Aleman-Santiago_Chile_Jan 1811

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

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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

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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.

Economics

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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

22

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

23

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

24

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

26

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

27

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

29

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

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 © 2010 Wells Fargo Securities, LLC.

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Economics

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