Economic Outlook: Cyclical Recovery, Structural Challenges

John E. Silvia, Chief Economist

May 16, 2013

Economic Outlook: Cyclical Recovery, Structural Challenges GIC Central Banking Series: Recovery 2013 – Strength or Stagnation?

Wells Fargo Economics 2

Where Are We Now?

Source:

Five benchmarks for good decision making

Inflation Interest Rates

Growth

Profits The Dollar


Expectations for the Future

Wells Fargo vs. Consensus

How do we differ from consensus?

Sustained below-trend growth

Still cautious on consumer segments

Housing improving—multifamily especially

State and local governments—still restructuring

Employment—cyclical and structural change


-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

U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change

GDP - CAGR: Q1 @ 2.5%

GDP - Yr/Yr Percent Change: Q1 @ 1.8%

Forecast

What We Get Versus What We Expect

Sustained recovery in 2013, but still below historical experience—benchmark 2.75

percent is trend from 1982-2012

Source: U.S. Department of Commerce and Wells Fargo Securities, LLC


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Real Final Sales to Private Domestic Purchasers vs. Government Spending

Final Sales to Private Dom. Purch.: Q1 @ 2.5%

Gov. Consumption & Investment: Q1 @ -2.1%

Both series are Year-over-Year Percent Changes

Private Sector vs. Public Sector

The economy is rebalancing back to private sector demand



70

75

80

85

90

95

100

105

110

115

-60

-40

-20

0

20

40

60

80

100

120

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Wells Fargo Small Business Survey & NFIBOverall Situation, NFIB Small Business Optimism 1986=100

Overall Situation: 1Q 2013 @ 9.0 (Left Axis)

Small Business Optimism: 1Q 2013 @ 89.7 (Right Axis)

Small Businesses

Small Businesses: A full recovery in small business

optimism is still distant

Source: National Federation of Independent Businesses, Gallup, Wells Fargo Bank and Wells Fargo Securities, LLC


30

35

40

45

50

55

60

65

30

35

40

45

50

55

60

65

87 89 91 93 95 97 99 01 03 05 07 09 11 13

ISM Manufacturing Composite IndexDiffusion Index

ISM Manufacturing Index: Apr @ 50.7

12-Month Moving Average: Apr @ 51.4

Manufacturing

Large, Global Businesses: Slowdown in manufacturing

recently after typical recovery

Source: Institute for Supply Management and Wells Fargo Securities, LLC


250

300

350

400

450

500

550

600

650

700

250

300

350

400

450

500

550

600

650

700

86 88 90 92 94 96 98 00 02 04 06 08 10 12

Initial Claims for UnemploymentSeasonally Adjusted, In Thousands

Year-over-Year Percent Change: Apr-27 @ -12.7%

Initial Claims: Apr-27 @ 324.0 Thousand

4-Week Moving Average: Apr-27 @ 342.3 Thousand

52-Week Moving Average: Apr-27 @ 367.6 Thousand

Initial Unemployment Claims: Cyclical

Signaling continued, moderate job gains ahead

Source: U.S. Department of Labor and Wells Fargo Securities, LLC


57

58

59

60

61

62

63

64

65

57

58

59

60

61

62

63

64

65

86 88 90 92 94 96 98 00 02 04 06 08 10 12

Employment-Population Ratio16 Years and Over, Seasonally Adjusted

Employment-Population Ratio: Apr @ 58.6

Employment: Structural

Structural Change: A much lower base to support

growth and spending, especially for entitlements



52%

54%

56%

58%

60%

62%

64%

66%

68%

70%

72%

74%

76%

52%

54%

56%

58%

60%

62%

64%

66%

68%

70%

72%

74%

76%

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Labor Force Participation RateSeasonally Adjusted

Female: Apr @ 57.2%

Male: Apr @ 69.8%

Employment: Participation Rates by Gender

Both men and women have left the labor force—a new path for

women



2%

4%

6%

8%

10%

12%

14%

16%

18%

2%

4%

6%

8%

10%

12%

14%

16%

18%

94 96 98 00 02 04 06 08 10 12

Unemployment RatesSeasonally Adjusted

U-6 Unemployment Rate: Apr @ 13.9%

U-3 Unemployment Rate: Apr @ 7.5%

Employment: Structural

U-3 reverting to 6.37 percent long-run average, but U-6 is not

mean-reverting. Employment growth is mean-reverting at 1.28

percent.



-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

Real Personal Consumption ExpendituresBars = CAGR Line = Yr/Yr Percent Change

PCE - CAGR: Q1 @ 3.2%

PCE - Yr/Yr Percent Change: Q1 @ 2.0%

Forecast

Consumer Spending

Subpar recovery suggests slower consumer spending and lower

state sales tax revenues compared to the past



0%

50%

100%

150%

200%

250%

0%

50%

100%

150%

200%

250%

Lowest 20

percent

Second 20

percent

Third 20

percent

Fourth 20

percent

Highest 20

percent

Income Growth by QuintilePercent Change from 1984 to 2011, After-Tax Income

Income Growth

After-tax income has increased the most for the lowest and highest income households

since the mid-1980s



Proprietors'

Income, 9%

Rental

Income, 3%

Receipts on

Assets, 12%

Transfer

Receipts, 16%

Wage and Salary

Disbursements,

48%

Supplement to

Wages and

Salaries, 12%

Personal Income SourcesMarch 2013

Personal Income

Wages and salaries make up less than half of personal income as transfer payments take on more

responsibility



-60%

-40%

-20%

0%

20%

40%

-60%

-40%

-20%

0%

20%

40%

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Nondefense Capital Goods Orders, Ex-AircraftSeries are 3-Month Moving Averages

3-Month Annual Rate: Mar @ 16.7%

Year-over-Year Percent Change: Mar @ 0.2%

New Orders

Signs of life appeared early in this recovery in capital goods orders—now the slowdown—

fiscal cliff?



0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

U.S. Housing StartsMillions of Units

Forecast

Housing

Continued improvement ahead reflecting multifamily gains



2.50

2.55

2.60

2.65

2.70

2.75

2.80

1,200

1,400

1,600

1,800

2,000

2,200

2,400

80 84 88 92 96 00 04 08 12

Median Home Size vs. Average Household SizeSquare Feet; Number of Persons

Median Square Footage: 2012 @ 2,305 (Left Axis)

Number of Persons per Household: 2012 @ 2.55 (Right Axis)

Housing Demographics

Secular Shift? Households are living in smaller homes with more people since the recession, but longer-term

trends may win out



-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

03 04 05 06 07 08 09 10 11 12 13

Home Price Growth vs. Mortgage RatesPercent

S&P/Case-Shiller 20 Home Price Index, Yr/Yr %: Feb @ 9.32%

5/1 Year ARM: Apr @ 2.55%

CoreLogic Home Price Index, Yr/Yr %: Feb @ 10.23%

Home Prices

Home prices are rising faster than mortgage interest rates

Source: S&P/Case-Shiller, CoreLogic, Bloomberg LP and Wells Fargo Securities, LLC


17.8

18.3

18.9

19.3

20.0

20.1

21.0

23.4

23.5

25.0

25.2

28.4

31.9

33.8

34.9

40.2

52.4

21.5

0% 10% 20% 30% 40% 50% 60%

Washington

Alabama

Oregon

Virginia

New Jersey

New Hampshire

Idaho

Rhode Island

Maryland

Ohio

California

Illinois

Michigan

Georgia

Arizona

Florida

Nevada

US

Negative Equity Mortgages - By StatePercent of Mortgages Outstanding

As of Q4 2012

Housing

Negative equity in homes has contributed to foreclosures and

reduced labor mobility

Source: CoreLogic and Wells Fargo Securities, LLC


0%

4%

8%

12%

16%

20%

24%

0%

4%

8%

12%

16%

20%

24%

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Commercial Real Estate Vacancy RatesPercent

Office Vacancy Rate: Q1 @ 17.0%

Industrial Vacancy Rate: Q1 @ 8.2%

Retail Vacancy Rate: Q1 @ 10.6%

Apartment Vacancy Rate: Q1 @ 4.3%

Commercial Real Estate

The recovery has been uneven across property types

Source: Reis, Inc., PPR and Wells Fargo Securities, LLC


Commercial Real Estate

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%

05 06 07 08 09 10 11 12 13

Apartment Supply & DemandPercent, Thousands of Units

Apartment Net Completions: Q1 @ 15,266 Units (Right Axis)

Apartment Net Absorption: Q1 @ 36,847 Units (Right Axis)

Apartment Vacancy Rate: Q1 @ 4.3% (Left Axis)

Source: Reis, Inc., U.S. Department of Commerce and Wells Fargo Securities, LLC

Industrial Supply & Demand Apartment Supply & Demand

-80

-60

-40

-20

0

20

40

60

0%

2%

4%

6%

8%

10%

12%

14%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Industrial Supply & DemandPercent, Millions of Square Feet

Industrial Net Completions: Q1 @ 5.8M SF (Right Axis)

Industrial Net Absorption: Q1 @ 24.6M SF (Right Axis)

Industrial Vacancy Rate: Q1 @ 8.2% (Left Axis)


Inflation & Interest Rates

Inflation Interest Rates

Growth

Profits The Dollar

Core Inflation

Monetary Policy

Yield Curve

Real Interest Rates

Wage-Price Spiral

Market Expectations

Key Drivers


-12%

-9%

-6%

-3%

0%

3%

6%

9%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

92 94 96 98 00 02 04 06 08 10 12

U.S. Consumer Price IndexBoth Series are 3-Month Moving Averages

CPI 3-Month Annual Rate: Mar @ 1.4%

CPI Year-over-Year: Mar @ 1.7%

Inflation: Persistent at Low Rates

Consumer price growth should not pose a barrier to easier

Federal Reserve policy in 2013



-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2008 2009 2010 2011 2012 2013

TIPS Inflation Compensation5-Year and 5-Year Forward

5-Year: Apr-30 @ 2.10%

5-Year 5 Years Ahead: Apr-30 @ 2.64%

Inflation Expectations

Inflation expectations have been rising

Source: Federal Reserve Board and Wells Fargo Securities, LLC


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1996 1998 2000 2002 2004 2006 2008 2010 2012

Inflation and the Real YieldPercent

5-Year Treasury Note Yield: Apr @ 0.7%

Median Inflation Expect. for 5-10 Yrs: Apr @ 2.8%

1996-2009 Average Median Inflation Expectation for 5-10 Years: 2.9%

Inflation vs. Yields: Negative Real Yields – Three Non-market Buyers

Inflation expectations exceed nominal returns

Source: Federal Reserve Board, University of Michigan and Wells Fargo Securities, LLC


0

100

200

300

400

500

600

700

0

100

200

300

400

500

600

700

1996 1998 2000 2002 2004 2006 2008 2010 2012

Aaa and Baa Corporate Bond SpreadsOver 10-Year Treasury, Basis Points

Baa Spread: Apr @ 283 Bps

Aaa Spread: Apr @ 197 Bps

Corporate Spreads: Positive for Issuance

Spreads have returned to a more normal level; bond issuance is

strong



-400

-300

-200

-100

0

100

200

300

400

500

600

-400

-300

-200

-100

0

100

200

300

400

500

600

90 92 94 96 98 00 02 04 06 08 10 12

Baa Corporate Yield Over S&P Index EarningsMoody's Baa Corporate Yield Minus S&P Index Earnings Yield

Corporate - Earnings: May @ -181.9 bps

Corporate Spreads

Recent inversion in the ratio between bond yields and equity

earnings

Source: Moody’s Analytics, S&P and Wells Fargo Securities, LLC


$0

$3

$6

$9

$12

$15

$18

$21

$24

$27

$30

$0

$3

$6

$9

$12

$15

$18

$21

$24

$27

$30

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Investment Grade Corporate Issuance3-Month Moving Average, Billions of USD

Investment Grade Corporate: May @ $23.7 Billion

Investment Grade Corporate Bonds

Businesses are taking advantage of low interest rates

Source: IFR Markets and Wells Fargo Securities, LLC


$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

04 05 06 07 08 09 10 11 12 13

High Yield Corporate Issuance3-Month Moving Average, Billions of USD

High Yield Corporate Issuance: Apr @ $26.9 Billion

High Yield Corporate Bonds

As investors search for yield among exceptionally low

interest rates, bond issuance has gained momentum

Source: IFR Markets and Wells Fargo Securities, LLC


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

87 89 91 93 95 97 99 01 03 05 07 09 11 13

Delinquency RatesLoans at All Commercial U.S. Banks

Consumer Loans: Q4 @ 2.62%

Real Estate Loans: Q4 @ 7.57%

C&I Loans: Q4 @ 1.16%

Credit: Changing Relationships

Delinquencies of real estate loans are significantly different from consumer and C&I loans



0%

1%

2%

3%

4%

5%

6%

7%

0%

1%

2%

3%

4%

5%

6%

7%

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

Charge-Off RatesLoans at All Commercial U.S. Banks

Consumer Loans: Q4 @ 2.50%

Real Estate Loans: Q4 @ 0.83%

C&I Loans: Q4 @ 0.31%

Credit: Changing Relationships

Patterns in charge-off rates have also changed



65%

70%

75%

80%

85%

90%

95%

100%

105%

110%

65%

70%

75%

80%

85%

90%

95%

100%

105%

110%

1985 1989 1993 1997 2001 2005 2009 2013

Loan-to-Deposit RatioAt Commercial Banks in the United States

Loans-to-Deposit Ratio: Mar @ 77.9%

Bank Lending: Money Multiplier

Banks are no longer turning over deposits into loans at the

previous pace



Credit

Business credit is poised to grow as standards are relaxed

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

92 94 96 98 00 02 04 06 08 10 12

Net Percentage of Banks Tightening StandardsCommercial and Industrial Loans

C&I Loans to Large & Medium Firms: Q1 @ -7.4%

C&I Loans to Small Firms: Q1 @ -7.7%


Demand Standards

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

92 94 96 98 00 02 04 06 08 10 12

Net Percent of Banks Reporting Stronger DemandCommercial and Industrial Loans

Demand for C&I Loans to Large & Medium Firms: Q1 @ 19.1%

Demand for C&I Loans to Small Firms: Q1 @ 15.4%


$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Commercial & Industrial Loans by Bank TypeBillions of U.S. Dollars

Foreign Banks: Mar @ $254.1 B

Small Domestic Banks: Mar @ $436.5 B

Large Domestic Banks: Mar @ $850.5 B

Business Lending

Banks of all types are integral to business lending



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: Q4 @ 2.9%

Domestic: Q4 @ 9.8%

Corporate Profits: Increasing Role of Global Profits

Profits as a percentage of GDP are historically high and are

being boosted by profits earned abroad



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 Tire

BorgWarner

Priceline.com

Nike

Coca-Cola

Heinz

Proctor & Gamble

Avon

Exxon Mobil

AFLAC

Intel

Applied Materials

Oracle

Johnson & Johnson

Merck

Boeing

Eaton Corp.

Emerson Electric

Fluor

GE

3M

Caterpillar

Cisco

Qualcomm

Apple

eBay

IBM

Symantec


0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Non-fin. Corporate Business: Corporate Interest As a Percentage of Pre-Tax Profits

Corporate Interest: Q4 @ 20.2%

Interest Expense: Under Control

Corporate interest expenses are declining amid the low-rate

environment



4%

6%

8%

10%

12%

14%

16%

4%

6%

8%

10%

12%

14%

16%

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Corporate ProftsPercent of GDP

Corporate Profits: Q4 @ 14.3%

Long-run Average (1982-2012): 10.85%

Corporate Profits

Corporate profits are at a record share of GDP, however, it may

be temporary



$0

$200

$400

$600

$800

$1,000

$1,200

$0

$200

$400

$600

$800

$1,000

$1,200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Domestic ProfitsFinancial and NonFinancial Corporations, Billions of Dollars

NonFinancial Corporations: Q4 @ $1,106.8B

Financial Institutions: Q4 @ $453.8B

Corporate Profits: Domestic Profits

Financial institutions have struggled to see profits rise after

the recession



-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

2000 2002 2004 2006 2008 2010 2012 2014

Federal Budget BalancePercentage of GDP

Budget Balance: Q1 @ -5.8%

Forecast

Fiscal Policy: Difficult Choices/Chronic Imbalance

The nation has entered uncharted waters in fiscal policy—no balance at 2.75

percent GDP growth

Source: U.S. Department of Commerce, U.S. Department of the Treasury and Wells Fargo Securities, LLC

Wells Fargo Economics 41 41

Federal Debt Held by the Public: Unsustainable

Federal debt held by the public will likely remain near 80

percent

Source: Congressional Budget Office and Wells Fargo Securities, LLC

0%

20%

40%

60%

80%

100%

120%

140%

0%

20%

40%

60%

80%

100%

120%

140%

40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 20

Federal Debt Held by the PublicPercentage of GDP, CBO Projection

Federal Debt Held by the Public: 2023 @ 77.0% Projected


Federal Government Spending

The unfunded liabilities of the entitlement programs reflect a commitment to spend in the

future


$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

2012 2014 2016 2018 2020 2022

U.S. Federal Government Mandatory OutlaysTrillions of U.S. Dollars, Projections Begin in 2013

Other Programs: 2023 @ $0.3T

Income Security: 2023 @ $0.3T

Social Security: 2023 @ $1.4T

Healthcare Programs: 2023 @ $1.6T


Long-term Real GDP Expectations

Different expectations for future economic growth


0%

1%

2%

3%

4%

5%

0%

1%

2%

3%

4%

5%

2013 2014 2015-2018 2019-2023

Real GDP Growth EstimatesComparison to CBO Assumptions, Year-over-Year Percent Change

CBO Forecast

WF Economics Forecast

Blue Chip Consensus


$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

Japan China U.K. OPEC Taiwan Caribbean

Top Holders of U.S. TreasuriesBillions of Dollars

Feb-11

Feb-12

Feb-13

U.S. Government Debt: Who Holds Our Debt?

Japan and China hold an unprecedented amount of U.S.

debt

Source: U.S. Department of the Treasury and Wells Fargo Securities, LLC


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1996 1998 2000 2002 2004 2006 2008 2010 2012

Real Government Consumption & InvestmentBars = CAGR Line = Yr/Yr % Change

Government Consumption & Investment: Q1 @ -4.1%

Government Consumption & Investment: Q1 @ -2.1%

Fiscal Policy: Restructuring Continues

The government sector continues to be a drag on GDP as state and local governments

restructure



9.2%

7.3%

7.2%

6.9%

6.2%

4.2%

4.1%

3.9%

2.9%

2.1%

2.0%

1.0%

0.7%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

China

India

Singapore

Turkey

Indonesia

Korea

Russia

Brazil

South Africa

United States

Japan

Euro area

United Kingdom

GDP Growth Post-Recession Average Annual Percent Change for 2010-2012

Global Growth

The global recovery is being driven by emerging markets

Source: International Monetary Fund and Wells Fargo Securities, LLC


1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

10-Year Government Bond YieldsPercent

Italy: May 02 @ 3.8%

Spain: May 02 @ 4.1%

United States: May 02 @ 1.6%

Germany: May 02 @ 1.1%

Eurozone Financial Markets: Structural Break in Risk Assessments

Tensions in European financial markets have subsided, at least

for now

Source: IHS Global Insight and Wells Fargo Securities, LLC


70

80

90

100

110

120

130

70

80

90

100

110

120

130

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

U.S. Dollar IndexBroad Index

U.S. Dollar Broad Index: Q1 @ 84.8

Long-run Average (1982-2012): 96.99

Global Economies: A Strong Dollar Policy?

Economic fundamentals and risks abroad will drive the dollar



Potential Challenges to the Outlook

Outlook Risks

What are the primary risks to the outlook?

Easier monetary policy brings questions for the dollar, inflation and interest rate outlook

Fiscal policy: tax increases and/or spending cuts face unsustainable long-run outlook

Housing: unable to sustain growth on its own if rates rise?

European debt crisis weighs on global growth and global credit allocation

Weak employment growth means less-than-expected real income and spending growth for some consumer segments


U.S. Forecast

2010 2011 2012 2013 2014

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Real Gross Domestic Product 1 2.0 1.3 3.1 0.4 2.5 1.0 2.2 1.8 2.4 1.8 2.2 1.7 2.1

Personal Consumption 2.4 1.5 1.6 1.8 3.2 2.0 2.8 1.9 1.8 2.5 1.9 2.3 2.1

Inflation Indicators 2

PCE Deflator 2.4 1.6 1.5 1.6 1.3 1.6 1.6 1.6 1.9 2.4 1.8 1.5 1.9

Consumer Price Index 2.8 1.9 1.7 1.9 1.7 1.9 1.8 1.7 1.6 3.1 2.1 1.8 2.1

Industrial Production 1 5.4 2.9 0.3 2.3 5.0 6.1 4.8 4.6 5.7 3.4 3.6 3.9 4.4

Corporate Profits Before Taxes 2 10.3 6.7 7.5 3.1 4.8 5.2 5.3 5.7 26.8 7.3 6.8 5.3 6.4

Trade Weighted Dollar Index 3 72.7 74.5 72.7 73.4 76.2 76.5 77.0 77.5 75.4 70.9 73.5 76.8 78.3

Unemployment Rate 8.3 8.2 8.0 7.8 7.7 7.6 7.5 7.4 9.6 8.9 8.1 7.6 7.2

Housing Starts 4 0.71 0.74 0.77 0.90 0.97 0.96 1.02 1.08 0.59 0.61 0.78 1.00 1.19

Quarter-End Interest Rates 5

Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25

Conventional Mortgage Rate 3.95 3.68 3.50 3.35 3.57 3.40 3.60 3.80 4.69 4.46 3.66 3.59 4.30

10 Year Note 2.23 1.67 1.65 1.78 1.87 1.80 2.00 2.20 3.22 2.78 1.80 1.97 2.70

Forecast as of: April 26, 20131 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

ForecastActual

20132012

ForecastActual

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


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 Authors

April-29 Is the U.K. Economy (Finally) Turning the Corner? Bryson

April-23 Stability Ratios: Judging Economic Volatility Silvia & Iqbal

April-19 How Stationary Is My Economic North Star? Part II Silvia & Iqbal

April-15 Fiscal Policy: Not Your 1960s' Model for Investors Silvia & Brown

April-12 Easy Money: Japan's Policy Gamble Quinlan

April-03 What is Driving Auto Sales Higher? Aleman & Brown

April-02 Will Fed Tightening Derail Developing Economies? Bryson

March-25 Identifying Change: Did the Great Recession Alter Credit Silvia, Iqbal & Watt

March-25 Sweden and Denmark: So Close, Yet So Far Apart Bryson

March-21 Argentina's Economy Slows Down Considerably in 2012 Aleman

March-20 How Stationary Is My Economic North Star? Silvia, Iqbal & Swankoski

March-20 Florida's Economic Recovery Continues To Build Momentum Vitner & Silverman

March-15 Arizona: Back from the Brink Aleman & Griffiths

March-11 Mexican Central Bank: Concerned By Slowing Inflation Aleman

March-07 Government Spending: Three Faces of Change Silvia & Brown

March-05 Commercial Real Estate Chartbook: Quarter 4 Vitner, Khan & Silverman

February-28 Emerging Market Debt: A Looming Problem? Bryson

February-25 Economic Impact of Budget Sequestration Silvia & Brown

February-20 Economic Outlook and the Banking Sector Silvia

February-18 Sequestration: Which States Are Most Vulnerable? Vitner & Brown

February-15 The Chinese Financial System: Year of the Turtoise? Bryson

February-11 Student Loans: A Different Financial Market Silvia & Watt

February-11 Strong Contraction in Mexican Industrial Production Aleman

February-11 Housing Chartbook: January 2013 Vitner, Khan & Silverman

February-07 European Debt Dynamics: An Update Bryson

February-05 Alabama's Big Wheels Keep on Turning Vitner & Silverman

February-04 When Is This Time Different? Silvia, Iqbal, Watt & Swankoski

February-04 The Brazilian Economy Continues to Struggle Aleman

January-25 Bank of Japan Joins Other Central Banks Quinlan

January-25 British Economy Remains Quite Weak Bryson

January-24 Is Commercial Real Estate Still an Inflation Hedge? Khan

January-15 A Decision Maker's View of Fiscal Policy Silvia

January-15 California's Broadening Economic Recovery Vitner

January-14 Peruvian Economy: Still Going Strong Aleman

January-09 National Health Spending: Secular Growth Cyclical Slowdown Silvia & Swankoski

January-04 Employment: So, Is This It? Silvia & Watt

January-02 A Fiscal Cliff Resolution? Not Really Silvia & Brown

December-19 Texas: Growth in a Weakening World Environment Aleman & Griffiths

December-19 Canada: Economic Rock Star Faces Big Challenges Quinlan

December-18 Fiscal Cliff and True Reform Silvia

December-17 Housing Chartbook: November 2012 Vitner, Khan & Silverman

December-13 2013 Economic Outlook

Wells Fargo Economics

Wells Fargo Securities, LLC Economics Group

53

John E. Silvia … ....................... … [email protected]

Global Head of Research and Economics

Diane Schumaker-Krieg ………………… ………[email protected]

Global Head of Research & Economics

Chief Economist

Mark Vitner, Senior Economist……………....………. . [email protected]

Jay Bryson, Global Economist …………………....………[email protected]

Sam Bullard, Senior Economist [email protected]

Nick Bennenbroek, Currency Strategist ……[email protected]

Eugenio Aleman, Senior Economist…………………[email protected]

Anika Khan, Senior Economist .… . [email protected]

Senior Economists

Kaylyn Swankoski, Economic Analyst [email protected]

Zachary Griffiths, Economic Analyst [email protected]

Sara Silverman, Economic Analyst [email protected]

Economists Azhar Iqbal, Econometrician………………………………[email protected]

Tim Quinlan, Economist …………………………………[email protected]

Michael A. Brown, Economist ………………… [email protected]

Sarah Watt, Economist …………………………… [email protected]

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. 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 © 2013 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 Services Authority. The content of this report has been approved by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FSA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, not 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.

Peg Gavin, Executive Assistant. [email protected]

Cyndi Flowe, Senior Administrative Assistant [email protected]

mailto:[email protected]

















Economic Outlook: Cyclical Recovery, Structural Challenges

Documents

Transcript of Economic Outlook: Cyclical Recovery, Structural Challenges