WEEKLY GUIDANCE ON ECONOMIC AND GEOPOLITICAL EVENTS October 23, 2018 Wage Growth and Savings Supportive of Higher Spending

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1 Craig P. Holke Investment Strategy Analyst WEEKLY GUIDANCE ON ECONOMIC AND GEOPOLITICAL EVENTS October 23, 2018 Wage Growth and Savings Supportive of Higher Spending Key takeaways» Wages in the U.S. have been rising at a steady, yet unspectacular, rate. We expect wages to maintain this trend, supporting further household spending and economic growth.» U.S. households reduced spending and boosted the savings rate following the last recession. Savings rates tend to decline prior to recessions, allowing for higher levels of spending. What it may mean for investors» We believe that the strong labor market likely will continue to drive wages higher. This supports our view of continued economic growth, favoring equity sectors such as Consumer Discretionary, Industrials, Financials, and Health Care. There has been much discussion about the slow wage growth in the U.S. With the consumer driving roughly 70% of the U.S. economy, a slowdown in consumer spending could have a significant effect on economic growth. Yet, we believe the U.S. consumer likely will continue spending at current levels, or potentially increase spending as the economic cycle continues to mature. Rising wages also may contribute to higher levels of spending in the future. In addition, the savings rate in the U.S. has increased significantly since the last recession. This potentially would allow the savings rate to decline, as in the past, and support higher spending levels without jeopardizing household finances. Wages in the U.S. recently have shown signs of improvement. Although the year-overyear (YoY) increase declined from 2.9% to 2.8% in September, recent monthly gains have been solid and signal potential higher future YoY gains. In addition, other wage growth measures, such as the Federal Reserve Bank of Atlanta s Wage Growth Tracker, were reflecting more solid wage gains of 3.5% in of September. The labor market remains very tight, with unemployment (3.7%) at the lowest level since Open job positions, as measured by the Bureau of Labor Statistics, have reached new highs. This has employers struggling to fill open positions and worried about keeping valuable employees. Chart 1 reflects small business employers plans to increase wages in order to attract or keep employees in the face of the tightest labor market in decades Wells Fargo Investment Institute. All rights reserved. Page 1 of 5

2 Chart 1. Plans to increase wages are at a multicycle high 25 Plans to increase compensation, diffusion index Sources: National Federation of Independent Business, Wells Fargo Investment Institute, October 16, Data is a three-month moving average diffusion index representing the share of small businesses in the National Federation of Independent Business that plan to increase compensation. Shaded bars depict recessions. Monthly data is from March 1991 to August Gradually rising wages should support increased household spending. We expect wages to rise, yet at a moderate pace. We do not expect wages to reach levels that would cause economic-growth concerns in the near term. 1 There are signs of lower wage earners finally receiving increases, possibly helped by the increase in minimum wages in some parts of the country. This is positive in that lower wage earners spend a greater portion of income increases. Higher wage earners instead may save a greater portion. While this saving is a positive for investments, it does not drive higher consumer spending. 2 The U.S. savings rate has increased following the last recession U.S. households have increased the saving rate, currently at 6.6%, following the last recession. This higher savings rate is positive in that it allows for greater investment or future spending. Yet, the savings rate also may trend back down as it has in recent cycles, allowing for higher current spending even at the same income levels. Chart 2 depicts how the savings rate has changed since Toward the end of the prior two economic cycles, the savings rate has declined. This may have contributed to spending remaining higher than otherwise would have been supported prior to the recession. 1 Just How Strong is the U.S. Labor Market?, Craig Holke, Global Perspectives, September 11, The Stimulative Effect of Redistribution, Hobijn and Nussbacher, Federal Reserve Bank of San Francisco, June 29, Wells Fargo Investment Institute. All rights reserved. Page 2 of 5

3 Chart 2. U.S. savings rate has room to decline allowing for higher spending 14 Percent change, year-over-year Savings rate Personal consumption Sources: Bureau of Economic Analysis, Wells Fargo Investment Institute, October 16, Savings rate is the share of savings as a percent of disposable personal income (income after consumption). Personal consumption tracks nominal consumer spending on goods and services. Shaded bars depict recessions. Monthly data is from March 1991 to September Market implications We believe that the consumer, along with solid business investment, will continue to support U.S. economic growth. While we may not see economic growth above 4% again in the near term, it should remain strong enough to keep the economy growing above trend for some time. Household spending at these levels (or higher) is supportive of our favorable view on equities that are expected to perform well in the current economy. These include the Consumer Discretionary, Financials, Industrials, and Health Care sectors. U.S. fixed-income markets likely will continue to be driven primarily by Federal Reserve (Fed) policy. We believe that the Fed likely will raise interest rates once more this year, and continue rate increases at a moderate pace in Wells Fargo Investment Institute. All rights reserved. Page 3 of 5

4 Economic Calendar Date Country Report Estimate Previous 10/23/2018 JN Machine Tool Orders YoY % 10/23/2018 EC Consumer Confidence /23/2018 JN Nikkei Japan PMI Mfg /23/2018 US Richmond Fed Manufact. Index /24/2018 EC Markit Eurozone Manufacturing PMI /24/2018 SK GDP YoY 2.20% 2.80% 10/24/2018 US MBA Mortgage Applications /24/2018 US FHFA House Price Index MoM % 10/24/2018 US Markit US Manufacturing PMI /24/2018 US Markit US Services PMI /24/2018 US New Home Sales k 10/24/2018 US U.S. Federal Reserve Releases Beige Book 10/25/2018 EC ECB Main Refinancing Rate 0.00% 0.00% 10/25/2018 US Advance Goods Trade Balance -- -$75.8b 10/25/2018 US Wholesale Inventories MoM /25/2018 US Durable Goods Orders % 10/25/2018 US Cap Goods Orders Nondef Ex Air % 10/25/2018 US Initial Jobless Claims /25/2018 US Bloomberg Consumer Comfort /25/2018 US Pending Home Sales NSA YoY % 10/25/2018 US Kansas City Fed Manf. Activity /26/2018 FR Consumer Confidence /26/2018 CH Industrial Profits YoY % 10/26/2018 US GDP Annualized QoQ % 10/26/2018 US Personal Consumption % 10/26/2018 US GDP Price Index % 10/26/2018 US Core PCE QoQ % 10/26/2018 US U. of Mich. Sentiment /28/2018 JAPAN Retail Trade YoY % 10/29/2018 ITALY PPI MoM % 10/29/2018 JAPAN Jobless Rate % 10/29/2018 US Personal Income % 10/29/2018 US Personal Spending % 10/29/2018 US PCE Core YoY % 10/29/2018 US PCE Deflator YoY % 10/30/2018 EUROZONE GDP SA QoQ % 10/30/2018 JAPAN Industrial Production MoM /30/2018 CHINA Manufacturing PMI /30/2018 US S&P CoreLogic CS 20-City YoY NSA % 10/30/2018 US Conf. Board Consumer Confidence /30/2018 US Conf. Board Expectations /31/2018 CHINA Caixin China PMI Mfg /31/2018 US MBA Mortgage Applications /31/2018 US ADP Employment Change k 10/31/2018 US Chicago Purchasing Manager Source: Bloomberg as of October 19, Wells Fargo Investment Institute. All rights reserved. Page 4 of 5

5 Risk Considerations Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. Risks associated with the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players; reduction in traditional advertising dollars, increasing household debt levels that could limit consumer appetite for discretionary purchases, declining consumer acceptance of new product introductions, and geopolitical uncertainty that could affect consumer sentiment. Investing in the Financial services companies will subject a investment to adverse economic or regulatory occurrences affecting the sector. Some of the risks associated with investment in the Health Care sector include competition on branded products, sales erosion due to cheaper alternatives, research and development risk, government regulations and government approval of products anticipated to enter the market. There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio s performance. General Disclosures Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. The information in this report was prepared by Global Investment Strategy. Opinions represent GIS opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR Wells Fargo Investment Institute. All rights reserved. Page 5 of 5