30120 WCOB BusinessForecast2015 bk (2)
Transcript of 30120 WCOB BusinessForecast2015 bk (2)
Business ForecastPresented by: Center for Business and Economic Research
AEP SWEPCOCharles Schwab & Company
City of Fort SmithFriday, Eldredge and Clark
HoganTaylor LLPJ. B. Hunt Transport Services, Inc.
McKee Foods Corporat ionRegions Bank
City of West MemphisWright, L indsey & Jennings LLP
Center for Retai l ing Excel lenceGreenwood Gearhart Inc.
Walmart /Sam’s Club
Walton Business Partners
Walton Academic Partners
Walton Presenting Partners
SPONSORS
Walton Corporate PartnersFrost, PLCC
Reece Moore Pendergraft LLPSmith Hurst PLC
Tyson Foods, Inc.
Walton Media PartnersArkansas Money & Pol i t ics
Northwest Arkansas Democrat GazetteTalk Business & Pol i t ics
Business Forecast 2015Friday, January 30, 201511:30 a.m. 1:30 p.m.Schedule of Events
Welcome and Special Remarks Eli Jones, DeanSam M. Walton College of Business, University of Arkansas
2014 Contest Awards Kathy Deck, DirectorCenter for Business and Economic ResearchSam M. Walton College of Business, University of Arkansas
Introduction of Moderator Eli Jones
Introduction of Panelists John JamesFounderAcumen Brands
Presentations
Global Forecaster Carl TannenbaumChief EconomistNorthern Trust
Domestic Forecaster John SilviaChief EconomistWells Fargo
State and Local Forecaster Kathy Deck
Panel Discussion John James, Carl Tannenbaum, John Silvia, Kathy Deck
Recognitions and Announcements Eli Jones
Business Forecast 2015 is in association with the National Association for Business Economics (NABE).
Please use Twitter hashtag #BF2015 for this event.
John James is the founder of Acumen Brands, an ecommerce company in Fayetteville, Arkansas.Previously he was a family practice physician who, on the last day of his residency, gave up medicinefor the adventure of innovation. James paid for medical school with proceeds from his firstecommerce company, a quiz bowl question business, founded from his dorm room at the Universityof Arkansas in 1995. John has built and sold multiple businesses centered around search enginemarketing, including ventures in keyword arbitrage, multichannel niche retail, and hyperlocal onlinemedia. James is currently the CEO of Acumen Brands, which includes Country Outfitter, with over 10million social followers and email subscribers. His company has raised over $100 million in venturefunding, including an $88 million Series C led by General Atlantic. He holds a B.S. from the Universityof Arkansas and a M.D. from the University of Arkansas for Medical Sciences.
Carl Tannenbaum is the chief economist for Northern Trust. Prior to joining Northern Trust, Carl leda team at the Federal Reserve Bank of Chicago whose charter was to analyze financial risk, itsimplication for the broad economy and policy choices to address it. He served as the head of theentire Federal Reserve System's risk group in Washington for a year, working closely with FederalReserve SystemGovernors and senior officials. Preceding his work at the Federal Reserve, Carl servedas chief economist and head of balance sheet management at LaSalle Bank/ABN AMRO, where heworked for 24 years. He received a bachelor's degree in finance and economics and a Masters ofBusiness Administration degree from the University of Chicago. He is a past chairman of theConference of Business Economists and also a past president of the National Association for BusinessEconomics and the North American Asset/Liability Management Association.
John Silvia is managing director and chief economist for Wells Fargo. Previously, he was a senioreconomist for the U.S. Senate Joint Economic Committee and chief economist for the U.S. SenateBanking, Housing and Urban Affairs Committee. Prior to that, he was chief economist of KemperFunds andmanaging director of Scudder Kemper Investments, Inc. Silvia is on several Bloomberg BestForecast lists, is chair for the Economic Advisory Committee of the Securities Industry and FinancialMarkets Association, serves on the Blue Chip Panel of Economic Forecasters for the Federal ReserveBank of Philadelphia, the Economic Advisory Roundtable, and the finance committee for the MintMuseum in Charlotte, N.C. He is the author of "Dynamic Economic Decision Making" and "Economic& Business Forecasting." He has served as president of the Charlotte Economics Club and on advisorycommittees to the Federal Reserve Bank of Cleveland, the Federal Reserve Bank of Chicago, and thePublic Securities Association. Currently, he serves on the President’s Council for Charlotte’s CentralPiedmont Community College. Silvia holds B.A. and Ph.D. in economics from Northeastern Universityand a M.S. in economics from Brown University.
Kathy Deck is the director of the Center for Business and Economic Research in the Sam M. WaltonCollege of Business at the University of Arkansas. Her research interests include local economicdevelopment, industry market structure, and education and health care economics. Deck also acts asa media resource for economic analysis of current events and trends. She was named Communicatorof the Year in 2009 by the Northwest Arkansas Public Relations Society of America, was recognizedas one of the 40 under 40 by Arkansas Business and the Northwest Arkansas Business Journal, andnamed aWoman of Influence by Arkansas Business. Before joining the Center, Deck was the antitrusteconomist for the Arizona Attorney General. Deck earned a B.A. in economics from the College ofWilliam and Mary and a M.S. in economics from the University of Wisconsin Madison.
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2 Northern Trust Global Economic Research
Themes
Global economic growth has been good, but unevenWill the leaders pull everyone forward, or be drawn back to the pack?
Energy price realignment will be a mixed blessingConsumers will benefit but there is potential for instability amongproducers
Diverging fortunes create anxiety within and betweennations
Politics and economics have gotten more complicated
Central bankers have a challenging set of objectivesMonetary policy remains in uncharted territory
3 Northern Trust Global Economic Research
Carrying the Freight
4 Northern Trust Global Economic Research
United Kingdom
3%
4%
5%
6%
7%
8%
9%
2006 2008 2010 2012 2014
UK Unemployment
Solid growth and falling unemploymentNo exit yet from central bank
Source: Haver Analytics
7%6%5%4%3%2%1%0%1%2%3%4%
2009 2010 2011 2012 2013 2014
YOYCh
ange
UK GDP Growth
5 Northern Trust Global Economic Research
The De Leveraging Process
60%
80%
100%
120%
140%
160%
180%
2002 2005 2008 2011
Household Debt/Income Ratio
US Eurozone UK Canada
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
US UK Euro Canada
Year
over
Year
Chan
ge
Real Consumer Spending
Deleveraging is well along in some places, not othersA key driver of consumption
Sources: Haver Analytics, Bloomberg
6 Northern Trust Global Economic Research
China: Growth Issues?
4%
6%
8%
10%
12%
14%
16%
2006 2008 2010 2012 2014
Year
over
Year
Chan
ge
China: Real GDP Growth
40%
20%
0%
20%
40%
60%
80%
100%
2008 2010 2012 2014Year
over
Year
Chan
ge
China: Residential Real Estate
Starts Values
A challenging transition to sustainable growthControlling credit without creating a crash
Sources: Haver Analytics/China Index Academy/Sofun
7 Northern Trust Global Economic Research
Slowing Progress
8 Northern Trust Global Economic Research
The Eurozone’s Malaise
1.0%
0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Germany France Italy SpainPe
rcen
tcha
nge,QoQ
annu
alized
rate
Real Gross Domestic Product(2014:Q3)
Eurozone growth is very soft, and uneven
Source: Haver Analytics
Eurozone
Average
6%
5%
4%
3%
2%
1%
0%
1%
2%
3%
4%
2009 2011 2013
YOYPercen
tCha
nge
Eurozone GDP Growth
9 Northern Trust Global Economic Research
Eurozone Challenges
4%
2%
0%
2%
4%
6%
8%
10%
12%
14%
2000 2002 2005 2007 2010 2012
Percen
tcha
nge,Ye
arto
year
Eurozone: Lending to the Private Sector
Deepening disinflationPoor bank health restricts credit
Source: Haver Analytics
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2011 2012 2013 2014
Percen
tcha
nge,year
over
year
Eurozone Inflation Trends
10 Northern Trust Global Economic Research
Japan: Challenges
Back into recession after sales tax increaseInflation is finally positive
15
10
5
0
5
10
15
2010 2011 2012 2013 2014
Percen
tcha
nge,an
nualized
rate
Japan: Real GDP Growth
1.51.00.50.00.51.01.52.02.53.03.54.0
2010 2011 2012 2013 2014Pe
rcen
tcha
nge,year
toyear
Japan: Consumer Price Index
Source: Haver Analytics
11 Northern Trust Global Economic Research
Fuel for the Fire
12 Northern Trust Global Economic Research
Energy Realignment
25
50
75
100
125
Jan 14 Apr 14 Jul 14 Oct 14 Jan 15
WestT
exas
Interm
ediate,$
perb
arrel
Price of Crude Oil
A stunning declineFlagging Chinese demand is among the root causes
Source: Haver Analytics
0
5
10
15
20
25
30
35
40
45
2008 2009 2010 2011 2012 2013 2014
Percen
tcha
nge,year
over
year
China: Slowing Activity
Retail Sales
Industrial Production
13 Northern Trust Global Economic Research
The Supply Side
OPEC: not your father’s cartel
Monies needed to combat insurgents, placate thepopulace
Internal dissonance
Punitive impulses
Russia is among those under the most pressure
Competitive strategy
Are traditional producers tying to push new producersbelow breakeven?
14 Northern Trust Global Economic Research
Consequences
ConsumersU.S. fares especially well
ImportersJapan, India, eurozone
Some manufacturersOutside of energyproduction
FrackersHigher breakeven costs
RussiaOverreliance on energy
Peripheral producersVenezuela, Nigeria, Iran,etc.
Winners Losers
15 Northern Trust Global Economic Research
Domino Effects
Strain on some corporate borrowers in emerging marketsBreakeven prices have two dimensions
Sources: BIS, The Economist
25%
30%
35%
40%
45%
50%
2006 2008 2010 2012
Shareof
TotalB
orrowing
U.S. Dollar Credit to NonbanksOutside of the U.S.
16 Northern Trust Global Economic Research
Not on the Same Track
17 Northern Trust Global Economic Research
Global Economic Ties
10%
15%
20%
25%
30%
35%
1980 1985 1990 1995 2000 2005 2010
Shareof
WorldGD
P
World Exports
0%
5%
10%
15%
20%
25%
30%
35%
1980 1985 1990 1995 2000 2005 2010
Shareof
WorldGD
P
Outward Foreign DirectInvestment
Trade and capital flows have expanded substantially inthe last generation
Sources: International Monetary Fund, United Nations
18 Northern Trust Global Economic Research
Economics and Social Stability
0
5
10
15
20
25
30
1910 1930 1950 1970 1990 2010
Percen
t
Top 1% Share of Income: AdvancedEconomies
Australia CanadaUnited Kingdom United States
Globalization has leveled income across countries, but exaggeratedinequality within countriesA rising sense of disenfranchisement
Sources: http://topincomes.g mond.parisschoolofeconomics.eu/, OECD
0%
10%
20%
30%
40%
50%
60%
US UK CAN GER ESP
Youth Unemployment
19 Northern Trust Global Economic Research
Backlash Ahead?
Income inequality and high unemploymentcreate discontent
Does the system work for me?
Populist politicians are quick to capitalize
Anti market, anti trade, anti immigrant
Redistributive policies can diminish growth
Companies can move to a friendlier haven
20 Northern Trust Global Economic Research
The Engineers
21 Northern Trust Global Economic Research
Zhou XiaochuanPeoples Bank of China
Raghuram RajanReserve Bank of India
Haruhiko KurodaBank of Japan
Janet YellenFederal Reserve
Mario DraghiEuropean Central Bank
Mark CarneyBank of England
22 Northern Trust Global Economic Research
The Course of Central Banking
Cheap liquidity to promote growthDifferent markets in different phases
Sources: Federal Reserve, ECB, BOC, BOE, Bloomberg, Haver Analytics
0
1
2
3
4
5
6
7
2006 2008 2010 2012 2014
Percen
t
Central Bank Policy Rates
U.K. U.S. Euro Japan
50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
2007 2008 2009 2010 2011 2012 2013 2014
Percen
tofG
DP
Central Bank Assets: Increase Since 2007
ECB BOJ BOE Fed
23 Northern Trust Global Economic Research
Inflation Issues
Well below targeted levelsGlobal capacity exerts downward pressure
Sources: Bloomberg, Haver Analytics
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
CPI PCE Deflator
Percen
tcha
nge,year
over
year
U.S. Inflation
Overall Core
0
1
2
3
4
5
6
2011 2012 2013 2014
Percen
tcha
nge,year
over
year
Global Inflation Trends
Eurozone US UK
24 Northern Trust Global Economic Research
Parting Thoughts
The global outlook remains positive
Forward readings are encouraging
Performance will continue to be somewhatuneven
Some regions and sectors are further along
Risks to the outlook are varied
Geopolitics tops the list
For all of today’s challenges, we’ve come a longway
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University of Arkansas 2
Where Are We Now?
Source:
Five benchmarks for good decision making
Inflation InterestRates
Growth
Profits The Dollar
University of Arkansas 3
Expectations for the Future
Wells Fargo vs. Consensus
How do we differ from consensus?
Sustained-trend growth
Employment—cyclical and structural change
Still cautious on consumer segments
Housing improving—multifamily especially
State and local governments—still restructuring
Unsustainable long-run fiscal policy
Europe weak growth path
China growth sub 7 percent
University of Arkansas 4
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2000 2002 2004 2006 2008 2010 2012 2014 2016
U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change
GDP - CAGR: Q3 @ 5.0%GDP - Yr/Yr Percent Change: Q3 @ 2.7%
Forecast
Upswing 2H 2014: One-off or Sustained?
Following a poor start to the year, GDP growth has
rebounded smartly. Solid growth prospects in the year
ahead.
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
University of Arkansas 5
25
30
35
40
45
50
55
60
65
25
30
35
40
45
50
55
60
65
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
ISM Manufacturing & Non-Manufacturing Composite Index
ISM Non-Manufacturing Index SA: Dec @ 56.2
ISM Manufacturing Index SA: Dec @ 55.5
Manufacturing & Services
Indexes on business activity suggest an improving near-term
outlook
Source: Institute for Supply Management and Wells Fargo Securities, LLC
University of Arkansas 6
70
75
80
85
90
95
100
105
110
115
-60
-40
-20
0
20
40
60
80
100
120
04 05 06 07 08 09 10 11 12 13 14
Wells Fargo Small Business Survey & NFIBOverall Situation, NFIB Small Business Optimism 1986=100
Wells Fargo Overall Situation: Q4 @ 58.0 (Left Axis)
Small Business Optimism: Q4 @ 98.2 (Right Axis)
Small Businesses
Small Businesses:A full recovery in small business
optimism is still distant, taxes and regulation the two big issues
Source: National Federation of Independent Businesses, Gallup, Wells Fargo Bank and Wells Fargo Securities, LLC
University of Arkansas 7
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2000 2002 2004 2006 2008 2010 2012 2014 2016
Real Personal Consumption ExpendituresBars = CAGR Line = Yr/Yr Percent Change
PCE - CAGR: Q3 @ 3.2%PCE - Yr/Yr Percent Change: Q3 @ 2.7%
Forecast
Consumer Spending
Faster job growth, asset appreciation and more access to
credit are supportive to the consumer spending outlook
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
University of Arkansas 8
0
10
20
30
40
50
60
70
80
0
10
20
30
40
50
60
70
80
2005 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Bloomberg Consumer Comfort by Income12-Week Moving Average
Income Between $25K and $39.9K: Jan-04 @ 34.6Income Between $50K and $74.9K: Jan-04 @ 46.4Income Between $75K and $99.9K: Jan-04 @ 50.9Income Over $100K: Jan-04 @ 63.7
Consumer Confidence: By Income Group
Confidence improves with income, but remains historically
low across all income ranges
Source: Bloomberg LP and Wells Fargo Securities, LLC
University of Arkansas 9
Auto Lending
There has been an increase in auto sales to sub and near-prime
buyers
Source: CNW Research and Wells Fargo Securities, LLC
University of Arkansas 10
Auto Lending
The rise in sub-prime auto sales has been most prevalent in the
used auto sales market
Source: CNW Research and Wells Fargo Securities, LLC
University of Arkansas 11
0%
50%
100%
150%
200%
250%
0%
50%
100%
150%
200%
250%
Lowest 20percent
Second 20percent
Third 20percent
Fourth 20percent
Highest 20percent
Income Growth by QuintilePercent Change from 1984 to 2012, After-Tax Income
Income Growth: Rising at Different Rates
After-tax nominal income has increased the most for the lowest and highest income
households since the mid-1980s
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
University of Arkansas 12
-3.4%
1.2%
3.5%
5.6%4.7%
-6%
-4%
-2%
0%
2%
4%
6%
8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Lowest 20percent
Second 20percent
Third 20percent
Fourth 20percent
Highest 20percent
Income Growth by QuintilePercent Change in Nominal After-Tax Income 2007-2012
Income Growth: Rising at Different Rates
Since 2007, income growth has been clearly concentrated in the
upper quintiles
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
University of Arkansas 13
Inflation & Interest Rates
Inflation InterestRates
Growth
Profits The Dollar
CoreInflation
MonetaryPolicy
YieldCurve
Real Interest Rates
Wage-PriceSpiral
MarketExpectations
Key Drivers
University of Arkansas 1414
-2%
-1%
0%
1%
2%
3%
4%
5%
-2%
-1%
0%
1%
2%
3%
4%
5%
92 94 96 98 00 02 04 06 08 10 12 14
PCE Deflator vs. Core PCE DeflatorYear-over-Year Percent Change
PCE Deflator: Nov @ 1.2%"Core" PCE Deflator: Nov @ 1.4%
Inflation: Rising – Not Low
Inflation remains historically low, but has picked up as growth
accelerates and excess slack lessens
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
University of Arkansas 15
Inflation
Services continue to underpin overall inflation, led by rising shelter costs as the housing market has recovered. Between 2008 and 2013, total prices are up 8.2 percent vs. 16.8 percent
for medical care.
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
92 94 96 98 00 02 04 06 08 10 12 14
U.S. "Core" CPI - Services vs. Goods Year-over-Year Percent Change
Core Services CPI: Dec @ 2.4%Core Goods CPI: Dec @ -0.8%
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Shelter CostsServices vs. Goods
-1%
0%
1%
2%
3%
4%
5%
6%
7%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
88 90 92 94 96 98 00 02 04 06 08 10 12 14
Shelter, OER & Rent CostsYear-over-Year Percent Change
Shelter: Dec @ 2.9%Rent: Dec @ 3.4%OER: Dec @ 2.6%
University of Arkansas 16
Yield Curve: Rates Rise Without Fed
The Fed will begin to raise the funds rate in mid-2015
Source: Bloomberg LP and Wells Fargo Securities, LLC
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Yield CurveU.S. Treasuries, Active Issues
January 12, 2015December 15, 2014January 13, 2014
University of Arkansas 17
-30%
-20%
-10%
0%
10%
20%
30%
40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
90 92 94 96 98 00 02 04 06 08 10 12 14
Commercial and Industrial LoansAt Commercial Banks in the United States
Year-over-Year Change: Dec @ 13.2%3-Month Annualized Rate: Dec @ 12.0%
Business Lending
Commercial and industrial lending has surged over the past quarter, helped by easier credit
and increased demand
Source: Federal Reserve Board and Wells Fargo Securities, LLC
University of Arkansas 18
0%
2%
4%
6%
8%
10%
12%
14%
0%
2%
4%
6%
8%
10%
12%
14%
47 51 55 59 63 67 71 75 79 83 87 91 95 99 03 07 11
Corporate ProfitsAs a Percent of GDP
Rest of World: Q3 @ 2.3%Domestic: Q3 @ 10.0%
NAFTA
ChinaJoins WTO
Corporate Profits: Increasing Role of Global Profits
Profits as a percentage of GDP are historically high and are
being boosted by profits earned abroad post NAFTA
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
University of Arkansas 19
U.S. Companies listed in the S&P 500 with Greater Than 50 Percent of Sales Abroad
(A Sample)
Corporate Profits from Abroad
Many U.S. companies rely on the health of international
economies
Goodyear TireBorgWarnerPriceline.comNikeCoca-ColaHeinzProctor & GambleAvonExxon MobilAFLACIntelApplied MaterialsOracleJohnson & Johnson
MerckBoeingEaton Corp.Emerson ElectricFluorGE3MCaterpillarCiscoQualcommAppleeBayIBMSymantec
University of Arkansas 20
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
After-Tax Corporate Profit GrowthYear-over-Year Percent Change, 2-Year Moving Average
After-Tax Profits: Q3 @ 5.3%
Corporate Profit Growth
Corporate profit growth remains firm—typical mid-cycle
slowdown
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
University of Arkansas 21
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
2,500
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
2,500
66 70 74 78 82 86 90 94 98 02 06 10
U.S. Homeowners vs. RentersAnnual Change in Occupied Units, In Thousands
Renters: 2013 @ 525.5 ThousandHomeowners: 2013 @ -76.5 Thousand
Series Break 1981
Housing: Emergence of Renters as Occupants
The number of renters has been accelerating steadily since 2007,
while homeowners have been declining
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
University of Arkansas 22
Commercial Real Estate: Divergence
Apartments have seen the greatest improvement in operating fundamentals but are also seeing intense new development. The industrial market has also improved quite significantly.
-75
-50
-25
0
25
50
75
100
2%
3%
4%
5%
6%
7%
8%
9%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Apartment Supply & DemandPercent, Thousands of Units
Apartment Net Completions: Q3 @ 47,293 Units (Right Axis)Apartment Net Absorption: Q3 @ 37,691 Units (Right Axis)Apartment Vacancy Rate: Q3 @ 4.2% (Left Axis)
Source: Reis, Inc., PPR, U.S. Department of Commerce and Wells Fargo Securities, LLC
Industrial Supply & DemandApartment Supply & Demand
-80
-60
-40
-20
0
20
40
60
80
4%
5%
6%
7%
8%
9%
10%
11%
12%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Industrial Supply & DemandPercent, Millions of Square Feet
Industrial Net Completions: Q3 @ 22.6M SF (Right Axis)Industrial Net Absorption: Q3 @ 34.6M SF (Right Axis)Industrial Vacancy Rate: Q3 @ 7.0% (Left Axis)
University of Arkansas 23
Commercial Real Estate
Office and retail commercial real estate have not seen the same type of improvement as apartments and industrial space, as vacancy rates remain somewhat elevated.
-40
-30
-20
-10
0
10
20
30
0%
3%
6%
9%
12%
15%
18%
21%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Office Supply & DemandPercent, Millions of Square Feet
Office Net Completions: Q3 @ 5.8M SF (Right Axis)Office Net Absorption: Q3 @ 8.0M SF (Right Axis)Office Vacancy Rate: Q3 @ 16.8% (Left Axis)
Source: Reis, Inc., PPR, U.S. Department of Commerce and Wells Fargo Securities, LLC
Retail Supply & DemandOffice Supply & Demand
-8
-4
0
4
8
12
16
20
0%
2%
4%
6%
8%
10%
12%
14%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Retail Supply & DemandPercent, Millions of Square Feet
Retail Net Completions: Q3 @ 1.4M SF (Right Axis)Retail Net Absorption: Q3 @ 2.7M SF (Right Axis)Retail Vacancy Rate: Q3 @ 10.3% (Left Axis)
University of Arkansas 24
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
$5.0
$5.5
2007 2008 2009 2010 2011 2012 2013 2014 2015
Federal Reserve Balance Sheet vs. S&P 500 Index Trillions, Index
Agencies & MBS: Jan @ $1,775.5B (Left Axis)Treasuries: Jan @ $2,461.3B (Left Axis)Other Securities: Jan @ $222.3B (Left Axis)S&P 500 Index: Jan @ 2,033.9 (Right Axis)
Fed Balance Sheet: Challenge to Asset Values
We have seen a strong correlation in the expansion of the Fed’s balance sheet and the
rise in the S&P 500
Source: Federal Reserve Board and Wells Fargo Securities, LLC
University of Arkansas 2525
Federal Government Spending: Entitlements in the Driver’s Seat
The unfunded liabilities of the entitlement programs reflect a commitment to spend in the
future
Source: Congressional Budget Office and Wells Fargo Securities, LLC
$0.0T
$0.5T
$1.0T
$1.5T
$2.0T
$2.5T
$3.0T
$3.5T
$4.0T
$0.0T
$0.5T
$1.0T
$1.5T
$2.0T
$2.5T
$3.0T
$3.5T
$4.0T
2013 2015 2017 2019 2021 2023
U.S. Federal Government Mandatory OutlaysTrillions of U.S. Dollars, Projections Begin in 2014
Other Programs: 2024 @ $0.2TIncome Security: 2024 @ $0.3TSocial Security: 2024 @ $1.5THealthcare Programs: 2024 @ $1.6T
University of Arkansas 26
50
60
70
80
90
100
110
120
80
90
100
110
120
130
140
150
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
U.S. Trade Weighted Currency IndexesMarch 1973=100
"Other ITP" Index: Jan @ 139.3 (Left Axis)
Major Currency Index: Jan @ 85.8 (Right Axis)
U.S. Trade Weighted Currency Indexes
The dollar has experienced recent strength against both
major and emerging currencies
Source: Federal Reserve Board and Wells Fargo Securities, LLC
University of Arkansas 27
40
60
80
100
120
140
160
180
200
2200.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2.20
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Euro, Pound & Yen Exchange RatesUSD per Euro, USD per Pound Yen per USD
Dollars per Euro: Jan @ 1.18 (Left Axis)Dollars per Pound: Jan @ 1.52 (Left Axis)Yen per Dollar: Jan @ 118.50 (Right Axis, Inverted)
Global Economies: A Stronger Dollar
The dollar has appreciated against the euro, pound and yen
recently.
Source: Bloomberg LP and Wells Fargo Securities, LLC
University of Arkansas 28
0.85
0.95
1.05
1.15
1.25
1.35
1.45
9.50
10.70
11.90
13.10
14.30
15.50
16.70
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dollar Exchange Rates: Canada & MexicoForeign Currency per U.S. Dollar
Mexican Pesos/U.S. Dollar: Jan @ 14.60 (Left Axis)Canadian Dollars/U.S. Dollar: Jan @ 1.19 (Right Axis)
Global Economies: A Stronger Dollar
The Canadian dollar and Mexican peso have both seen
recent depreciation against the U.S. dollar
Source: Bloomberg LP and Wells Fargo Securities, LLC
University of Arkansas 2929
Federal Fiscal Policy
The composition of federal spending has shifted dramatically.The CBO projects that the debt-to-GDP ratio will reach nearly 80 percent by 2024.
Source: Congressional Budget Office and Wells Fargo Securities, LLC
Federal Debt Continues to RiseComposition of Federal Spending
18%
35%
62%
60%
59%
31%
22%
6%
7%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2050
2013
1970
Federal SpendingPercent of Total
Discretionary Mandatory Net Interest
Total Spending 1970: 19 percent of GDP
Total Spending 2013: 21 percent of GDP
Total Spending 2050: 29 percent of GDP
20%
30%
40%
50%
60%
70%
80%
20%
30%
40%
50%
60%
70%
80%
1974 1979 1984 1989 1994 1999 2004 2009 2014 2019 2024
U.S. Debt Held By The PublicCBO Baseline Projections Begin in 2014, Percent of GDP
Baseline Debt: 2024 @ 77.2%
University of Arkansas 30
U.S. Forecast
2012 2013 2014 2015 2016
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Real Gross Domestic Product 1 -2.1 4.6 5.0 3.0 2.7 2.6 2.8 2.9 2.3 2.2 2.4 3.1 2.9Personal Consumption 1.2 2.5 3.2 4.5 3.0 2.7 2.7 2.6 1.8 2.4 2.5 3.1 2.6
Inflation Indicators 2
PCE Deflator 1.1 1.6 1.5 1.1 0.8 0.7 0.9 1.4 1.8 1.2 1.3 1.0 2.0Consumer Price Index 1.4 2.1 1.8 1.2 0.7 0.5 0.8 1.7 2.1 1.5 1.6 0.9 2.4
Industrial Production 1 3.9 5.7 4.0 5.9 4.7 4.9 3.5 3.1 3.8 2.9 4.3 4.7 3.6
Corporate Profits Before Taxes 2 -4.8 0.1 1.4 1.5 3.7 3.6 4.1 4.6 11.4 4.2 -0.4 4.0 5.2
Trade Weighted Dollar Index 3 76.9 75.9 81.3 85.1 86.8 88.0 89.3 90.5 73.5 75.9 78.5 88.6 92.9Unemployment Rate 6.6 6.2 6.1 5.7 5.5 5.4 5.3 5.2 8.1 7.4 6.2 5.4 5.0
Housing Starts 4 0.93 0.99 1.03 1.02 1.06 1.13 1.21 1.24 0.78 0.92 1.00 1.17 1.28
Quarter-End Interest Rates 5
Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.50 0.75 1.00 0.25 0.25 0.25 0.63 2.00Conventional Mortgage Rate 4.34 4.16 4.16 3.86 3.60 3.72 3.87 3.89 3.66 3.98 4.17 3.77 4.5610 Year Note 2.73 2.53 2.52 2.17 1.99 2.21 2.29 2.30 1.80 2.35 2.54 2.20 2.82
Forecast as of: January 14, 20151 Compound Annual Growth Rate Quarter-over-Quarter2 Year-over-Year Percentage Change3 Federal Reserve Major Currency Index, 1973=100 - Quarter End4 Millions of Units5 Annual Numbers Represent Averages
2015ForecastActual Forecast
2014Actual
Wells Fargo U.S. Economic Outlook
Source: U.S. Department of Commerce, U.S. Department of Labor, Federal Reserve Board, Freddie Mac and Wells Fargo Securities, LLC
Appendix
University of Arkansas 32
Recent Special Commentary
Wells Fargo Economics Group Publications
To join any of our research distribution lists please visit our
website: http://www.wellsfargo.com/
economics
Date Title AuthorsU.S. Macro
January-06 Making Sense of Household Formations Vitner & KhanDecember-15 Profits: Understanding Why and How of Cyclical Variation Silvia & IqbalDecember-15 Just Another Final Hour Budget Deal Silvia & BrownDecember-12 What If We Just Need Fewer Jobs? Silvia, Iqbal & House
U.S. Regional
January-05 Pennsylvania 2015 Economic Outlook Vitner, Wolf & MoehringDecember-30 Florida Consumers Getting Better All the Time Vitner & WolfDecember-30 Colorado Economic Outlook: December 2014 Vitner & MoehringDecember-19 California Employment Conditions: November 2014 Vitner & Wolf
Global Econom yJanuary-06 Argentina's Economy Continued to Deteriorate in Q3 2014 AlemánJanuary-02 Real GDP Growth in Singapore Ends Year on Weak Note Bryson
December-22 Which Developing Countries Have External Debt "Issues"? Bryson & NelsonDecember-19 Russian Central Bank Acts to Stop Ruble's Fall Quinlan
Interest Rates/Credit Market
January-07 Are Higher Rates a Liability for Households? Silvia, Vitner & BrownDecember-17 FOMC Patiently Lays Groundwork Bullard & BrownDecember-17 A Look Ahead to 2015: A Flatter Yield Cure, Refinancing Risk Silvia, Vitner & BrownDecember-10 Fed Tightening Cycles and Yield Spreads: Flatter Silvia, Vitner & Brown
Real EstateDecember-23 Nonresidential Construction Recap: December 2014 KhanDecember-17 Housing Chartbook: December 2014 Vitner & KhanDecember-16 Dodge Momentum Index Inches Higher in November KhanDecember-10 Commercial Real Estate Chartbook: Q3 Vitner & Khan
University of Arkansas
Wells Fargo Securities, LLC Economics Group
33
John E. Silvia … ....................... … [email protected]
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Chief Economist
Mark Vitner, Senior Economist……………....………. . [email protected]
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Sam Bullard, Senior Economist [email protected]
Nick Bennenbroek, Currency Strategist ……[email protected]
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Anika R. Khan, Senior Economist … . [email protected]
Senior Economists
Zachary Griffiths, Economic Analyst [email protected]
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Economists
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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 theFinancial 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 reportconstitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the FinancialServices 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, andshould not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposesonly.
Donna LaFleur, Executive Assistant. [email protected]
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$
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Per Capita Personal Income
United States Arkansas Northwest ArkansasSource: Bureau of Economic Analysis
1,080
1,100
1,120
1,140
1,160
1,180
1,200
1,220
1,240
Jan07
Jul0
7
Jan08
Jul0
8
Jan09
Jul0
9
Jan10
Jul1
0
Jan11
Jul1
1
Jan12
Jul1
2
Jan13
Jul1
3
Jan14
Jul1
4
Jan15
Jul1
5
Arkansas Non Farm Employment Forecast
Source: Bureau of Labor Statistics, January 2015 CBER Forecast
Thou
sand
s
Mining, Loggingand Construction
4%Manufacturing
12%
Trade,Transportation and
Utilities21%
Information1%
Financial Activities3%Professional and
Business Services19%
Education andHealth Services
12%
Leisure andHospitality
10%
Other Services3%
Government15%
Northwest Arkansas Employment by Sector November 2014
Source: Bureau of Labor Statistics
1.1%
10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
Trade, Transportation and Utilities
Manufacturing
Information
Non Farm
Other Services
Professional and Business Services
Government
Education and Health Services
Financial Activities
Leisure and Hospitality
Mining, Logging and Construction
Change in Northwest Arkansas MSA Employment by Sector,November 2013 November 2014
Source: Bureau of Labor Statistics, CBER Calculations
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Jan13
Jan14
Unemployment Rates, Not Seasonally Adjusted
United States Arkansas Northwest ArkansasSource: Bureau of Labor Statistics
4.0%
2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Jan13
Jan14
Labor Force, Year Over Year Percent Change
United States Arkansas Northwest ArkansasSource: Bureau of Labor Statistics
155
165
175
185
195
205
215
225
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Jan13
Jan14
Jan15
Northwest Arkansas Employment Forecast
Source: Bureau of Labor Statistics, January 2015 CBER Forecast
Thou
sand
s
Mining and Logging1%
Construction4%
Manufacturing13%
Trade,Transportation and
Utilities20%
Information1%
Financial Activities4%
Professional andBusiness Services
11%
Education andHealth Services
15%
Leisure andHospitality
9%
Other Services4%
Government18%
Arkansas Employment by Sector November 2014
Source: Bureau of Labor Statistics
1.5%
10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
InformationGovernment
Professional and Business ServicesTrade, Transportation and Utilities
Financial ActivitiesOther Services
Non FarmEducation and Health Services
Leisure and HospitalityManufacturing
Mining and LoggingConstruction
Change in Arkansas Employment by SectorNovember 2013 November 2014
Source: Bureau of Labor Statistics, CBER Calculations