Global Economic Update€¦ · 6/5/2015 · Global Economic Update Tim Quinlan, Economist May,...

Global Economic Update

Tim Quinlan, Economist

May, 2015

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Economics 2

United States,87.4%

European Union,4.6%

Japan, 2.2%

DevelopingCountries, 3.9%

Other, 1.9%

Canadian Exports2000

Exports Then & Now

“When the United StatesSneezes…”

Source: IHS Global Insight and Wells Fargo Securities, LLC

Economics 3

United States,76.8%

European Union,7.4%

Japan, 2.0%

DevelopingCountries,

10.4%

Other, 3.4%

Canadian Exports2014

Exports Then & Now

Still true, but the picture ischanging


Economics 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 GDPBars = CAGR Line = Yr/Yr Percent Change

GDP - CAGR: Q1 @ 0.2%

GDP - Yr/Yr Percent Change: Q1 @ 3.0%

Forecast

Real GDP Forecast

Shifting to full potential

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

Economics 5

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 of Apr. 23

March 2015 Median Response

December 2014 Median Response

Futures Market Expectations

2015 2016 Longer Run2017

Pace of Policy Firming

The FOMC downshifted itsexpectations for the Federal

Funds rate path in the recentmeeting to 50-75 bps at the end

of 2015, which is more in linewith market expectations

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

Economics 6

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

FOMC Central Tendency for Longer Run

Unemployment Rate: Mar @ 5.5%

U-6 Unemployment Rate: Mar @ 10.9%

Unemployment

The labor market is steadilyfirming, although slack remains

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

Economics 7

Labor Turnover

The recent pickup in job openings and quits are consistent with recently strong employmentgains, potential for moderation going forward

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

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

Job Openings and HiresMillions of Workers SA, 3-Month Moving Average

Hires: Feb @ 5.05M

Total Job Openings: Feb @ 5.13M


SeparationsHiring

1.0

1.5

2.0

2.5

3.0

3.5

1.0

1.5

2.0

2.5

3.0

3.5

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

Quits vs. LayoffsMillions of Workers SA, 3-Month Moving Average

Quits: Feb @ 2.73M

Layoffs: Feb @ 1.68M

Economics 8

88

92

96

100

104

108

112

116

88

92

96

100

104

108

112

116

2000 2002 2004 2006 2008 2010 2012 2014

Employment: Canada & United StatesTotal Payrolls, Index, 2005=100

Canada: Mar @ 111.9

United States: Mar @ 106.4

North American Employment Comparison

Canada’s labor market did nottake nearly as bad a hit during

the recession, but U.S. jobgrowth is now outpacing gains

in Canada

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

Economics 99

-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: Mar @ 0.3%

"Core" PCE Deflator: Mar @ 1.3%

Inflation

Falling oil prices will weigh onheadline inflation, but core

inflation should remain stable


Economics 10

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

Housing StartsMillions of Units

Multifamily Starts

Multifamily Forecast

Single-family Starts

Single-family Forecast

Forecast

Housing Starts

Housing starts remain wellbelow historical levels, but are

expected to increase in thecoming years


Economics 11

-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 14

U.S. Homeowners vs. RentersAnnual Change in Occupied Units, In Thousands

Renters: 2014 @ 1026.3 Thousand

Homeowners: 2014 @ -234.5 Thousand

Series Break1981

Housing: Emergence of Renters as Occupants

The number of renters has beengrowing steadily since 2007,while homeowners have been

declining


Economics 12

C$0

C$250

C$500

C$750

C$1000

C$1250

C$1500

C$1750

C$2000

C$2250

C$2500

0

250

500

750

1000

1250

1500

1750

2000

2250

2500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

U.S. Housing Starts vs. Canadian Lumber ExportsThousands of Starts, Millions of CAD

Lumber Exports: Feb @ $1140.7 (Right Axis)

Housing Starts: Mar @ 926K (Left Axis)

U.S. Housing and Canadian Exports

Canadian lumber exports fell astaggering 70.5 percent as U.S.

housing starts saw a remarkablysimilar peak-to-trough decline

of 79.0 percent.

As U.S. homebuilding has comeback (starts are up 88 percent

from the April 2009 low),Canadian lumber exports haverisen in lock step, providing anearly identical recovery from

the May 2009 low.

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

Economics 13

-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: Q4 @ 4.4%

PCE - Yr/Yr Percent Change: Q4 @ 2.9%

Forecast

Real PCE Forecast

Consumer spending is set toremain steady above 2 percent

over the forecast horizon


Economics 14

55%

60%

65%

70%

75%

80%

85%

90%

95%

55%

60%

65%

70%

75%

80%

85%

90%

95%

2000 2002 2004 2006 2008 2010 2012 2014

Household Debt: Canada & United StatesTotal Household Debt as a Percent of GDP

U.S. Household Debt/GDP: Q4 @ 71.7%

Canadian Household Debt/GDP: Q4 @ 90.3%

Consumer Debt Dynamics

Rather stunning reversal

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

Economics 15

-60%

-40%

-20%

0%

20%

40%

-60%

-40%

-20%

0%

20%

40%

98 00 02 04 06 08 10 12 14

Manufacturers' New OrdersSeasonally Adjusted, 3-Month Moving Averages

3-Month Annual Rate: Mar @ -11.6%

Year/Year Percent Change: Mar @ -3.8%

Capital Spending

Despite robust survey data,manufacturers’ new orders arefalling. However, orders datacan be notoriously volatile—

what happens if we look at corefigures?


Economics 16

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

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

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

3-Month Annual Rate: Mar @ -9.4%

Year-over-Year Percent Change: Mar @ 0.1%

Core Capital Spending

Weakness in core capital goodsorders has not been as

pronounced, but we have seensix declines in five months


Economics 1717

-6%

-4%

-2%

0%

2%

4%

6%

8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2010 2011 2012 2013 2014 2015

PPI Final DemandSeasonally Adjusted

Year-over-Year: Mar @ -0.8%

3-Month Annualized Rate: Mar @ -4.3%

Inflation

Although factory orders haveshown considerable weakness inrecent months, much of this canbe attributed to price declines,

particularly in the energy sector,as orders are reported in

nominal terms


Economics

Anecdotes from the Frontlines

18

Source: ISM, Federal Reserve Board, Reuters and Wells Fargo Securities, LLC

Economics 19

-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: Q4 @ 0.6%

Equipment Investment - Yr/Yr Percent Change: Q4 @ 5.3%

Forecast

Business Spending

We anticipate modest growth incapital expenditures


Economics 20

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 Product1 -2.1 4.6 5.0 2.2 0.2 2.0 2.9 2.9 2.3 2.2 2.4 2.3 2.8

Personal Consumption 1.2 2.5 3.2 4.4 1.9 2.8 3.0 3.0 1.8 2.4 2.5 3.0 2.8

Inflation Indicators2

PCE Deflator 1.1 1.6 1.5 1.1 0.3 0.2 0.3 0.9 1.8 1.2 1.3 0.4 2.0

Consumer Price Index 1.4 2.1 1.8 1.2 -0.1 -0.1 0.2 1.0 2.1 1.5 1.6 0.2 2.4

Industrial Production1 3.9 5.7 4.1 4.6 -1.0 1.6 3.5 3.1 3.8 2.9 4.2 2.4 3.3

Corporate Profits Before Taxes2 -4.8 0.1 1.4 -0.2 4.8 5.0 4.9 4.7 11.4 4.2 -0.8 4.8 4.2

Trade Weighted Dollar Index3 76.9 75.9 81.3 85.1 92.1 92.8 94.0 95.3 73.5 75.9 78.5 93.5 98.3

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 Starts4

0.93 0.99 1.03 1.06 0.97 1.13 1.21 1.24 0.78 0.92 1.00 1.12 1.22

Quarter-End Interest Rates5

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 1.56

Conventional Mortgage Rate 4.34 4.16 4.16 3.86 3.77 3.95 4.15 4.23 3.66 3.98 4.17 4.03 4.51

10 Year Note 2.73 2.53 2.52 2.17 1.94 2.19 2.35 2.41 1.80 2.35 2.54 2.22 2.66

Forecast as of: May 1, 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

Actual

2014

ForecastActual

2015

Forecast

Economics 21

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2002 2004 2006 2008 2010 2012 2014 2016

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

Compound Annual Growth: Q4 @ 2.4%

Year-over-Year Percent Change: Q4 @ 2.6%

Forecast

Canadian Real GDP Forecast

The recent strength may havebeen overstated by inventories


Economics 22

0%

1%

2%

3%

4%

5%

6%

7%

8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

00 02 04 06 08 10 12 14

Central Bank Policy Rates

U.S. Target Rate: Apr @ 0.25%

Bank of Canada: Apr @ 0.75%

Monetary Policy

The Bank of Canada hasadopted a more dovish stance; isthis a one-and-done or are more

rate cuts in the offing?

Source: Bloomberg LP and Wells Fargo Securities, LLC

Economics 23

100

150

200

250

300

350

400

450

5000.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

2000 2002 2004 2006 2008 2010 2012 2014

Canadian Exchange Rate and CRBCAD per USD (Inverted), Index

CAD per USD: May @ 1.216 (Left Axis)

CRB: May @ 228.0 (Right Axis)

Exchange Rate

In the past year, the Canadiandollar has lost about 11 percent

of its value against the U.S.dollar, although CAD has rallied

in recent weeks


Economics 24

70

80

90

100

110

120

130

140

150

70

80

90

100

110

120

130

140

150

Jan 2012 Jul 2012 Jan 2013 Jul 2013 Jan 2014 Jul 2014 Jan 2015

Exchange Rates Relative to CADIndex, Jan 2012 = 100

USD per CAD: May-8 @ 84.89

EUR per CAD: May-8 @ 96.84

JPY per CAD: May-8 @ 132.60

Varying Degrees of Depreciation

Although the Canadian dollarhas weakened against the

U.S. dollar, ECB easing hascaused CAD to strengthen

against the euro.

Source: Bloomberg LP and Wells Fargo Securities, LLC

Economics

Wells Fargo Securities, LLC Economics Group

25

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

Sam Bullard, Senior Economist [email protected]

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

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

Senior Economists

Mackenzie Miller, Economic Analyst [email protected]

Erik Nelson, Economic Analyst [email protected]

Alex Moehring, Economic Analyst [email protected]

Economists

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

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

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Economic Analysts

Administrative Assistants

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Global Economic Update€¦ · 6/5/2015 · Global Economic Update Tim Quinlan, Economist May,...

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