2015 Economic Outlook

2015 Economic Outlook

Anika R. Khan, Senior EconomistJune 18, 2015

22

Economic Growth

We are now more than five years into the recovery and economic growth should reach its trend over the next two years. Despite a recent slowdown in activity due

to one-off factors, the composition of growth will remain broad based

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

Real Private Final SalesReal GDP Forecast

-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: Q1 @ -0.7%

GDP - Yr/Yr Percent Change: Q1 @ 2.7%

Forecast

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Real Private Final Sales to Domestic PurchasersBars = CAGR Line = Yr/Yr Percent Change

Real Priv Fin Sales to Dom. Purch. - CAGR: Q1 @ 1.2%Real Priv Fin Sales to Dom. Purch. - Yr/Yr Pct Chg: Q1 @ 3.4%

Forecast

33

GDP Components

Businesses still have a considerable amount of cash on the sidelines. We expect some of this money to be redirected into capital spending, but there are downside

risks due to the recent drop in oil prices


Cash on SidelinesBusiness Fixed Investment

-30%

-20%

-10%

0%

10%

20%

30%

-30%

-20%

-10%

0%

10%

20%

30%

2000 2002 2004 2006 2008 2010 2012 2014

Capital Spending by TypeYear-over-Year Percent Change

Intellectual Property: Q1 @ 8.1%Equipment: Q1 @ 5.6%Structures: Q1 @ -1.0%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

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

U.S. Nonfin. Corporate Cash HoldingsTotal Assets Market Value, U.S. Nonfinancial Corporations

Cash Ratio: Q4 @ 4.4%

4-Q Moving Average: Q4 @ 4.3%

4

Equipment Spending

Equipment outlays led the economy out of recession in 2010-2011 but have been unimpressive since

Source: U.S. Department of Commerce, Institute for Supply Management and Wells Fargo Securities, LLC

OrdersEquipment Outlays

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

25

30

35

40

45

50

55

60

65

70

93 95 97 99 01 03 05 07 09 11 13 15

ISM New Orders & Nondef. Cap. Gds. Orders Ex. AircraftIndex, Year-over-Year Percent Change

ISM New Orders Index, 12-MMA: May @ 57.8 (Left Axis)

Core Capex Orders, 3-MMA: Apr @ -3.4% (Right Axis)-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Real Equipment InvestmentBars = CAGR Line = Yr/Yr Percent Change

Equipment Investment - CAGR: Q1 @ 2.7%

Equipment Investment - Yr/Yr Percent Change: Q1 @ 6.3%

Forecast

5

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Real Nonresidential ConstructionBars = CAGR Line = Yr/Yr Percent Change

Nonres Construction - CAGR: Q1 @ -20.8%

Nonres Construction - Yr/Yr Percent Change: Q1 @ -0.2%

Forecast

Nonresidential Construction

We remain optimistic that structure investment will continue to improve later this year with commercial and manufacturing leading

the way


Percent change in real GDP by state 2013-2014

U.S. = 2.2%

2.7% - 6.3%

(-1.3)% - 0.7%

1.8% - 2.7%

1.2% - 1.8%

0.7% - 1.2%

AL

ARAZ

CACO

FL

GA

IA

ID

IL IN

KSKY

LA

ME

MI

MN

MO

MS

MT

NC

ND

NE

NH

NM

NV

NY

OH

OK

OR

PA

SC

SD

TN

TX

UT

VA

VT

WA

WI

WV

WY

0.7

0.81.4

2.84.7

CT0.6

DC1.6

DE1.2

2.7

2.3

0.4

2.7

1.2 0.4

1.81.0

1.9

MA2.3

MD0.8

0.2

1.9

1.4

0.9

-1.2

1.8

1.4

6.3

0.7

2.3

NJ0.4

1.0

1.0

2.5

2.1

2.8

3.6

1.8

RI1.2

2.2

0.6

1.7

5.2

3.1

0.02

0.6

3.0

1.0

5.1

5.1

AK-1.3

HI0.8

77

Oil Prices

Global oil prices have started to increase again, however, it is too early to tell if this trend will continue. If this is the start of a recovery, we could see a slow in

discretionary consumer spending due to higher gasoline prices

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

WTI Oil PricesBrent Oil Prices

$0

$20

$40

$60

$80

$100

$120

$140

$0

$20

$40

$60

$80

$100

$120

$140

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Brent Spot PriceMonthly Average Cash Spot Prices, Dollars per Barrel

Brent Crude: J un @ $64.18

$0

$20

$40

$60

$80

$100

$120

$140

$0

$20

$40

$60

$80

$100

$120

$140

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

West Texas Intermediate Spot PriceMonthly Average Cash Spot Prices, Dollars per Barrel

WTI : J un @ $59.80

8

$20

$50

$80

$110

$140

$170

1.0

1.5

2.0

2.5

3.0

3.5

06 07 08 09 10 11 12 13 14

Oil: Total Oil Open Interest Contract vs. Spot PriceIn Millions, Dollars per Barrel

Total Open Interest/ Combined Contracts: May @ 2.3M (Left Axis)Oil Spot Price: May @ $60.30 per Barrel (Right Axis)

Oil Spot Price

Oil prices appear to be stabilizing for the time

being

Source: Bloomberg LP and Wells Fargo Securities, LLC

9

$100

$200

$300

$400

$500

$600

$700

$800

$900

$100

$200

$300

$400

$500

$600

$700

$800

$900

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Corn PriceDollars per Bushel

Corn: J un-05 @ $360.50

Commodities

Due to the drop in energy prices such as ethanol, the price for corn has also been

affected

Source: Bloomberg LP and Wells Fargo Securities, LLC

1010

Mining Investment and Employment

Reflecting the sharp drop in oil prices, the mining component of structure investment tumbled significantly along with employment

Source: U.S. Energy Information Administration, U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC

Mining EmploymentMining Investment and Rig Count

-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Mining Exploration Structure Investment and Rig CountAnnual Growth Rate Percentages

Mining Exploration Structure Investment: Q1 @ -30.3%Rig Count: Q1 @ -71.0%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

90 92 94 96 98 00 02 04 06 08 10 12 14

Mining EmploymentYear-over-Year Percent Change

Mining Incl. Oil & Gas Extraction: May @ -1.3%Mining Excl. Oil & Gas Extraction: May @ -2.2%

11

Variables OutcomeReal GDP -0.16%Real PCE -0.19% PCE Deflator -0.23%Real Trade Balance Wider $25B per QuarterExports Drop first 4 Quarters, then StabilizeImports Continuously Increase

Direction

Macro-Model: Effects of a 10% Appreciation in the Dollar Index

The U.S. Dollar

Our macro-econometric model shows that a modest

appreciation of the U.S. dollar should have a

minimal effect on the U.S. economy

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

1212

Employment Situation

Job growth appears to have ratcheted up a bit in recent months. Wages are now behaving the way they have when the economy began to approach full

employment

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

Unemployment RateNonfarm Employment

-1,000

-800

-600

-400

-200

0

200

400

600

-1,000

-800

-600

-400

-200

0

200

400

600

2007 2008 2009 2010 2011 2012 2013 2014 2015

Nonfarm Employment ChangeChange in Employment, In Thousands

Monthly Change: May @ 280K

0%

2%

4%

6%

8%

10%

12%

0%

2%

4%

6%

8%

10%

12%

65 70 75 80 85 90 95 00 05 10 15

Unemployment and Wage RatesWages for Production & Nonsupervisory Workers, SA

Unemployment Rate: May @ 5.5%Hourly Earnings - Yr/Yr % Change: May @ 2.0%

1313

Millennial Housing & Employment

Millennials are a main driving force for apartment demand. We expect apartment activity to remain robust as there is still pent-up demand as well as increased job

growth for this cohort

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

Employment by IndustryReasons for Renting

1%

3%

9%

9%

16%

20%

35%

<1%

3%

8%

10%

19%

23%

26%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Protect AgainstHome Price Declines

To live in aBetter Neighborhood

Cannot Geta Mortgage

Less Hassleand Stress

More Flexibility

More Affordable

Preparing Financiallyto Own a Home

What is Your Primary Reason for Renting?FNMA Survey of Young Renters (Ages 18-39)

Q3 2013

Q3 2012

0% 2% 4% 6% 8% 10% 12% 14% 16%

Utilities

Mining

Agriculture

Wholesale

Information

Public Administration

Trans. & Warehousing

Other Services

Construction

Financial Activities

Education

Manufacturing

Prof. & Business Svcs.

Health & Social Svcs.

Retail

Leisure & Hospitality

Millennial Employment by IndustryIndustry Distribution of Workers Ages 16-34

2013

2007

1414

Suburbs vs. Primary Cities

The rate of population growth in some of America’s largest cities is outpacing suburban growth for the first time in decades

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

Population Growth by MetroPrimary City vs. Suburban

1.12%

0.50%

1.03%

2.31%

1.74%

1.00%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1990 - 2000 2000 - 2010 2011 - 2013

Pop. Growth - Primary City vs. SuburbsAnnual Average Growth, Percent

Primary CitySuburban

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

Philadelphia

Tampa

Sacramento

Boston

Minneapolis

Columbus

Portland

San Diego

Richmond

New York

Oklahoma City

Seattle

New Orleans

Atlanta

Washington D.C.

Orlando

Denver

Charlotte

Raleigh

Population Growth - Primary City vs. Suburbs2011 - 2013 Average Annual Growth Rate, Percent

PrimarySuburb

15

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

94 96 98 00 02 04 06 08 10 12 14

In-Store vs. Non-Store Retail Sales 3-Month Moving Average, Year-over-Year Percent Change

Non-Store Retailers: May @ 7.4%

Retail Sales ex. Non-Store Retailers: May @ 1.7%

E-Commerce Effect

Online sales growth is expected to continue to

outpace brick-and-mortar stores for some time


16

8

10

12

14

16

18

20

22

8

10

12

14

16

18

20

22

95 97 99 01 03 05 07 09 11 13 15

Light Vehicle SalesIn Millions, Seasonally Adjusted Annual Rate

Total Light Vehicle Sales: May @ 17.7 Million

Keep America Rolling

Cash For Clunkers

Employee Pricing for Everyone

Auto Sales

Light vehicle sales are now above its prerecession peak as pent-up demand and easy

credit help fuel activity


17

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: May @ $1,754.8B (Left Axis)Treasuries: May @ $2,460.1B (Left Axis)Other Securities: May @ $218.1B (Left Axis)S&P 500 Index: May @ 2,088.0 (Right Axis)

Fed Balance Sheet

As expected, the Fed’s bond buying program ended in October. Now the focus is on when the Fed will move

on short term rates

Source: Federal Reserve Board and Wells Fargo Securities, LLC

18

0

50

100

150

200

250

300

350

400

450

500

0

50

100

150

200

250

300

350

400

450

500

0 5 10 15 20 25 30

Cum

ula

tive T

ighte

nin

g (

bps)

Length of Tightening Cycle (Months)

Historic Fed Tightening CyclesCumulative Tightening (bps) in Months

Past Tightening Cycles

There have been five tightening cycles in the

past 25 years

In the 2004 cycle, the Fed stayed on hold for 12 months and hiked rates 425 bps from

1.00%


Tightening Last Cut Length of Cumulative Cumulative Tightening Terminal

Cycle to First Hike Tightening Cycle Tightening First Year Fed Funds Rate

1983 - 1984 5.0 Months 16 Months 325 bps 200 bps 11.75%

1986 - 1989 4.0 Months 28 Months 387 bps 100 bps 9.75%

1994 - 1995 17 Months 13 Months 300 bps 250 bps 6.00%



Average 9 Months 18.8 Months 322.4 bps 185 bps 7.85%

Tightening Cycles Since 1983

Historic Fed Tightening Cycles

19

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Appropriate Pace of Policy FirmingTarget Federal Funds Rate at Year-End; Market Data as J une 15

March 2015 Median ResponseDecember 2014 Median ResponseFutures Market Expectations

2015 2016 Longer Run2017

Pace of Policy Firming

The FOMC Committee downshifted its expectations for the Federal Funds rate path in its recent meeting


Construction

21

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

Th

ousa

nds

Housing StartsMillions of Units

Multifamily StartsMultifamily ForecastSingle-family StartsSingle-family Forecast

Forecast

Residential

As economic and labor market conditions continue

to improve, we expect to see gradual gains in overall

starts


2222

Residential

Residential investment spending has made only a marginal contribution to real GDP growth. However, improving household formations suggest a pick up is

imminent


Household FormationsResidential Investment Spending

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

85 87 90 93 95 98 01 03 06 09 11 14

Residential Investment SpendingBar = Compound Annual Rate Line = Percentage Points at Annual Rate

Residential Investment Spending: Q1 @ 4.93% (Right Axis)

Contribution to U.S. Real GDP: Q1 @ 0.16% (Left Axis)0.0

0.5

1.0

1.5

2.0

2.5

0.0

0.5

1.0

1.5

2.0

2.5

60 64 68 72 76 80 84 88 92 96 00 04 08 12

Household FormationsAverage of CPS/ASEC and CPS/HVS, In Millions

Survey Averages: 2014 @ 780K1948 to 2014 Average

2323

Residential Sales Activity

Sales for new and existing single-family homes are being restrained by a lack of for-sale inventory and a shortage of developed lots in highly desirable markets

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

Mortgage ApplicationsExisting & New Home Sales

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

90 92 94 96 98 00 02 04 06 08 10 12 14

Existing & New Single-Family Home SalesIn Millions, Seasonally Adjusted Annual Rate

New Home Sales: Apr @ 0.5 Million (Left Axis)

Existing Home Sales: Apr @ 4.4 Million (Right Axis)

0

2,000

4,000

6,000

8,000

10,000

12,000

0

100

200

300

400

500

600

94 96 98 00 02 04 06 08 10 12 14

Mortgage ApplicationsSeasonally Adjusted Index (1990=100); 4-Week Moving Average

Mort. Appl.: 4-Week Average: May-29 @ 200.7 (Left Axis)

Refinances: May-15 @ 1,686.1 (Right Axis)

24

U.S. Housing Forecast

National Housing Outlook

2008 2009 2010 2011 2012 2013 2014 2015 2016

Real GDP, percent change - 0.3 - 2.8 2.5 1.6 2.3 2.2 2.4 2.2 2.9 Nonfarm Employment, percent change - 0.6 - 4.3 - 0.7 1.2 1.7 1.7 1.9 2.2 1.7 Unemployment Rate 5.8 9.3 9.6 8.9 8.1 7.4 6.2 5.4 5.0

Home ConstructionTotal Housing Starts, in thousands 905.5 553.9 586.9 608.8 780.6 924.9 1003.3 1,130.0 1,230.0 Single- Family Starts, in thousands 622.0 445.0 471.1 430.5 535.3 617.7 647.8 730.0 820.0 Multifamily Starts, in thousands 283.5 108.9 115.8 178.3 245.3 307.2 355.5 400.0 410.0

Home SalesNew Home Sales, Single- Family, in thousands 485.0 374.0 321.0 305.0 369.0 429.0 437.0 530.0 610.0Total Existing Home Sales, in thousands 4,110.0 4,340.0 4,190.0 4,260.0 4,660.0 5,090.0 4,940.0 5,150.0 5,400.0Existing Single- Family Home Sales, in thousands 3,660.0 3,870.0 3,708.0 3,787.0 4,128.0 4,484.0 4,344.0 4,530.0 4,750.0Existing Condominium & Townhouse Sales, in thousands 450.0 464.0 474.0 477.0 528.0 603.0 591.0 620.0 650.0

Home PricesMedian New Home, $ Thousands 232.1 216.7 221.8 227.2 245.2 268.9 282.8 295.0 305.5

Percent Change - 6.4 - 6.6 2.4 2.4 7.9 9.7 5.2 4.3 3.6Median Existing Home, $ Thousands 198.1 172.5 172.9 166.1 176.8 197.1 208.3 219.0 228.0

Percent Change - 9.5 - 12.9 0.2 - 3.9 6.4 11.5 5.7 5.1 4.1FHFA (OFHEO) Home Price Index (Purch Only), Pct Chg - 7.9 - 5.7 - 3.0 - 4.1 3.2 7.5 5.5 4.8 4.2Case- Shiller C- 10 Home Price Index, Percent Change - 16.7 - 12.9 2.1 - 3.5 0.3 11.7 7.9 4.0 3.8

Interest Rates - Annual AveragesPrime Rate 4.88 3.25 3.25 3.25 3.25 3.25 3.25 3.44 4.56Ten- Year Treasury Note 3.66 3.26 3.22 2.78 1.80 2.35 2.54 2.24 2.66Conventional 30- Year Fixed Rate, Commitment Rate 6.04 5.04 4.69 4.46 3.66 3.98 4.17 4.05 4.51One- Year ARM, Effective Rate, Commitment Rate 5.18 4.71 3.79 3.03 2.69 2.61 2.44 2.60 3.00

Forecast as of: J une 01, 2015

Source: Federal Reserve Board, FHFA, MBA, NAR, S&P, U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC

Forecast

25

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Hu

ndre

ds

Private Nonresidential ConstructionPercent Change, 3-Month Moving Average

Year-over-Year: Apr @ 10.5% (Left Axis)Month-over-Month: Apr @ 2.2% (Right Axis)

Nonresidential Construction

Private nonresidential construction spending continues to improve


26

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

Power

Religious

Communication

Educational

Health Care

Commercial

Retail & Other Commercial

Transportation

Office Buildings

Warehouse

Amusement & Recreation

Manufacturing

Nonresidential

Private Nonresidential Construction Put-in-PlaceYear-over-Year Percent Change, Seasonally Adjusted

Private Nonresidential Construction Spending

Manufacturing outlays have seen strong gains


27

20

30

40

50

60

70

80

-60%

-40%

-20%

0%

20%

40%

60%

00 02 04 06 08 10 12 14

Manufacturing Construction Spending & ISM Survey3MMA YoY Percent Change, Diffusion Index

Private Manufacturing: Apr @ 50.3% (Left Axis)

ISM Index: May @ 52.8 (Right Axis)

Commercial Construction Spending

The slide in oil prices and harsh weather conditions could be playing a role in

weaker-than-expected manufacturing output

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

2828

Leading Indicators

Forward-looking indicators including the Dodge Momentum Index and architectural billings suggest growth in construction spending should continue to

increase through the year

Source: Dodge Data & Analytics, The American Institute of Architects, U.S. Department of Commerce and Wells Fargo Securities, LLC

Architectural Billings IndexDodge Momentum Index

$100

$150

$200

$250

$300

$350

$400

50

75

100

125

150

175

200

02 03 04 05 06 07 08 09 10 11 12 13 14 15

DMI vs. Private Nonresidential Construction SpendingExcl. Manufacturing, (Year 2000=100), Billions

Dodge Momentum Index: May @ 122.3 (Left Axis)Private Nonres. Construction Spending: Apr @ $295.9B (Right Axis)

-30%

-20%

-10%

0%

10%

20%

20

30

40

50

60

70

96 98 00 02 04 06 08 10 12 14

Architectural Billings vs. Construction SpendingIndex, Year-over-Year Percent Change, Seasonally Adjusted

Architecture Billings Index: Apr @ 48.8 (Left Axis)Private Construction: Mar @ 2.9% (Right Axis)

2929

Construction Employment

Construction labor plunged during the Great Recession, but since then has seen an increase in gains and a pickup in hours worked


Hours WorkedConstruction Employment

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Construction EmploymentYear-over-Year Percent Change vs. 3-Month Annualized Rate

3-Month Annualized Rate: May @ 2.5%

Year-over-Year Percent Change: May @ 4.5%

36.0

36.5

37.0

37.5

38.0

38.5

39.0

39.5

40.0

36.0

36.5

37.0

37.5

38.0

38.5

39.0

39.5

40.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Average Weekly Hours-ConstructionPrivate Sector Workers

Average Hours Worked: May @ 38.9

3030

Construction Employment

Inflation in construction labor costs have been generally well contained. However, reported labor shortages could begin to put upward pressure on wages


Wages & SalariesUnemployment vs. Avg. Hourly Earnings

0%

2%

4%

6%

8%

10%

5%

10%

15%

20%

25%

30%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Construction Unemployment vs. Avg. Hourly EarningsYear-over-Year Percent Change

Construction Unemployment Rate: May @ 7.5% (Left Axis)

Average Hourly Earnings YoY Percent Change: Apr @ 1.8% (Right Axis)

0%

1%

2%

3%

4%

5%

0%

1%

2%

3%

4%

5%

02 03 04 05 06 07 08 09 10 11 12 13 14 15

Construction Wage & SalariesYear-over-Year Percent Change

Construction: Q1 @ 2.0%

3131

Producer Price Index

Total construction costs remain low due to the drop in oil prices. However, some material prices such as aluminum, gypsum and concrete are elevated

Source: Dodge Data & Analytics, The American Institute of Architects, U.S. Department of Commerce and Wells Fargo Securities, LLC

Construction Final DemandMaterials & Components for Construction

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

PPI : Materials & Components for ConstructionQuarter-over-Quarter Percent Change, NSA

Materials & Components for Construction: Q1 @ 0.2%-1%

0%

1%

2%

3%

4%

5%

6%

7%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

10 11 12 13 14 15

Construction Final Demand Seasonally Adjusted

Year-over-Year: May @ 1.8%3-Month Annualized Rate: May @ 1.1%

32

U.S. Construction Forecast

2008 2009 2010 2011 2012 2013 2014 2015 2016

Real GDP, percent change - 0.3 - 2.8 2.5 1.6 2.3 2.2 2.4 1.9 2.9Structure Investment, percent change 6.1 - 18.9 - 16.4 2.3 13.1 - 0.5 8.2 - 1.9 10.8

Nonfarm Employment, percent change - 0.6 - 4.3 - 0.7 1.2 1.7 1.7 1.9 2.2 1.7Construction Employment, percent change - 6.1 - 16.0 - 8.3 0.2 2.1 3.7 4.8 5.5 6.4

Nonresidential Employment, percent change - 1.3 - 13.4 - 7.5 0.9 2.1 2.6 2.3 1.8 3.1Unemployment Rate 5.8 9.3 9.6 9.0 8.1 7.4 6.2 5.4 5.0

Construction Unemployment Rate 11.0 19.7 20.1 16.5 14.4 12.5 9.7 10.6 10.8

Nonresidential Total, Value Put- in- Place, $ billions 408.6 344.5 261.9 257.0 302.1 303.8 337.9 367.2 397.1Nonresidential Total, Value Put- in- Place, percent change 10.7 - 15.7 - 24.0 - 1.8 17.5 0.6 11.2 8.7 8.1Commercial, percent change 4.1 - 34.1 - 36.3 - 2.3 14.8 12.3 17.2 10.6 11.4Office, percent change 3.0 - 32.4 - 34.7 - 3.0 15.4 8.7 23.6 11.4 13.2Retail & Other Commercial, percent change - 3.1 - 37.8 - 27.9 4.9 13.0 10.7 12.8 10.1 10.3Hotel, percent change 28.7 - 28.2 - 55.9 - 25.0 21.5 28.8 18.8 10.5 11.1Industrial Total, percent change 33.2 7.9 - 29.1 - 3.2 18.0 1.2 16.1 7.2 10.6Institutional Total, percent change 9.7 - 8.2 - 18.2 - 2.5 6.4 - 1.2 - 2.6 3.8 5.0Health, Value Put- in- Place, percent change 8.0 - 7.9 - 16.4 - 2.2 8.6 - 3.3 - 4.8 4.9 6.2Education, percent change 12.0 - 9.7 - 19.9 4.5 18.1 0.7 - 1.9 3.2 5.3Religious, percent change - 4.3 - 14.0 - 15.1 - 19.9 - 9.5 - 4.0 - 2.9 0.0 1.0Public Safety, percent change 28.7 5.8 - 19.0 - 7.1 0.5 - 7.4 - 3.5 1.5 3.2Amusement & Recreation, percent change 3.5 - 20.1 - 23.0 4.1 - 8.1 16.2 6.3 5.9 3.6

Power, Value Put- in- Place, percent change 27.1 10.1 - 14.7 - 0.9 37.2 - 11.7 16.3 3.2 6.2Transportation, Value Put- in- Place, percent change 10.2 - 8.4 8.5 - 3.5 13.9 2.1 7.2 2.5 5.4Communication, Value Put- in- Place, percent change - 3.7 - 25.4 - 10.3 - 0.3 - 9.3 7.0 - 6.6 2.1 1.5

Interest Rates - Annual AveragesTen- Year Treasury Note 3.7 3.3 3.2 2.8 1.8 2.4 2.5 2.2 2.7

Forecast as of: J une 01, 2015

Nonresidential Construction Spending OutlookForecast

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

Global Outlook

34

-12%

-8%

-4%

0%

4%

8%

-12%

-8%

-4%

0%

4%

8%

2002 2004 2006 2008 2010 2012 2014 2016

Eurozone Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change

Compound Annual Growth: Q1 @ 1.6%

Year-over-Year Percent Change: Q1 @ 1.0%

Forecast

Eurozone GDP Forecast

The Eurozone has emerged from its double-dip

recession, but the recovery will lag the U.S.

Source: IHS Global Insight and Wells Fargo Securities, LLC

35

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.00

1.10

1.20

1.30

1.40

1.50

1.60

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

U.S. Dollar/Euro Exchange RateDollars/Euro

U.S. Dollars/Euro: J un-05 @ 1.11

The Euro

We expect the dollar to strengthen against the euro on stronger US growth and

higher interest rates


36

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Chinese Real GDP ForecastYear-over-Year Percent Change

Year-over-Year Percent Change: Q1 @ 7.0%

Forecast

Chinese GDP Forecast

Growth in China is not expected to return to the

double-digit rate seen earlier in the decade


37

8.3%

10.2%

16.6%

20.9%21.8%

24.7%

0%

5%

10%

15%

20%

25%

30%

0%

5%

10%

15%

20%

25%

30%

US J apan China UnitedKingdom

Canada Germany

Value-Added Embodied in FDDPercent of Total Value-Added

2009

Value Added from Foreign Sources

The U.S. economy has low exposure to the rest of the

world

Source: Organisation for Economic Cooperation and Development and Wells Fargo Securities, LLC

38

U.S. Forecast

Wells Fargo U.S. Economic 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 2.2 - 0.7 1.3 2.9 3.6 2.3 2.2 2.4 1.9 2.9

Personal Consumption 1.2 2.5 3.2 4.4 1.8 2.5 2.8 3.0 1.8 2.4 2.5 2.8 2.8

Inflation Indicators 2

PCE Deflator 1.1 1.6 1.5 1.1 0.3 0.0 0.2 0.8 1.8 1.2 1.3 0.3 1.9

Consumer Price Index 1.4 2.1 1.8 1.2 - 0.1 - 0.1 0.1 0.8 2.1 1.5 1.6 0.2 2.2

Industrial Production 1 3.9 5.7 4.1 4.6 - 0.7 0.0 3.5 3.1 3.8 2.9 4.2 2.2 3.2

Corporate Profits Before Taxes 2 - 4.8 0.1 1.4 - 0.2 3.7 3.2 3.9 4.8 11.4 4.2 - 0.8 3.9 5.3

Trade Weighted Dollar Index 3 76.9 75.9 81.3 85.1 92.1 90.5 91.5 92.8 73.5 75.9 78.5 91.7 95.9

Unemployment Rate 6.6 6.2 6.1 5.7 5.6 5.4 5.3 5.2 8.1 7.4 6.2 5.4 5.0

Housing Starts 4 0.93 0.98 1.03 1.06 0.97 1.14 1.21 1.24 0.78 0.92 1.00 1.13 1.22

Quarter- End Interest Rates 5

Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.50 0.75 0.25 0.25 0.25 0.44 1.56Conventional Mortgage Rate 4.34 4.16 4.16 3.86 3.77 4.05 4.15 4.23 3.66 3.98 4.17 4.05 4.5110 Year Note 2.73 2.53 2.52 2.17 1.94 2.25 2.35 2.41 1.80 2.35 2.54 2.24 2.66

Forecast as of: J une 10, 20151 Compound Annual Growth Rate Quarter-over-Quarter2 Year-over-Year Percentage Change3 Federal Reserve Major Currency I ndex, 1973=100 - Quarter End4 Millions of Units5 Annual Numbers Represent Averages

Actual

2014

ForecastActual

2015

Forecast

2015 Economic Outlook

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