs 3-Month Percent Change, Annual Rate Year/Year Percent Change: -0.3% 3 Month Annual Rate: -0.7% 3% Local Employment Ex. Education Yr/Yr Percent Change vs 3-Month Percent Change, Annual Rate Year/Year Percent Change: 1. 3 Month Annual Rate: 2.7% 1% 1% -1% -1% % -3% % -5% Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 21

22 State & Local Tax Revenue 25% 2 15% 1 Personal Income Taxes vs. Personal Income Year-over-Year Percentage Change 25% 2 15% 1 Personal income growth continues to increase modestly, further supporting income tax collections. 5% -5% -1-15% -2 5% -5% -1-15% -2-25% -3 Income Taxes: 5.1% Personal Income: 4.1% % -3 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 22

23 State & Local Tax Revenue Sales tax collections have also improved as overall economic activity has increased Sales Tax Revenue vs. Personal Spending Year-over-Year Percentage Change General Sales and Gross Receipts Taxes: 2.1% Personal Consumption Expenditures: Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 23

24 Property Tax Revenues 3 25% 2 House Price Appreciation and Property Taxes Year-over-Year Percent Change, 4-Quarter Moving Average Purchase-Only Home Price Index: 5. Property Tax Revenue: % 2 15% 15% Home price appreciation has helped to turn around property tax collections. 1 5% 1 5% -5% -5% % % Source: U.S. Department of Commerce, FHFA and Wells Fargo Securities, LLC Economic Outlook 24

25 Fiscal Policy Federal Budget Balance Percentage of GDP - Forecast - After improving earlier in the recovery the federal budget deficit has widened again Budget Balance: -2.5% Source: U.S. Department of Commerce, U.S. Department of the Treasury and Wells Fargo Securities, LLC Economic Outlook 25

26 Five Critical Key Takeaways Economic Outlook The economy should weather the global economic slowdown. Exports will clearly decelerate. We expect real GDP to rise about 1.7 percent in Weaker Global Growth The weaker global economy continues to pull at industries closely tied to it, creating a disinflationary undertow that is squeezing corporate profits. Interest Rates The Federal Reserve has begun to normalize interest rates amid a challenging backdrop. Policymakers will likely move very gradually and cautiously. The Housing Recovery The Mix of Growth is Shifting Demand for single-family homes is reviving, with firsttime homebuyers beginning to come back into the market. Apartment construction is close to peaking. The economy is better for consumers than producers. Regions exposed to agriculture, energy, mining and manufacturing are seeing conditions weaken. Economic Outlook 26

27 U.S. 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: April 29, 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: IHS Global Insight and Wells Fargo Securities, LLC Economic Outlook 27

28 International Forecast (Year-over-Year Percent C hange) Wells Fargo International Economic Forecast GDP CPI Global (PPP Weights) 2.9% % 3.3% 3. Global (Market Exchange Rates) % 3. n/a n/a n/a Advanced Economies % % 1. United States % 2.3% 0.1% % Eurozone 1.5% 1.7% % 1.1% United Kingdom 2.3% % 0.1% 0.7% 1.5% Japan 0.5% -0.1% 0.7% % Korea % 3.1% 0.7% 0.9% 1.9% Canada % 1.1% 1.3% 1.9% Developing Economies 1 3.7% % % China 6.9% 6.3% % India % % 4.9% Mexico 2.5% % Brazil -3.9% -3.5% Russia -3.7% -0.5% % Forecast as of: April 6, Aggregated Using PPP Weights 2 Forecasts Refer to Fiscal Year Source: Wells Fargo Securities, LLC Economic Outlook 28

29 Appendix

30 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 April-26 How "Durable" is Rising Core Inflation? Silvia & House April-26 Recession Risk Remains Elevated: 26 Percent Probability Silvia, Iqbal & Pugliese April-13 Light at the End of the Tunnel of Oncoming Train? Quinlan, House & Nelson April-01 Employment Costs: A Bend in the Trend? House & Causey March-28 Capital Hill Update: A New Perspective from the CBO Silvia & Brown U.S. Regional April-21 Charlotte Continues to See Strong Gains Vitner April-15 Cleveland Retools Its Economy Vitner & Feik April-15 California Employment Conditions: March 2016 Vitner & Batcheller April-15 New York Employment Conditions: March 2016 Vitner April-15 North Carolina Employment Conditions: March 2016 Vitner & Batcheller Global Econom y April-27 U.K. GDP Growth Downshifted in Q Bryson April-21 Do Emerging Market Economies Have Debt Problems? Bryson April-15 Is the Chinese Economy Coming in for a "Soft Landing"? Bryson April-14 Brazilian Congress Moves Closer to Impeach Rouseff Alemán April-14 Is the Lion City Returning to Its Den? Bryson & Nelson Interest Rates/Credit Market April-27 An Evolving Interest Rate Framework: The Rise of Uncertainty Silvia April-20 Breaking Down the Market Model: When Imperfection Rules Silvia April-13 Net Treasury Issuance: A Longer-Term View Silvia & Brown April-06 Corporate Interest Coverage Holding Up Despite Weaker Sales Silvia & Nelson March-30 Households Appear Ready for Higher Rates Silvia & Moehring Real Estate April-26 Is the Hotel Cycle Near the End? Khan & Iqbal April-20 Will U.S. Mortgage Rates Retest Historical Lows? Vitner, Khan & Iqbal March-31 Housing Chartbook: March 2016 Vitner, Khan & Batcheller March-01 Office Energy Markets Softening Khan & Iqbal February-29 Housing Data Wrap-Up: February 2016 Vitner, Khan & Batcheller Economic Outlook 30

31 Wells Fargo Securities, LLC Economics Group Global Head of Research and Economics Economists 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 Anika R. Khan, Senior Economist. Eugenio J. Alemán, Senior Economist Tim Quinlan, Senior Azhar Iqbal, Econometrician Eric J. Viloria, Currency Strategist Senior Economists Erik Nelson, Economic Analyst Alex Moehring, Economic Analyst Misa Batcheller, Economic Analyst Michael Pugliese, Economic Analyst Julianne Causey, Economic Analyst Sarah House, Economist Michael A. Brown, Economist Economic Analysts 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. Economic Outlook 31