Economic Outlook: Cyclical Recovery, Structural Challenges GIC Central Banking Series: Recovery 2013 – Strength or Stagnation? John E. Silvia, Chief Economist May 16, 2013
Where Are We Now?
Interest Rates
Inflation
Growth
Five benchmarks for good decision making
Profits
Source:
Wells Fargo Economics
2
The Dollar
Wells Fargo vs. Consensus
Expectations for the Future
Sustained below-trend growth
Still cautious on consumer segments
How do we differ from consensus?
Housing improving—multifamily especially
State and local governments—still restructuring
Employment—cyclical and structural change
Wells Fargo Economics
3
What We Get Versus What We Expect
U.S. Real GDP Bars = CAGR
Line = Yr/Yr Percent Change
10%
10% GDP - CAGR: Q1 @ 2.5%
8%
GDP - Yr/Yr Percent Change: Q1 @ 1.8%
6%
6% Forecast
4%
Sustained recovery in 2013, but still below historical experience—benchmark 2.75 percent is trend from 1982-2012
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
-8%
-8%
-10% 2000
-10% 2002
2004
2006
2008
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Wells Fargo Economics
8%
4
2010
2012
2014
Private Sector vs. Public Sector
8%
The economy is rebalancing back to private sector demand
Real Final Sales to Private Domestic Purchasers vs. Government Spending
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4% Both series are Year-over-Year Percent Changes
-6%
Final Sales to Private Dom. Purch.: Q1 @ 2.5% Gov. Consumption & Investment: Q1 @ -2.1%
-8%
-8% 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Wells Fargo Economics
-6%
5
Small Businesses
Wells Fargo Small Business Survey & NFIB Overall Situation, NFIB Small Business Optimism 1986=100
Small Businesses: A full recovery in small business optimism is still distant
120
115
100
110
80
105
60
100
40
95
20
90
0
85
-20
80
-40
Overall Situation: 1Q 2013 @ 9.0 (Left Axis)
75
Small Business Optimism: 1Q 2013 @ 89.7 (Right Axis) -60 2004
70 2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: National Federation of Independent Businesses, Gallup, Wells Fargo Bank and Wells Fargo Securities, LLC
Wells Fargo Economics
6
Manufacturing
ISM Manufacturing Composite Index Diffusion Index
Large, Global Businesses: Slowdown in manufacturing recently after typical recovery
65
65
60
60
55
55
50
50
45
45
40
40
35
35
ISM Manufacturing Index: Apr @ 50.7 12-Month Moving Average: Apr @ 51.4
30
30 87
89
91
93
95
97
99
01
03
Source: Institute for Supply Management and Wells Fargo Securities, LLC
Wells Fargo Economics
7
05
07
09
11
13
Initial Unemployment Claims: Cyclical
Initial Claims for Unemployment Seasonally Adjusted, In Thousands
700 650 600
Signaling continued, moderate job gains ahead
700
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
650 600
550
550
500
500
450
450
400
400
350
350
300
300
250
250 86
88
90
92
94
96
98
00
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Wells Fargo Economics
8
02
04
06
08
10
12
Employment: Structural
Employment-Population Ratio 16 Years and Over, Seasonally Adjusted
Structural Change: A much lower base to support growth and spending, especially for entitlements
65
65
64
64
63
63
62
62
61
61
60
60
59
59
58
58 Employment-Population Ratio: Apr @ 58.6
57
57 86
88
90
92
94
96
98
00
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Wells Fargo Economics
9
02
04
06
08
10
12
Employment: Participation Rates by Gender
Labor Force Participation Rate Seasonally Adjusted
Both men and women have left the labor force—a new path for women
76%
76%
74%
74%
72%
72%
70%
70%
68%
68%
66%
66%
64%
64%
62%
62%
60%
60%
58%
58%
56%
56%
Female: Apr @ 57.2%
54%
54%
Male: Apr @ 69.8%
52%
52% 00
01
02
03
04
05
06
07
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Wells Fargo Economics
10
08
09
10
11
12
13
Employment: Structural
Unemployment Rates Seasonally Adjusted 18%
18% U-6 Unemployment Rate: Apr @ 13.9%
16%
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.
16%
U-3 Unemployment Rate: Apr @ 7.5%
14%
14%
12%
12%
10%
10%
8%
8%
6%
6%
4%
4%
2%
2% 94
96
98
00
02
04
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Wells Fargo Economics
11
06
08
10
12
Consumer Spending
Real Personal Consumption Expenditures Bars = CAGR
Line = Yr/Yr Percent Change
8%
8%
6%
6%
4%
Subpar recovery suggests slower consumer spending and lower state sales tax revenues compared to the past
Forecast
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
PCE - CAGR: Q1 @ 3.2% PCE - Yr/Yr Percent Change: Q1 @ 2.0%
-8% 2000
-8% 2002
2004
2006
2008
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Wells Fargo Economics
12
2010
2012
2014
Income Growth
Income Growth by Quintile Percent Change from 1984 to 2011, After-Tax Income
After-tax income has increased the most for the lowest and highest income households since the mid-1980s
250%
250%
200%
200%
150%
150%
100%
100%
50%
50%
0%
0% Lowest 20 percent
Second 20 percent
Third 20 percent
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Wells Fargo Economics
13
Fourth 20 percent
Highest 20 percent
Personal Income
Personal Income Sources March 2013
Transfer Receipts, 16%
Wages and salaries make up less than half of personal income as transfer payments take on more responsibility
Receipts on Assets, 12%
Wage and Salary Disbursements, 48%
Rental Income, 3%
Proprietors' Income, 9% Supplement to Wages and Salaries, 12%
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Wells Fargo Economics
14
New Orders
Nondefense Capital Goods Orders, Ex-Aircraft Series are 3-Month Moving Averages
Signs of life appeared early in this recovery in capital goods orders—now the slowdown— fiscal cliff?
40%
40%
20%
20%
0%
0%
-20%
-20%
-40%
-40% 3-Month Annual Rate: Mar @ 16.7% Year-over-Year Percent Change: Mar @ 0.2%
-60% 1994
-60% 1996
1998
2000
2002
2004
2006
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Wells Fargo Economics
15
2008
2010
2012
Housing
U.S. Housing Starts Millions of Units 2.4
2.4
2.1
2.1
1.8
1.8 Forecast
1.5
Continued improvement ahead reflecting multifamily gains
1.2
1.2
0.9
0.9
0.6
0.6
0.3
0.3
0.0
0.0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Wells Fargo Economics
1.5
16
Housing Demographics
Median Home Size vs. Average Household Size Square Feet; Number of Persons
Secular Shift? Households are living in smaller homes with more people since the recession, but longer-term trends may win out
2,400
2.80
2,200
2.75
2,000
2.70
1,800
2.65
1,600
2.60
1,400
2.55 Median Square Footage: 2012 @ 2,305 (Left Axis) Number of Persons per Household: 2012 @ 2.55 (Right Axis)
1,200
2.50 80
84
88
92
96
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Wells Fargo Economics
17
00
04
08
12
Home Prices
Home Price Growth vs. Mortgage Rates Percent
Home prices are rising faster than mortgage interest rates
20%
20%
15%
15%
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
-10%
-15%
-15%
-20%
S&P/Case-Shiller 20 Home Price Index, Yr/Yr %: Feb @ 9.32% 5/1 Year ARM: Apr @ 2.55%
-25%
-20% -25%
CoreLogic Home Price Index, Yr/Yr %: Feb @ 10.23% -30%
-30% 03
04
05
06
07
08
09
10
Source: S&P/Case-Shiller, CoreLogic, Bloomberg LP and Wells Fargo Securities, LLC
Wells Fargo Economics
18
11
12
13
Housing
Negative Equity Mortgages - By State Percent of Mortgages Outstanding Washington
17.8
Alabama
18.3
Oregon
18.9
Virginia
19.3
New Jersey
20.0
New Hampshire
20.1
Idaho
Negative equity in homes has contributed to foreclosures and reduced labor mobility
As of Q4 2012
21.0
Rhode Island
23.4
Maryland
23.5
Ohio
25.0
California
25.2
Illinois
28.4
Michigan
31.9
Georgia
33.8
Arizona
34.9
Florida
40.2
Nevada
52.4
US
21.5 0%
10%
Source: CoreLogic and Wells Fargo Securities, LLC
Wells Fargo Economics
19
20%
30%
40%
50%
60%
Commercial Real Estate
Commercial Real Estate Vacancy Rates Percent 24%
20%
The recovery has been uneven across property types
24% Office Vacancy Rate: Q1 @ 17.0% Industrial Vacancy Rate: Q1 @ 8.2% Retail Vacancy Rate: Q1 @ 10.6% Apartment Vacancy Rate: Q1 @ 4.3%
16%
16%
12%
12%
8%
8%
4%
4%
0% 1994
0% 1996
1998
2000
2002
Source: Reis, Inc., PPR and Wells Fargo Securities, LLC
Wells Fargo Economics
20%
20
2004
2006
2008
2010
2012
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.
Apartment Supply & Demand
Industrial Supply & Demand
Apartment Supply & Demand
Industrial Supply & Demand
Percent, Thousands of Units
Percent, Millions of Square Feet
9%
100
14%
60
8%
75
12%
40
7%
50
10%
20
6%
25
8%
0
5%
0
6%
-20
4%
-25
4%
-40
-50
2%
-75
0%
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)
3%
2% 05
06
07
08
09
10
11
12
13
21
-60
-80 2005
Source: Reis, Inc., U.S. Department of Commerce and Wells Fargo Securities, LLC
Wells Fargo Economics
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) 2006
2007
2008
2009
2010
2011
2012
2013
Inflation & Interest Rates
Core Monetary InflationInflation Policy
Yield Curve
Key Drivers
Growth Real Interest Rates
Profits Wage-Price Spiral
Wells Fargo Economics
Market Expectations
22
Interest Rates
The Dollar
Inflation: Persistent at Low Rates
U.S. Consumer Price Index Both Series are 3-Month Moving Averages
Consumer price growth should not pose a barrier to easier Federal Reserve policy in 2013
9%
9%
6%
6%
3%
3%
0%
0%
-3%
-3%
-6%
-6%
-9%
-9%
CPI 3-Month Annual Rate: Mar @ 1.4% CPI Year-over-Year: Mar @ 1.7%
-12%
-12% 92
94
96
98
00
02
04
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Wells Fargo Economics
23
06
08
10
12
Inflation Expectations
TIPS Inflation Compensation 5-Year and 5-Year Forward
3.5%
Inflation expectations have been rising
3.0%
3.0%
2.5%
2.5%
2.0%
2.0%
1.5%
1.5%
1.0%
1.0%
0.5%
0.5%
0.0%
0.0%
-0.5%
-0.5%
-1.0%
-1.0%
-1.5%
-2.5% 2008
-1.5%
5-Year: Apr-30 @ 2.10%
-2.0%
5-Year 5 Years Ahead: Apr-30 @ 2.64%
-2.0% -2.5%
2009
2010
2011
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Wells Fargo Economics
3.5%
24
2012
2013
Inflation vs. Yields: Negative Real Yields – Three Non-market Buyers
Inflation and the Real Yield Percent 8.0%
8.0%
5-Year Treasury Note Yield: Apr @ 0.7% Median Inflation Expect. for 5-10 Yrs: Apr @ 2.8%
7.0%
Inflation expectations exceed nominal returns
7.0%
6.0%
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
1.0% 1996-2009 Average Median Inflation Expectation for 5-10 Years: 2.9%
0.0% 1996
0.0% 1998
2000
2002
2004
2006
2008
Source: Federal Reserve Board, University of Michigan and Wells Fargo Securities, LLC
Wells Fargo Economics
25
2010
2012
Corporate Spreads: Positive for Issuance
Aaa and Baa Corporate Bond Spreads Over 10-Year Treasury, Basis Points 700
700 Baa Spread: Apr @ 283 Bps
600
Spreads have returned to a more normal level; bond issuance is strong
Aaa Spread: Apr @ 197 Bps
500
500
400
400
300
300
200
200
100
100
0 1996
0 1998
2000
2002
2004
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Wells Fargo Economics
600
26
2006
2008
2010
2012
Corporate Spreads
Baa Corporate Yield Over S&P Index Earnings Moody's Baa Corporate Yield Minus S&P Index Earnings Yield
Recent inversion in the ratio between bond yields and equity earnings
600
600
500
500
400
400
300
300
200
200
100
100
0
0
-100
-100
-200
-200
-300
-300
Corporate - Earnings: May @ -181.9 bps
-400
-400 90
92
94
96
98
00
02
Source: Moody’s Analytics, S&P and Wells Fargo Securities, LLC
Wells Fargo Economics
27
04
06
08
10
12
Investment Grade Corporate Bonds
Investment Grade Corporate Issuance 3-Month Moving Average, Billions of USD
Businesses are taking advantage of low interest rates
$30
$30
$27
$27
$24
$24
$21
$21
$18
$18
$15
$15
$12
$12
$9
$9
$6
$6
$3 $0 2004
$0 2005
2006
2007
2008
Source: IFR Markets and Wells Fargo Securities, LLC
Wells Fargo Economics
$3
Investment Grade Corporate: May @ $23.7 Billion
28
2009
2010
2011
2012
2013
High Yield Corporate Bonds
High Yield Corporate Issuance 3-Month Moving Average, Billions of USD $50
$50 High Yield Corporate Issuance: Apr @ $26.9 Billion
$45
As investors search for yield among exceptionally low interest rates, bond issuance has gained momentum
$45
$40
$40
$35
$35
$30
$30
$25
$25
$20
$20
$15
$15
$10
$10
$5
$5
$0
$0 04
05
06
07
08
Source: IFR Markets and Wells Fargo Securities, LLC
Wells Fargo Economics
29
09
10
11
12
13
Credit: Changing Relationships
Delinquency Rates Loans at All Commercial U.S. Banks 11% 10% 9%
Delinquencies of real estate loans are significantly different from consumer and C&I loans
11%
Consumer Loans: Q4 @ 2.62% Real Estate Loans: Q4 @ 7.57% C&I Loans: Q4 @ 1.16%
10% 9%
8%
8%
7%
7%
6%
6%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0% 87
89
91
93
95
97
99
01
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Wells Fargo Economics
30
03
05
07
09
11
13
Credit: Changing Relationships
Charge-Off Rates Loans at All Commercial U.S. Banks 7%
7% Consumer Loans: Q4 @ 2.50% Real Estate Loans: Q4 @ 0.83%
6%
Patterns in charge-off rates have also changed
6%
C&I Loans: Q4 @ 0.31%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0% 85
87
89
91
93
95
97
99
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Wells Fargo Economics
31
01
03
05
07
09
11
13
Bank Lending: Money Multiplier
Loan-to-Deposit Ratio At Commercial Banks in the United States
Banks are no longer turning over deposits into loans at the previous pace
110%
110%
105%
105%
100%
100%
95%
95%
90%
90%
85%
85%
80%
80%
75%
75%
70%
70% Loans-to-Deposit Ratio: Mar @ 77.9%
65% 1985
65% 1989
1993
1997
2001
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Wells Fargo Economics
32
2005
2009
2013
Credit
Business credit is poised to grow as standards are relaxed
Standards
Demand
Net Percentage of Banks Tightening Standards
Net Percent of Banks Reporting Stronger Demand
Commercial and Industrial Loans
Commercial and Industrial Loans
100%
100%
60%
60%
80%
80%
40%
40%
60%
60%
20%
20%
40%
40%
0%
20%
20%
-20%
-20%
0%
-40%
-40%
-20%
-60%
-60%
-40%
-80%
-60%
-100%
0%
-20% -40%
C&I Loans to Large & Medium Firms: Q1 @ -7.4% C&I Loans to Small Firms: Q1 @ -7.7%
-60% 92
94
96
98
00
02
04
06
08
10
12
Demand for C&I Loans to Large & Medium Firms: Q1 @ 19.1% Demand for C&I Loans to Small Firms: Q1 @ 15.4%
33
-80% -100%
92
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Wells Fargo Economics
0%
94
96
98
00
02
04
06
08
10
12
Business Lending
Commercial & Industrial Loans by Bank Type Billions of U.S. Dollars $1,800 $1,600
Banks of all types are integral to business lending
$1,800 Foreign Banks: Mar @ $254.1 B Small Domestic Banks: Mar @ $436.5 B Large Domestic Banks: Mar @ $850.5 B
$1,400
$1,400
$1,200
$1,200
$1,000
$1,000
$800
$800
$600
$600
$400
$400
$200
$200
$0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Wells Fargo Economics
$1,600
34
$0
Corporate Profits: Increasing Role of Global Profits
Corporate Profits As a Percent of GDP
Profits as a percentage of GDP are historically high and are being boosted by profits earned abroad
14%
14%
12%
12%
10%
10%
8%
8%
6%
6%
4%
4%
2%
2%
Rest of World: Q4 @ 2.9% Domestic: Q4 @ 9.8%
0%
0% 47
51
55
59
63
67
71
75
79
83
87
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Wells Fargo Economics
35
91
95
99
03
07
11
Corporate Profits from Abroad
U.S. Companies listed in the S&P 500 with Greater Than 50 Percent of Sales Abroad (A Sample)
Many U.S. companies rely on the health of international economies
Wells Fargo Economics
Goodyear Tire BorgWarner Priceline.com Nike Coca-Cola Heinz Proctor & Gamble Avon Exxon Mobil AFLAC Intel Applied Materials Oracle Johnson & Johnson
36
Merck Boeing Eaton Corp. Emerson Electric Fluor GE 3M Caterpillar Cisco Qualcomm Apple eBay IBM Symantec
Interest Expense: Under Control
Non-fin. Corporate Business: Corporate Interest As a Percentage of Pre-Tax Profits 100%
Corporate interest expenses are declining amid the low-rate environment
100%
80%
80%
60%
60%
40%
40%
20%
20%
Corporate Interest: Q4 @ 20.2% 0%
0% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Wells Fargo Economics
37
Corporate Profits
Corporate Profts Percent of GDP
Corporate profits are at a record share of GDP, however, it may be temporary
16%
16%
14%
14%
12%
12%
10%
10%
8%
8%
6%
6%
Corporate Profits: Q4 @ 14.3% Long-run Average (1982-2012): 10.85%
4%
4% 82
84
86
88
90
92
94
96
98
00
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Wells Fargo Economics
38
02
04
06
08
10
12
Corporate Profits: Domestic Profits
Domestic Profits Financial and NonFinancial Corporations, Billions of Dollars $1,200
$1,200
NonFinancial Corporations: Q4 @ $1,106.8B Financial Institutions: Q4 @ $453.8B $1,000
Financial institutions have struggled to see profits rise after the recession
$1,000
$800
$800
$600
$600
$400
$400
$200
$200
$0
$0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Wells Fargo Economics
39
Fiscal Policy: Difficult Choices/Chronic Imbalance
Federal Budget Balance Percentage of GDP
The nation has entered uncharted waters in fiscal policy窶馬o balance at 2.75 percent GDP growth
4.0%
4.0%
2.0%
2.0%
0.0%
0.0%
-2.0%
-2.0%
-4.0%
Forecast
-4.0%
-6.0%
-6.0%
-8.0%
-8.0%
-10.0%
-10.0%
-12.0%
-12.0% Budget Balance: Q1 @ -5.8%
-14.0% 2000
-14.0% 2002
2004
2006
2008
2010
2012
2014
Source: U.S. Department of Commerce, U.S. Department of the Treasury and Wells Fargo Securities, LLC
Wells Fargo Economics
40
Federal Debt Held by the Public: Unsustainable
Federal Debt Held by the Public Percentage of GDP, CBO Projection 140%
140% Federal Debt Held by the Public: 2023 @ 77.0%
Federal debt held by the public will likely remain near 80 percent
Projected
120%
120%
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0% 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 20
Source: Congressional Budget Office and Wells Fargo Securities, LLC
Wells Fargo Economics
41
Federal Government Spending
U.S. Federal Government Mandatory Outlays Trillions of U.S. Dollars, Projections Begin in 2013 $4.0T $3.5T
The unfunded liabilities of the entitlement programs reflect a commitment to spend in the future
$4.0T Other Programs: 2023 @ $0.3T Income Security: 2023 @ $0.3T Social Security: 2023 @ $1.4T Healthcare Programs: 2023 @ $1.6T
$3.0T
$3.0T
$2.5T
$2.5T
$2.0T
$2.0T
$1.5T
$1.5T
$1.0T
$1.0T
$0.5T
$0.5T
$0.0T 2012
$0.0T 2014
2016
2018
Source: Congressional Budget Office and Wells Fargo Securities, LLC
Wells Fargo Economics
$3.5T
42
2020
2022
Long-term Real GDP Expectations
Real GDP Growth Estimates Comparison to CBO Assumptions, Year-over-Year Percent Change 5%
5% CBO Forecast WF Economics Forecast
4%
Different expectations for future economic growth
Blue Chip Consensus
4%
3%
3%
2%
2%
1%
1%
0%
0% 2013
2014
2015-2018
Source: Congressional Budget Office and Wells Fargo Securities, LLC
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43
2019-2023
U.S. Government Debt: Who Holds Our Debt?
Top Holders of U.S. Treasuries Billions of Dollars $1,400
$1,400
Feb-11 Feb-12
$1,200
Feb-13
$1,000
Japan and China hold an unprecedented amount of U.S. debt
$1,000
$800
$800
$600
$600
$400
$400
$200
$200
$0
$0 Japan
China
U.K.
OPEC
Source: U.S. Department of the Treasury and Wells Fargo Securities, LLC
Wells Fargo Economics
$1,200
44
Taiwan
Caribbean
Fiscal Policy: Restructuring Continues
Real Government Consumption & Investment Bars = CAGR
Line = Yr/Yr % Change
10%
The government sector continues to be a drag on GDP as state and local governments restructure
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
Government Consumption & Investment: Q1 @ -4.1%
-6%
Government Consumption & Investment: Q1 @ -2.1% -8% 1996
-8% 1998
2000
2002
2004
2006
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
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45
2008
2010
2012
Global Growth
GDP Growth Post-Recession Average Annual Percent Change for 2010-2012
United Kingdom Euro area Japan United States
0.7% 1.0% 2.0% 2.1%
South Africa
2.9%
Brazil
The global recovery is being driven by emerging markets
3.9%
Russia
4.1%
Korea
4.2%
Indonesia
6.2%
Turkey
6.9%
Singapore
7.2%
India
7.3%
China 0.0%
9.2%
2.0%
4.0%
Source: International Monetary Fund and Wells Fargo Securities, LLC
Wells Fargo Economics
46
6.0%
8.0%
10.0%
Eurozone Financial Markets: Structural Break in Risk Assessments
10-Year Government Bond Yields Percent 8.0%
8.0% Italy: May 02 @ 3.8%
7.0%
6.0%
Tensions in European financial markets have subsided, at least for now
Spain: May 02 @ 4.1%
Germany: May 02 @ 1.1%
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0% 2003
1.0% 2004
2005
2006
2007
2008
Source: IHS Global Insight and Wells Fargo Securities, LLC
Wells Fargo Economics
7.0%
United States: May 02 @ 1.6%
47
2009
2010
2011
2012
2013
Global Economies: A Strong Dollar Policy?
U.S. Dollar Index Broad Index
Economic fundamentals and risks abroad will drive the dollar
130
130
120
120
110
110
100
100
90
90
80
80
U.S. Dollar Broad Index: Q1 @ 84.8 Long-run Average (1982-2012): 96.99
70
70 82
84
86
88
90
92
94
96
98
Source: Federal Reserve Board and Wells Fargo Securities, LLC
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00
02
04
06
08
10
12
Outlook Risks
Potential Challenges 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 What are the primary risks to the 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
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49
U.S. Forecast
Wells Fargo U.S. Economic Outlook Actual 2012
Real Gross Domestic Product Personal Consumption Inflation Indicators PCE Deflator
1
2010
Actual 2011
2012
Forecast 2013 2014
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
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
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
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
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
2
Consumer Price Index Industrial Production
1
Corporate Profits Before Taxes Trade Weighted Dollar Index Unemployment Rate Housing Starts
Forecast 2013
2
3
4
Quarter-End Interest Rates 5 Federal Funds Target Rate
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
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
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
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
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
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, 2013 1 C ompound Annual Growth Rate Quarter-over-Quarter 2
Year-over-Year Percentage C hange
3
Federal Reserve Major C urrency Index, 1973=100 - Quarter End
4
Millions of Units
5
Annual Numbers Represent Averages
Source: U.S. Department of Commerce, U.S. Department of Labor, Federal Reserve Board, Freddie Mac and Wells Fargo Securities, LLC
Wells Fargo Economics
50
Appendix
Wells Fargo Economics Group Publications
Recent Special Commentary Date April-29 April-23 April-19 April-15 April-12 April-03 April-02
To join any of our research distribution lists please visit our website: http://www.wellsfargo.com/ economics
March-25 March-25 March-21 March-20 March-20 March-15 March-11 March-07 March-05 February-28 February-25 February-20 February-18 February-15 February-11 February-11 February-11 February-07 February-05 February-04 February-04 January-25 January-25 January-24 January-15 January-15 January-14 January-09 January-04 January-02 December-19 December-19 December-18 December-17 December-13
Wells Fargo Economics
Title
Authors
Is the U.K. Economy (Finally) Turning the Corner? Stability Ratios: Judging Economic Volatility How Stationary Is My Economic North Star? Part II Fiscal Policy: Not Your 1960s' Model for Investors Easy Money: Japan's Policy Gamble What is Driving Auto Sales Higher? Will Fed Tightening Derail Developing Economies?
Bryson Silvia & Iqbal Silvia & Iqbal Silvia & Brown Quinlan Aleman & Brown Bryson
Identifying Change: Did the Great Recession Alter Credit Sweden and Denmark: So Close, Yet So Far Apart Argentina's Economy Slows Down Considerably in 2012 How Stationary Is My Economic North Star? Florida's Economic Recovery Continues To Build Momentum Arizona: Back from the Brink Mexican Central Bank: Concerned By Slowing Inflation Government Spending: Three Faces of Change Commercial Real Estate Chartbook: Quarter 4
Silvia, Iqbal & Watt Bryson Aleman Silvia, Iqbal & Swankoski Vitner & Silverman Aleman & Griffiths Aleman Silvia & Brown Vitner, Khan & Silverman
Emerging Market Debt: A Looming Problem? Economic Impact of Budget Sequestration Economic Outlook and the Banking Sector Sequestration: Which States Are Most Vulnerable? The Chinese Financial System: Year of the Turtoise? Student Loans: A Different Financial Market Strong Contraction in Mexican Industrial Production Housing Chartbook: January 2013 European Debt Dynamics: An Update Alabama's Big Wheels Keep on Turning When Is This Time Different? The Brazilian Economy Continues to Struggle
Bryson Silvia & Brown Silvia Vitner & Brown Bryson Silvia & Watt Aleman Vitner, Khan & Silverman Bryson Vitner & Silverman Silvia, Iqbal, Watt & Swankoski Aleman
Bank of Japan Joins Other Central Banks British Economy Remains Quite Weak Is Commercial Real Estate Still an Inflation Hedge? A Decision Maker's View of Fiscal Policy California's Broadening Economic Recovery Peruvian Economy: Still Going Strong National Health Spending: Secular Growth Cyclical Slowdown Employment: So, Is This It? A Fiscal Cliff Resolution? Not Really
Quinlan Bryson Khan Silvia Vitner Aleman Silvia & Swankoski Silvia & Watt Silvia & Brown
Texas: Growth in a Weakening World Environment Canada: Economic Rock Star Faces Big Challenges Fiscal Cliff and True Reform Housing Chartbook: November 2012 2013 Economic Outlook
Aleman & Griffiths Quinlan Silvia Vitner, Khan & Silverman
52
Wells Fargo Securities, LLC Economics Group Global Head of Research and Economics
Economists Azhar Iqbal, Econometrician………………………………azhar.iqbal@wellsfargo.com
Diane Schumaker-Krieg ………………… ….diane.schumaker@wellsfargo.com Global Head of Research & Economics ……
Tim Quinlan, Economist …………………………………..tim.quinlan@wellsfargo.com
Chief Economist John E. Silvia …
Michael A. Brown, Economist ………………… michael.a.brown@wellsfargo.com
...................... …
Sarah Watt, Economist
john.silvia@wellsfargo.com
.
…………………………… .sarah.watt@wellsfargo.com Economic Analysts
Senior Economists
Kaylyn Swankoski, Economic Analyst Mark Vitner, Senior Economist……………....………. . Jay Bryson, Global Economist
.
mark.vitner@wellsfargo.com
Zachary Griffiths, Economic Analyst
…………………....……….jay.bryson@wellsfargo.com
Sam Bullard, Senior Economist
Sara Silverman, Economic Analyst
sam.bullard@wellsfargo.com
Peg Gavin, Executive Assistant.
Eugenio Aleman, Senior Economist………………….eugenio.j.aleman@wellsfargo.com
Cyndi Flowe, Senior Administrative Assistant
.…
zachary.griffiths@wellsfargo.com sara.silverman@wellsfargo.com
Administrative Assistants
Nick Bennenbroek, Currency Strategist ……nicholas.bennenbroek@wellsfargo.com
Anika Khan, Senior Economist
kaylyn.swankoski@wellsfargo.com
peg.gavin@wellsfargo.com cyndi.h.flowe@wellsfargo.com
. anika.khan@wellsfargo.com
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