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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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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Title
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?
22
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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