Economic Outlook: Cyclical Recovery, Structural Challenges

Economic Outlook: Cyclical Recovery, Structural Challenges Global Interdependence Center Conference John E. Silvia, Chief Economist April 18, 2012

Where Are We Now?

Interest Rates

Inflation

Growth

Five benchmarks for good decision making

Profits

Source:

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The Dollar

Wells Fargo vs. Consensus

Expectations for the Future

 Sustained below-trend growth

 Still cautious on the consumer

How do we differ from consensus?

 Still cautious on housing

 State and local governments—still restructuring

 Employment—cyclical and structural change

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What We Get Versus What We Expect

Real GDP Bars = CAGR

10.0%

Line = Yr/Yr Percent Change

10.0%

GDP - CAGR: Q4 @ 3.0% 8.0%

GDP - Yr/Yr Percent Change: Q4 @ 1.6%

6.0%

6.0% Forecast

4.0%

Sustained recovery in 2012, but still below historical experience

4.0%

2.0%

2.0%

0.0%

0.0%

-2.0%

-2.0%

-4.0%

-4.0%

-6.0%

-6.0%

-8.0%

-8.0%

-10.0% 2000

-10.0% 2002

2004

2006

2008

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

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8.0%

4

2010

2012

Inflation

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

9%

The current rate of consumer price growth should not threaten easy Federal Reserve policy

9%

6%

6%

3%

3%

0%

0%

-3%

-3%

-6%

-6%

-9%

-9%

CPI 3-Month Annual Rate: Mar @ 2.5% CPI Year-over-Year: Mar @ 2.8%

-12%

-12% 92

94

96

98

00

02

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

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04

06

08

10

12

Population Growth

U.S. Population Growth In Millions

4.0

Population growth has slowed following since the past recession

4.0

3.5

3.5

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 80

82

84

86

88

90

92

94

96

98

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

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00

02

04

06

08

10

Population Growth: Florida

Florida Population Growth In Thousands

500

Population growth has recovered modestly in Florida as affordability has increased

500

400

400

300

300

200

200

100

100

0

0 80

82

84

86

88

90

92

94

96

98

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

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00

02

04

06

08

10

Employment: Structural Challenge

Employment-Population Ratio 16 Years and Over, Seasonally Adjusted

65

Structural Change: A much lower base to support spending

65

64

64

63

63

62

62

61

61

60

60

59

59

58

58 Employment-Population Ratio: Mar @ 58.5

57

57 86

88

90

92

94

96

98

00

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

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02

04

06

08

10

12

Employment: Structural Challenge

Unemployment Rate

By Age Cohort, 12-Month Average

16% 14%

16% March 2012

14.2%

14%

12%

12%

10%

Unemployment is higher among groups that should be saving for and buying their first homes

10%

9.3%

8%

7.1%

6.8%

8% 6.5%

6%

6%

4%

4%

2%

2%

0%

0% 20-24

25-34

35-44

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

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45-54

55+

Student Loan Debt

New Student Loans Billions of Dollars $120

$120 New Student Loans: 2010-11 @ $111.9 B

$100

Increasing student loan debt may push back the timing of household formation and home-buying for many young adults

$100

$80

$80

$60

$60

$40

$40

$20

$20

$0

$0 2000-01

2002-03

2004-05

Source: The College Board and Wells Fargo Securities, LLC

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2006-07

2008-09

2010-11

Household Formation

U.S. Household Formation Year-over-Year Percent Change of 12-Month Moving Average 4.0%

4.0% 1982 Rebase

3.0%

Household formation has slowed to a crawl since the Great Recession

3.0%

2.0%

2.0%

1.0%

1.0%

0.0%

0.0%

-1.0%

-1.0% 2000 Rebase

-2.0%

-2.0%

Year-over-Year Percent Change: Dec @ 0.2% -3.0%

-3.0% 66

70

74

78

82

86

90

94

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

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98

02

06

10

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, although longerterm 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: 2011 @ 2,235 (Left Axis) Number of Persons per Household: 2011 @ 2.58 (Right Axis)

1,200

2.50 80

84

88

92

96

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

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00

04

08

House Prices

S&P Case-Shiller Composite-10 Home Price Index Year-over-Year Percentage Change

Uncertainty about the value of a home has kept many would-be buyers on the sideline

24%

24%

20%

20%

16%

16%

12%

12%

8%

8%

4%

4%

0%

0%

-4%

-4%

-8%

-8%

-12%

-12%

-16%

-16%

-20%

-20%

S&P Case-Shiller Composite-10: Jan @ -3.9%

-24%

-24% 88

90

92

94

96

98

Source: S&P Case-Shiller and Wells Fargo Securities, LLC

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00

02

04

06

08

10

Homeownership

Homeownership Rate Percent

70%

Homeownership Rates: How much further to fall?

70%

68%

68%

66%

66%

64%

64%

62%

62% Homeownership Rate: Q4 @ 66.0%

60%

60% 65

70

75

80

85

90

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

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95

00

05

10

Housing

Housing Starts Millions of Units 2.4

2.4

2.1

2.1

1.8

1.8

1.5

Structural Challenge: What is the new sustainable pace?

Forecast

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

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

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1.5

15

Housing: Home Improvement Cycle

Home improvements now account for the largest share of residential investment in the economy

2006

2011

Residential Investment

Residential Investment

Q4-2006

Brokers' Commissions 14.0%

Q4-2011

Other 0.9%

Brokers' Commissions 16.2%

Other 0.1%

New Building 36.9%

Improvements 25.1% New Building 60.1%

Improvements 46.9%

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

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Lending: Real Estate

Real Estate Lending 25%

The retrenchment in real estate lending may be over

By Commerical Banks, Year-over-Year Percent Change

25%

20%

20%

15%

15%

10%

10%

5%

5%

0%

0%

-5%

-5% Real Estate Loans: Mar @ 0.0%

-10% 1973

-10% 1977

1981

1985

1989

1993

Source: Federal Reserve Board and Wells Fargo Securities, LLC

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1997

2001

2005

2009

Lending: Real Estate

Real Estate Loans by Bank Type Billions of U.S. Dollars $4,000 $3,500

Small banks are leading the recent pick-up in real estate lending

$4,000

Foreign Banks: Mar @ $30.9 B Small Domestic Banks: Mar @ $1,483.5 B Large Domestic Banks: Mar @ $2,023.8 B

$3,500

$3,000

$3,000

$2,500

$2,500

$2,000

$2,000

$1,500

$1,500

$1,000

$1,000

$500

$500

$0

$0 90

92

94

96

98

00

02

Source: Federal Reserve Board and Wells Fargo Securities, LLC

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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: spending completely unconstrained  Housing: unable to sustain growth on its own What are the primary risks to the outlook?

 European debt crisis weighs on global growth  Rising oil and gasoline prices drag down real consumption

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Outlook Summary

Wells Fargo U.S. Economic Outlook

Actual 2008 Real Gross Domestic Product Personal Consumption Equipment and Software Government Purchases

1

2

Consumer Price Index

Corporate Profits Before Taxes 10-Year Treasury Note

2

2009

2010

2

2012

2013

-3.6 -2.0 -16.3 1.7 -0.3

3.0 2.0 14.6 0.7 1.6

1.7 2.2 10.4 -2.1 3.1

2.3 1.9 7.5 -1.8 2.5

2.1 1.2 5.2 -1.2 2.3

-16.4

9.1

32.2

7.9

6.2

6.5

3.66

3.26

3.22

2.78

2.36

2.73

C ompound Annual Growth Rate Quarter-over-Quarter Year-over-Year Percentage C hange

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

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-0.4 -0.7 -4.1 2.5 3.8

Fo recast as o f: A pril 13, 2012 1

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Appendix

Wells Fargo Economics Group Publications A Sampling of Our Recent Special, Regional & Industry Commentary Recent Special Commentary Date April-10 April-09 March-28 March-23 March-19 March-16 March-15 March-09 March-09 March-09 March-06 March-05 March-05 March-05

To join any of our research distribution lists please visit our website: http://www.wellsfargo.com/ economics

February-28 February-27 February-16 February-13 February-13 February-08 February-02 January-31 January-31 January-25 January-19 January-13 January-13 January-12 January-11 January-05 December-30 December-28 December-22 December-21 December-21 December-20 December-14 December-14 December-20 December-19 December-12 December-09 December-08 December-08 December-05

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Authors

Fiscal Consolidation in a Flow-of-Funds Framework Budget and Election Year Uncertainty Restrain the Capital Region

Bryson & Seydl Vitner & Watt

State Personal Income Gains: Who Is Hot And Who Is Not Here We Go Again: Oil Prices and the U.S. Economy The Composition of Job Growth: A Low-Wage Bias?

2011: Revising a Year of Modest Job Growth Three Hard Realities Continue to Limit the Cyclical Expansion Economic Outlook and the Biases that Limit Our Thinking Credit Quality Monitor The Quality of Job Growth Remains Subpar Three Measures of a Healthy Labor Market: A Cyclical View Georgia’s Recovery Kicked Into High Gear During 2011 Regional Impact of Gasoline Prices The Evolution of the Economy, Credit & Economic Policy

Vitner Silvia, Aleman & Iqbal Vitner & Seydl Vitner & Brown Silvia Silvia Anderson & Kashmarek Vitner Silvia, Iqbal & Watt Vitner Vitner & Brown Silvia

Insourcing: Manufacturing - A Viable Solution in a Global Economy?

Is the Skills Disconnect In the Labor Force New? Does the New LEI Alter Recession Predictability Accuracy?

Disparities of Education and Structural Unemployment WTI: No Longer A Benchmark For Oil Prices Bank Lending: Fed's Survey Suggests Support for Growth The Fragile Fiscal Policy Outlook: I

Silvia, Brown & Swankoski Silvia & Brown Silvia & Iqbal Silvia, Brown & Swankoski Aleman Silvia & Watt Silvia & Brown

Housing Chartbook: January 2011 Vitner, Khan & Seydl How Does The Recent Drop In The Unemployment Rate Square With Okun’s Law? Vitner & Seydl FOMC: Why the Recent Past Seldom Predicts the Future Silvia Vacancies and the Housing Recovery Vitner & Seydl How Might Fiscal Restraint Generate Economic Growth?

Silvia & Watt Eastern Europe Faces Monetary Policy Dilemma Anderson & Kashmarek Global Chartbook: January 2012 Bank Credit: A Surprisingly Typical Cycle Silvia & Watt The Charlotte Economy: Improvement Ahead Silvia & Brown Commodity Price Volatility to Continue Colorado Outlook: December 2011 South Korea Moves Forward on Free Trade Indian Economy: Still Deteriorating at the Margin Georgia Economic Outlook: December 2011 What's Behind the Upward Trend in Housing Activity?

New Jersey Faces Additional Hurdles Russia: Black Gold and Political Stranglehold Arizona: Growth, but at a Lower Gear Europe in 2012: Renaissance or More Dark Ages Thunder Down Under: Australia Braces for a Storm Pennsylvania Economic Update and Outlook Minnesota Economic Outlook: December 2011 Credit Quality Monitor - December 2011 What is Driving Construction Spending?

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Aleman Anderson & Kashmarek Anderson Bryson Vitner & Seydl Vitner & Khan Vitner, Khan & Watt Anderson & Kashmarek Aleman & Swankoski Bryson, Quinlan, & Seydl Quinlan Bryson, Quinlan, & Seydl Anderson & Kashmarek Anderson & Kashmarek Vitner & Khan

Wells Fargo Securities, LLC Economics Group Global Head of Research and Economics

Economists

Diane Schumaker-Krieg ………………… ….diane.schumaker@wellsfargo.com Global Head of Research & Economics

Azhar Iqbal, Econometrician………………………………azhar.iqbal@wellsfargo.com

……

Tim Quinlan, Economist …………………………………..tim.quinlan@wellsfargo.com Chief Economist Ed Kashmarek, Economist …………………………….ed.kashmarek@wellsfargo.com John Silvia

…

............................ …john.silvia@wellsfargo.com .

Michael Brown, Economist ………………………..michael.a.brown@wellsfargo.com Senior Economists

Economic Analysts

Mark Vitner, Senior Economist……………....……………. . mark.vitner@wellsfargo.com

Joe Seydl, Economic Analyst …………………………….joseph.seydl@wellsfargo.com

Jay Bryson, Global Economist

Sarah Watt, Economic Analyst …………………………….sarah.watt@wellsfargo.com

.

…………………....……….jay.bryson@wellsfargo.com

Scott Anderson, Senior Economist………………… …scott.a.anderson@wellsfargo.com Eugenio Aleman, Senior Economist Sam Bullard, Senior Economist

Kaylyn Swankoski, Economic Analyst

…………….eugenio.j.aleman@wellsfargo.com

Executive Assistant

………………………….sam.bullard@wellsfargo.com

Anika Khan, Senior Economist….…

…..

..

kaylyn.swankoski@wellsfargo.com

Peg Gavin

………………………...………………. peg.gavin@wellsfargo.com

anika.khan@wellsfargo.com

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, and Wells Fargo Securities International Limited. 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.

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.

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