The U.S. Economy: “From A Housing Market Driven Economy to a _______ _______ Driven Economy” Eugenio J. Aleman, Director and Senior Economist January 18, 2011
Real GDP Growth
Real GDP Bars = Compound Annual Rate
10%
U.S. real GDP growth accelerated somewhat during the third quarter
Line = Yr/Yr % Change
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4% Real GDP: Q3 @ 2.6%
-6%
-6%
Real GDP: Q3 @ 3.2% -8%
-8% 96
97
98
99
00
01
02
03
04
05
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
2
06
07
08
09
10
U.S. Nonfarm Employment
Nonfarm Employment Change Change in Employment, In Thousands
600
600
400
400
200
200
0
No more Census workers being hired
0
-200
-200
-400
-400
-600
-600 Nonfarm Employment Change: Dec @ 103,000
-800 2000 2001
-800 2002 2003
2004 2005 2006
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Economics
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2007 2008 2009
2010
Unemployment Rate
Unemployment Rate Seasonally Adjusted
12%
12%
10%
Not as high as during the 1980s recession but more damaging
10%
8%
8%
6%
6%
4%
4%
Unemployment Rate: Dec @ 9.4% 2%
2% 60
65
70
75
80
85
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Economics
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90
95
00
05
10
Mean Duration of Unemployment
Mean Duration Unemployment Average Weeks Unemployed
38
Duration of unemployment shows a struggling economy
38
34
34
30
30
26
26
22
22
18
18
14
14
10
10 Dec @ 34.2 Weeks
6
6 80
82
84
86
88
90
92
94
96
98
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Economics
5
00
02
04
06
08
10
Unemployment by Education Level
Unemployment Rate by Education Level December 2010
17.0%
College graduates have the edge even in the worst recession since the depression
15.0%
15.0%
13.0%
13.0%
11.0%
11.0%
9.0%
9.0%
7.0%
7.0%
5.0%
5.0%
3.0%
3.0%
1.0%
1.0% No High School Diploma
High School Diploma
Some College
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Economics
17.0%
6
College Degree
Corporate Profit & Job Growth
Corporate Profit and Job Growth Year-over-Year Percent Change 60%
9% Adjusted for Inventory Valuation and Capital Consumption
Normally, employment growth follows growth in profits
40%
6%
20%
3%
0%
0%
-20%
-3% Corporate Profits: Q3 @ 27.8% Job Growth: Q4 @ 0.68%
-40%
-6% 70
73
76
79
82
85
88
91
94
97
00
03
06
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
Economics
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09
Consumer Price Index
U.S. Consumer Price Index Year-over-Year Percent Change
6.0%
Consumer inflation is very low
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
1.0%
0.0%
0.0%
-1.0%
-1.0%
-2.0%
-2.0% CPI: Dec @ 1.5%
-3.0%
-3.0% 92
94
96
98
00
02
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Economics
8
04
06
08
10
Producer Price Index
Finished Goods Producer Price Index Year-over-Year Percent Change
10%
As well as producer prices
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
Finished Goods PPI: Dec @ 4.0% "Core" Finished Goods PPI: Dec @ 1.3%
-8%
-8% 96
98
00
02
04
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Economics
9
06
08
10
Federal Reserve Target Rate
U.S. Federal Reserve Target Rate 7.00%
7.00% US Federal Reserve: Jan @ 0.25%
Monetary policy remains extremely expansive
6.00%
6.00%
5.00%
5.00%
4.00%
4.00%
3.00%
3.00%
2.00%
2.00%
1.00%
1.00%
0.00% 2000
0.00% 2002
2004
2006
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Economics
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2008
2010
Federal Reserve Balance Sheet
Federal Reserve Balance Sheet Trillions
$2.5
$2.5
Other: Nov @ $238.9B Foreign Swaps: Nov @ $0.1B
$2.0
$2.0
PDCF & TAF Commercial Paper & Money Market
$1.5
A Monetary Tsunami?
Repos & Dis. Window: Nov @ $0.2B
$1.5
Agencies & MBS: Nov @ $1,186.8B Treasuries: Nov @ $891.5B
$1.0
$1.0
$0.5
$0.5
$0.0 2007
$0.0 2008
2009
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Economics
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2010
Negative Equity
Negative Equity Mortgages - By State Percent of Mortgages Outstanding
O…M…G…?
15% 15% 16% 16% 18% 20% 20% 20% 20% 20% 22% 23% 24% 28% 33%
Missouri Washington, DC Oregon Minnesota New Hampshire Colorado Illinois Ohio Rhode Island Utah Maryland Virginia Idaho Georgia California Michigan Florida Arizona Nevada
38% 46% 50% 68% 23%
US 0%
15%
30%
Source: Federal Reserve Board and Wells Fargo Securities, LLC
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45%
60%
75%
New Home Sales
New Home Sales Seasonally Adjusted Annual Rate, In Thousands
1,500
The housing market is very depressed
1,500
1,300
1,300
1,100
1,100
900
900
700
700
500
500
300
300
New Home Sales: Nov @ 290,000 3-Month Moving Average: Nov @ 291,000
100
100 89
91
93
95
97
99
01
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
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03
05
07
09
Housing Starts
Housing Starts Seasonally Adjusted Annual Rate, In Millions
2.4
We don’t see a short to medium term solution
2.4
2.2
2.2
2.0
2.0
1.8
1.8
1.6
1.6
1.4
1.4
1.2
1.2
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
Housing Starts: Nov @ 555K
0.0
0.0 87
89
91
93
95
97
99
01
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
14
03
05
07
09
Existing Home Sales
Existing Single-Family Home Resales Seasonally Adjusted Annual Rate - In Millions
7.0
No more first time home buyers’ credit, no more sales!
7.0
6.0
6.0
5.0
5.0
4.0
4.0
3.0
3.0 Existing Home Sales: Nov @ 4.2 Million
2.0
2.0 86
88
90
92
94
96
98
00
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
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02
04
06
08
10
Home Prices
Home Prices Year-over-Year Percentage Change
24%
Home prices are weakening again
24%
20%
20%
16%
16%
12%
12%
8%
8%
4%
4%
0%
0%
-4%
-4%
-8%
-8%
-12%
-12%
Median Sale Price: Nov @ $171,300
-16%
-16%
Median Sale Price, 3-M Mov Avg: Nov @ -0.4% FHFA Purchase Only Index: Oct @ -3.4%
-20%
-20%
S&P Case-Shiller Composite-10: Oct @ 0.2%
-24%
-24% 97
99
01
03
Source: IHS Global Insight and Wells Fargo Securities, LLC
Economics
16
05
07
09
ISM Manufacturing Index
ISM Manufacturing Composite Index Diffusion Index
65
But the rest of the economy is growing. Manufacturing has expanded for almost two years
65
60
60
55
55
50
50
45
45
40
40
35
35
ISM Manufacturing Index: Dec @ 57.0 12-Month Moving Average: Dec @ 57.3
30
30 87
89
91
93
95
97
99
01
Source: Institute for Supply Management and Wells Fargo Securities, LLC
Economics
17
03
05
07
09
11
ISM Non-Manufacturing Index
ISM Non-Manufacturing Composite Index
65
The service sector is also in expansion mode
65
60
60
55
55
50
50
45
45
40
40
35
35 ISM Non-Manufacturing Index: Dec @ 57.1
30
30 98
99
00
01
02
03
04
05
06
Source: Institute for Supply Management and Wells Fargo Securities, LLC
Economics
18
07
08
09
10
11
A new “Normal” for the U.S. Consumer? Credit Card vs. Old Economy Sears brings back the Christmas club Popular during the Depression, program allows shoppers to sock money away for special occasions so they can then spend it later without going into debt. But you can do the same thing on your own. August 01, 2010|Kathy M. Kristof | Personal Finance
Christmas club can tame holiday bills By Pat Curry • Bankrate.com Does the room start spinning when your first credit card bill arrives from your holiday spending spree and you realize the real cost of your largesse?
The Return of Layaway Layaway may sound like an old-school concept, especially in today’s “buy now, pay later” society. But the idea of setting aside products to pay off gradually is making a comeback, and is being praised as a way to regain control of family finances and make sure holiday giving doesn’t fall victim to the economic downturn.
In tough times, layaway plans make a comeback Retailers are touting the service -- and consumers are responding YOUR MONEY November 05, 2008|Andrea Chang | Chang is a Times staff writer.
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Consumer Credit
Revolving & Nonrevolving Debt $12
Month-over-Month Change, 3-M Mov. Avg., Millions of Dollars
$10
Credit card lending is nonexistent
$10
$8
$8
$6
$6
$4
$4
$2
$2
$0
$0
-$2
-$2
-$4
-$4
-$6
-$6
-$8
-$8
-$10 -$12 2004
Revolving: Sep @ -$6.1 Million Nonrevolving: Sep @ $3.4 Million
-$10 -$12
2005
2006
2007
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Economics
$12
20
2008
2009
2010
Consumer Confidence
Consumer Confidence Index Conference Board
160
Consumer confidence is still very weak for a strong recovery
160
140
140
120
120
100
100
80
80
60
60 Confidence Yr/Yr % Chg: Dec @ -2.0% Confidence: Dec @ 52.5 12-Month Moving Average: Dec @ 53.3
40
40
20
20 87
89
91
93
95
97
99
Source: Conference Board and Wells Fargo Securities, LLC
Economics
21
01
03
05
07
09
11
Personal Income
Personal Income Month-over-Month Percent Change
4%
Personal income is positive but mostly due to government transfers
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
-1%
-2%
-2% Personal Income: Nov @ 0.3%
-3% 2000
-3% 2002
2004
2006
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
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2008
2010
Personal Consumption Expenditures
Personal Consumption Expenditures Month-over-Month Percent Change
3.5%
3.5%
PCE: Nov @ 0.4%
Personal consumption has remained positive
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% 2000
-1.5% 2002
2004
2006
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
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2008
2010
Personal Saving Rate
Personal Saving Rate Disp. Personal Income Less Spending as a % of Disp. Income
15%
12%
The best news is that the saving rate is skyrocketing
15%
12%
9%
9%
6%
6%
3%
3% Personal Saving Rate: Nov @ 5.3% Personal Saving Rate, 12-Month M.A.: Nov @ 5.8%
0%
0% 60 63
66 69
72 75 78
81 84
87 90
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
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93 96
99 02
05 08
Real Personal Saving Rate
Real Personal Saving Rate 12%
12% Real Saving Rate: Sep @ 8.6 % 3-Month Moving Average: Sep @ 8.8 %
11%
11%
10%
But it is even better in real terms
10%
9%
9%
8%
8%
7%
7%
6%
6%
5%
5%
4%
4% 95
97
99
01
03
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
25
05
07
09
Mortgage and Treasury Rates
Conventional Mortgage Rate vs. 10-Year Treasury Yield Percent
But interest rates have turned the corner and this is not good for the housing market
7.0%
7.0%
6.0%
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0% Conventional 30-Year Fixed Mortg. Rate: Dec @ 4.81% 10-Year Yield: Dec @ 3.37%
1.0% 2004
1.0% 2005
2006
2007
2008
Source: Freddie Mac, Federal Reserve Board and Wells Fargo Securities, LLC
Economics
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2009
2010
Mortgage Spreads
Conventional Mortgage to 10-Year Treasury Spread Basis Points 300
300 Mortgage Spread: Dec @ 144 bps
The biggest reason is that risks to lending in mortgage market have, once again, increased
275
275
250
250
225
225
200
200
175
175
150
150
125
125
100 2004
100 2005
2006
2007
2008
Source: Freddie Mac, Federal Reserve Board and Wells Fargo Securities, LLC
Economics
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2009
2010
Global Forecast
Wells Fargo International Economic Forecast (Year-over-Year Percent C hange)
GDP 2010 Global (PPP weights) Global (Market Exchange Rates)
Growth in 2011 will probably be very similar to 2010
Advanced Economies United States Eurozone United Kingdom Japan Korea Canada
1
Developing Economies China India Mexico Brazil Russia
1
Forecast as of: December 8, 2010 1
Aggregated Using PPP Weights
Source: Wells Fargo Securities, LLC
Economics
28
2011
CPI 2012
2010
2011
2012
4.9% 3.7%
4.0% 2.8%
4.4% 3.2%
4.2% n/a
4.3% n/a
4.2% n/a
2.7% 2.8% 1.7% 1.8% 3.6% 6.4% 2.9%
2.2% 2.6% 1.5% 1.9% 1.2% 4.0% 2.1%
2.8% 3.3% 2.2% 2.1% 1.7% 4.2% 2.4%
1.4% 1.6% 1.6% 3.2% -0.7% 2.9% 1.7%
1.6% 1.7% 1.8% 2.6% -0.5% 3.2% 2.1%
1.9% 2.4% 1.9% 1.7% -0.2% 3.0% 1.9%
7.5% 10.3% 9.4% 5.3% 7.6% 4.3%
6.0% 9.0% 7.6% 3.6% 5.0% 4.1%
6.4% 9.3% 7.9% 3.5% 5.6% 4.5%
7.6% 3.2% 12.4% 4.1% 5.0% 6.9%
7.5% 3.7% 7.9% 4.8% 6.0% 9.3%
7.0% 2.7% 7.1% 5.2% 6.0% 9.3%
Summary of Near-Term Outlook
Growth
Interest Rates
The U.S. housing market has
Insert slide callout Summary
bottomed, but… Surprise crises have the potential to topple the world economy again The U.S. economy is still growing but employment creation is not enough Deflation remains a short-term concern while inflation remains a medium to long-term concern
The Federal Reserve will likely maintain an accommodative stance until recovery is firmly established. Indeed, our forecast calls for the Fed to remain on hold until the second half of next year. Most major foreign central banks likely will keep policy rates on hold well into 2011.
Financial Markets Commodity prices are up from the lows that were reached in early 2009. Another spike in commodity prices à la 2008 does not seem likely as long as global growth remains constrained. Credit is starting to flow but problems remain
Monetary and Fiscal Policy
Monetary policy is still not working Fiscal policy is the only alternative In any case, it will be VERY EXPENSIVE
Economics
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Wells Fargo Securities, LLC Economics Group a Global Head of Research and Economics: Diane Schumaker-Krieg Chief Economist:
Senior Economists
John Silvia, Chief Economist Mark Vitner, Senior Economist Jay Bryson, Global Economist Scott Anderson, Senior Economist Eugenio Aleman, Senior Economist Sam Bullard, Senior Economist
John Silvia 301 S. College Street MAC D1053-077 Charlotte, NC 28288
john.silvia@wellsfargo.com mark.vitner@wellsfargo.com jay.bryson@wellsfargo.com scott.a.anderson@wellsfargo.com eugenio.aleman@wellsfargo.com sam.bullard@wellsfargo.com
Economists
Anika Khan, Economist Azhar Iqbal, Econometrician Ed Kashmarek, Economist Tim Quinlan, Economist Michael Brown, Economist
anika.khan@wellsfargo.com azhar.iqbal@wellsfargo.com ed.kashmarek@wellsfargo.com tim.quinlan@wellsfargo.com michael.brown4@wellsfargo.com
Economic Analysts
Tyler Kruse, Economic Analyst Joe Seydl, Economic Analyst Sarah Watt, Economic Analyst
tyler.kruse@wellsfargo.com joseph.seydl@wellsfargo.com sarah.watt@wellsfargo.com
Executive Assistant
Peg Gavin
peg.gavin@wellsfargo.com
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