Economic Forecast - Summer 2014 NCLGBA Conference

Economic Outlook

Michael Wolf, EconomistJuly 18, 2014

Economics 22

-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 @ -2.9%

GDP - Yr/Yr Percent Change: Q1 @ 1.5%

Forecast

Gross Domestic Product

Real GDP declined in the first quarter but those contractionary forces

should prove to be temporary

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

Government

Economics 4

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2000 2002 2004 2006 2008 2010 2012 2014

Real Government Purchases Bars = CAGR Line = Yr/Yr Percent Change

Government Purchases-CAGR: Q1 @ -0.8%

Government Purchases-Yr/Yr: Q1 @ -1.5%

Forecast

Government Purchases

The public sector has remained a weight on the

overall economy but should soon move back into being a minor contributor to overall

growth


Economics 5

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$400

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$400

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

Federal Budget Surplus or Deficit12-Month Moving Sum in Billions of Dollars

Surplus or Deficit: May @ -$490 Billion

U.S. Budget Deficit

Deficit is shrinking, but not nearly fast enough

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

Economics 6

14%

16%

18%

20%

22%

24%

26%

14%

16%

18%

20%

22%

24%

26%

2013 2015 2017 2019 2021 2023

U.S. Budget GapCBO Baseline Scenario Projections, Percent of GDP

Outlays: 2024 @ 22.1%

Revenues: 2024 @ 18.3%

U.S. Budget Gap

The larger problem is that there is still no credible plan to move back into a

surplus

Source: Congressional Budget Office and Wells Fargo Securities, LLC

Business Investment

Economics 8

-40%

-30%

-20%

-10%

0%

10%

20%

30%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

2000 2002 2004 2006 2008 2010 2012 2014

Real Business Fixed InvestmentBars = CAGR Line = Yr/Yr Percent Change

Non-Res Fixed Invest - CAGR: Q1 @ -1.2%

Non-Res Fixed Invest - Yr/Yr Percent Change: Q1 @ 3.5%

Forecast

Business Investment

Business investment also declined slightly in the

beginning of the year, but all signs point to a moderate

pick up in investment moving forward


Economics 9

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: Q1 @ 4.3%

4-Q Moving Average: Q1 @ 4.4%

Corporate Cash

The financial health of the corporate sector is very strong and should allow

corporations to spend more going forward

Source: Federal Reserve Board and Wells Fargo Securities, LLC

Economics 10

0%

5%

10%

15%

20%

25%

30%

35%

40%

0%

5%

10%

15%

20%

25%

30%

35%

40%

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

Small Business Important ProblemsSingle Most Important Problem Facing Firms, SA 3-MMA

Regulations: J un @ 20.0%Taxes: J un @ 23.0%Poor Sales: J un @ 13.3%Interest Rates: J un @ 2.3%

Small Businesses

Problems have shifted from fears about sales to

concerns about taxes and regulation

Source: National Federation of Independent Business and Wells Fargo Securities, LLC

Consumption

Economics 1212

-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 @ 1.0%PCE - Yr/Yr Percent Change: Q1 @ 2.0%

Forecast

Personal Consumption Expenditures

Consumption should rebound during the forecast period but growth is likely

to remain somewhat subdued


Economics 13

-1,000

-800

-600

-400

-200

0

200

400

600

-1,000

-800

-600

-400

-200

0

200

400

600

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

Nonfarm Employment ChangeChange in Employment, In Thousands

Monthly Change: J un @ 288K

Employment

Total employment finally breached its prerecession

peak…

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

Economics 14

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 14

Unemployment RatesSeasonally Adjusted

U-6 Unemployment Rate: J un @ 12.1%

U-3 Unemployment Rate: J un @ 6.1%

Unemployment

…but the unemployment rate overstates the health of

the labor market. Discouraged workers and an abundance of part-time

work rein in spending


Economics 15

1%

2%

3%

4%

1%

2%

3%

4%

2002 2004 2006 2008 2010 2012 2014

Employment Cost Index Year-over-Year Percent Change

Wages and Salaries: Q1 @ 1.6%

Total Compensation: Q1 @ 1.8%

Wages and Salaries

In addition, wage growth has been relatively slow to

pick up, while inflation begins to pull away


Economics 1616

-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

2000 2002 2004 2006 2008 2010 2012 2014

Real Disposable Personal IncomeBars = CAGR Line = Yr/Yr Percent Change

Real Disp. Personal Inc. - CAGR: Q1 @ 1.5%

Real Disp. Personal Inc. - Yr/Yr Percent Change: Q1 @ 2.3%

Forecast

Income

Disposable income growth is also likely to remain

relatively subdued in the near term.


Economics 17

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

60 65 70 75 80 85 90 95 00 05 10

Household Debt - Consumer & MortgageAs a Percent of Disposable Personal Income

Household Debt: Q1 @ 97.9%

Consumer Balance Sheet

Although consumer leverage remains elevated,

it is off its prerecession high

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

Economics 18

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

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

Household Debt Service RatioDebt Payments as a Percent of Disposable Personal Income

DSR: Q1 @ 9.9%

Debt Service Ratio

And the debt service ratio has fallen to historical lows

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

Economics 1919

Household Debt

Rising student loan debt is crowding out other borrowing, particularly for autos and credit cards

Source: Federal Reserve Board and Wells Fargo Securities, LLC

20132003

Mortgage, 70.2%

Student Loans, 3.1%

Auto Loans, 8.7%

Credit Card, 8.7%

HE Revolving, 3.7%

Other, 5.6%

Household Debt - 2003

Mortgage, 70.0%

Student Loans, 9.1%

Auto Loans, 7.5%

Credit Card, 6.0%

HE Revolving, 4.7%

Other, 2.7%

Household Debt - 2013

Economics 20

Consumer Related

Rising equities and higher house prices have a limited effect on consumers

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

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

Household AssetsTrillions of Dollars

Financial Assets: Q1 @ $67.2 Trillion

Household Real Estate Holdings: Q1 @ $20.2 Trillion

Other Tangible Assets: Q1 @ $8.2 Trillion

Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities, LLC

Consumer ConfidenceHousehold Wealth

0

20

40

60

80

100

120

140

160

0

20

40

60

80

100

120

140

160

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

Consumer Confidence by Household Income1985=100; 3-Month Moving Averages

Under $15,000: J un @ 52.9$15,000-$24,999: J un @ 58.1$25,000-$34,999: J un @ 71.1$35,000-$49,999: J un @ 75.7$50,000 and Over: J un @ 105.5

Housing Market

Economics 22

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Conventional 30-Year Mortgage RatePercent, FHLMC Fixed-Rate Mortgage

Conventional 30-Year Fixed Mortg. Rate: J ul-09 @ 4.12%

Mortgage Rates

Although mortgage rates remain low by historical

standards, the rise over last year has had a negative effect on homebuying

Source: Freddie Mac and Wells Fargo Securities, LLC

Economics 23

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

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

Existing Home Resales Seasonally Adjusted Annual Rate - In Millions

Existing Home Sales: May @ 4.9 Million

Housing Market: Existing Home Sales

Existing home sales have struggled with higher

mortgage rates, weaker investor demand and a

particularly severe winter.


Economics 24

100

300

500

700

900

1,100

1,300

1,500

100

300

500

700

900

1,100

1,300

1,500

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

New Home SalesSeasonally Adjusted Annual Rate, In Thousands

New Home Sales: May @ 504,000

3-Month Moving Average: May @ 446,333

Housing Market: New Home Sales

New home sales have continued to improve,

though still remain at very low levels


Economics 25

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

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

Confidence: Plans to Buy a HomePercent of Consumers, Conference Board

Plans to Buy a Home Within Six Months: J un @ 5.4%

12-Month Moving Average: J un @ 5.7%

Home Purchase Expectations

Weak home sales have suffered from a lack of traditional homebuyer

demand while investors have dropped out

simultaneously

Source: The Conference Board and Wells Fargo Securities, LLC

Economics 26

-32%

-24%

-16%

-8%

0%

8%

16%

24%

-32%

-24%

-16%

-8%

0%

8%

16%

24%

96 98 00 02 04 06 08 10 12 14

Home PricesYear-over-Year Percentage Change

Median Sale Price: May @ $213,600Median Sales Price 3-M Mov. Avg.: May @ 5.3%FHFA (OFHEO) Purchase Only Index: May @ 5.6%S&P Case-Shiller Composite 10: Apr @ 10.8%

Home Prices

Home prices continue their upward trajectory, though

gains have moderated considerably

Source: Federal Housing Finance Agency, National Association of Realtors, S&P Corp. and Wells Fargo Securities, LLC

Economics 27

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

Thousa

nds

Housing StartsMillions of Units

Multifamily StartsMultifamily ForecastSingle-family StartsSingle-family Forecast

Forecast

Housing Market: Residential Construction

We expect residential construction to continue to

advance, though a full recovery in the housing market is a long way off


North Carolina

Economics 29

-4%

-2%

0%

2%

4%

6%

8%

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13-4%

-2%

0%

2%

4%

6%

8%

North Carolina Gross State Product & U.S. GDPYear-over-Year Percent Change

U.S. GDP: 2013 @ 1.8%North Carolina GDP: 2013 @ 2.3%

North Carolina: GDP

In 2013, GDP growth in North Carolina outpaced

that of the nation


Economics 30

91%

92%

93%

94%

95%

96%

97%

98%

99%

100%

101%

91%

92%

93%

94%

95%

96%

97%

98%

99%

100%

101%

69 73 77 81 85 89 93 97 01 05 09 13

North Carolina Employment: Percent of Previous Peak Percent

Percent of Previous Peak: May @ 98.7%

North Carolina: Labor Market

But total employment remains below its prerecession peak


Economics 31

North Carolina: Labor Market

A large drop in labor force participation has added to the downward momentum of the unemployment rate

60%

61%

62%

63%

64%

65%

66%

67%

68%

69%

70%

60%

61%

62%

63%

64%

65%

66%

67%

68%

69%

70%

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

Labor Force Participation Rate3-Month Moving Averages, Seasonally Adjusted

North Carolina: May @ 61.1%United States: J un @ 62.8%


UnemploymentLabor Force Participation

2%

4%

6%

8%

10%

12%

2%

4%

6%

8%

10%

12%

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

North Carolina vs. U.S. Unemployment RateSeasonally Adjusted

Unemployment Rate: May @ 6.4%United States: J un @ 6.1%

Economics 3232

May 2014

-2% -1% 0% 1% 2% 3% 4% 5% 6%

Information

Other Services

Construction

Financial Activities

Leisure and Hospitality

Manufacturing

Prof. & Bus. Svcs.

Educ. & Health Services

Government

Trade, Trans. & Utilities

Total Nonfarm

North Carolina Employment Growth By IndustryYear-over-Year Percent Change, 3-MMA

Number of Employees

Less

More

North Carolina: Employment

Employment growth has been relatively broad based,

with strong gains in administrative and business

support industries


Economics 3333

98

100

102

104

106

108

110

112

114

98

100

102

104

106

108

110

112

114

10 11 12 13 14

Nonfarm PayrollsIndex 100 = February 2010

Charlotte: May @ 111.6Raleigh: May @ 113.2Durham: May @ 107.7Greensboro: May @ 104.8Winston-Salem: May @ 105.5Asheville: May @ 107.3Wilmington: May @ 106.8Hickory: May @ 102.9Fayetteville: May @ 100.4


Raleigh and Charlotte have had the strongest

recoveries in terms of employment, while

Fayetteville and Hickory struggle to return to growth


Economics 34

North Carolina Unemployment by County

North Carolina Unemployment RateMay 2014

Less than 6.0%6.0% to 6.9%7.0% to 7.9%8.0% and greater

Economics 3535

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

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

North Carolina Nonfarm EmploymentYear-over-Year Percent Change

Office Employment: May @ 3.8%Non-office Employment: May @ 1.4%


Meanwhile, economies that rely on office-using

industries have performed considerably better


Economics 36


Manufacturing has been declining for years, contributing to the relatively weak economies in some parts of the state

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

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

North Carolina Nonfarm EmploymentYear-over-Year Percent Change

Manufacturing Employment: May @ -0.1%Non-Manufacturing: May @ 2.2%


Manufacturing Total EmploymentManufacturing Growth

300

400

500

600

700

800

900

300

400

500

600

700

800

900

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

North Carolina Manufacturing EmploymentIn thousands

Manufacturing Employment: May @ 442.0 thousand

Economics 3737

-4% 0% 4% 8% 12%

Winston-Salem

Greensboro

Asheville

Raleigh

Durham

North Carolina

Charlotte

Wilmington

Construction & Natural Resources EmploymentYear-over-Year Percent Change, 3-MMA

May 2013

North Carolina: Construction

Despite strong gains in a few areas, construction

payrolls in the state are still more than 30 percent from

their prerecession high, pushing workers to look for jobs in other industries or

remain unemployed


Economics 3838

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

North Carolina Personal IncomeBars = Compound Annual Rate Line = Yr/Yr % Change

North Carolina Personal Income: Q1 @ 2.7%

North Carolina Personal Income: Q1 @ 3.1%

North Carolina: Income

Income growth has held steady in the state but

remains below the gains seen in prior expansions


Economics 3939

-15%

0%

15%

30%

45%

-15%

0%

15%

30%

45%

95 97 99 01 03 05 07 09 11 13

North Carolina Sales Tax RevenueYear-over-Year Percent Change

North Carolina: Q4 @ 3.6%

North Carolina: Sales Tax

Nevertheless, sales tax revenue is growing again, indicating that consumers

in the state are feeling more confident


Economics 4040

North Carolina: Housing

The pace of residential construction has slowed, though home price continue to gain momentum

0

20

40

60

80

100

120

0

20

40

60

80

100

120

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

Thou

sand

s

Thou

sand

s

North Carolina Housing PermitsThousands of Permits, Seasonally Adjusted Annual Rate

Single-Family: May @ 39,264Single-Family, 12-MMA: May @ 34,242Multifamily, 12-MMA: May @ 14,072

Single-Family Average (1998-2003): 62,968

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

Home PricesResidential Construction

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

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

Core Logic HPI : NC vs. U.S.Year-over-Year Percent Change

United States: May @ 8.8%

North Carolina: May @ 5.2%

Economics 4141

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

Greensboro

Winston-Salem

North Carolina

Asheville

Durham

Charlotte

Raleigh

Wilmington

North Carolina PopulationYear-over-Year Percent Change

2013

North Carolina: Demographics

Areas with the highest population growth rates are

also likely to see some of the strongest economic

growth rates moving forward


Economics 42

U.S. Forecast

Wells Fargo U.S. Economic Forecast

2011 2012 2013 2014 2015

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

Real Gross Domestic Product 1 1.1 2.5 4.1 2.6 - 2.9 2.7 2.9 2.9 1.8 2.8 1.9 1.4 2.9

Personal Consumption 2.3 1.8 2.0 3.3 1.0 2.2 2.4 2.5 2.5 2.2 2.0 2.1 2.5

Inflation Indicators 2

PCE Deflator 1.4 1.1 1.1 1.0 1.1 1.6 1.7 1.9 2.4 1.8 1.1 1.6 2.0

Consumer Price Index 1.7 1.4 1.5 1.2 1.4 2.0 2.1 2.4 3.1 2.1 1.5 2.0 2.3

Industrial Production 1 4.2 1.9 2.5 4.9 4.5 4.8 4.4 4.3 3.3 3.8 2.9 4.2 4.8

Corporate Profits Before Taxes 2 2.1 4.5 5.7 6.2 - 2.2 3.6 3.8 4.0 7.9 7.0 4.6 2.4 4.3

Trade Weighted Dollar Index 3 76.2 77.5 75.2 76.4 76.9 75.9 76.5 76.8 70.9 73.5 75.9 76.5 78.2

Unemployment Rate 7.7 7.5 7.2 7.0 6.7 6.2 6.0 5.9 8.9 8.1 7.4 6.2 5.7

Housing Starts 4 0.95 0.86 0.88 1.03 0.93 1.04 1.05 1.07 0.61 0.78 0.92 1.03 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 0.63Conventional Mortgage Rate 3.57 4.07 4.49 4.46 4.34 4.16 4.35 4.34 4.46 3.66 3.98 4.30 4.4610 Year Note 1.87 2.52 2.64 3.04 2.73 2.53 2.75 2.80 2.78 1.80 2.35 2.70 3.00

Forecast as of: J uly 9, 20141 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

ForecastActual

2013

ForecastActual

2014

Client/Prospect Name

Wells Fargo Securities, LLC Economics Group

43

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

Global Head of Research and Economics

Diane Schumaker-Krieg ………………… ………[email protected] Head of Research & Economics

Chief Economist

Mark Vitner, Senior Economist……………....………. . .

[email protected]

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

Sam Bullard, Senior Economist [email protected]

Nick Bennenbroek, Currency Strategist……[email protected]

Eugenio J. Alemán, Senior Economist… …………[email protected]

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

Senior Economists

Zachary Griffiths, Economic Analyst [email protected]

Mackenzie Miller, Economic Analyst [email protected]

Blaire Zachary, Economic Analyst [email protected]

EconomistsAzhar Iqbal, Econometrician………………… ……………[email protected]

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

Eric J. Viloria, Currency Strategist [email protected]

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

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

Michael T. Wolf, Economist ………………… … [email protected]

Economic Analysts

Administrative Assistants

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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 the Financial Conduct 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 FCA 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 Burris, Senior Administrative Assistant [email protected]

Economic Forecast - Summer 2014 NCLGBA Conference

Business

Transcript of Economic Forecast - Summer 2014 NCLGBA Conference