Economics and Finance in a Two-Percent Economy John E. Silvia, Chief Economist July 2016
Where Are We Now?
Interest Rates
Inflation
Growth
Five benchmarks for good decision making
Profits
Source:
Wells Fargo Economic Outlook
2
The Dollar
Sustained Growth in 2016—Great Divide Between Domestic and Trade
U.S. Real GDP Bars = CAGR
Line = Yr/Yr Percent Change
10%
10% GDP - CAGR: Q1 @ 1.1%
8%
GDP - Yr/Yr Percent Change: Q1 @ 2.1%
6%
6% Forecast
4%
Trend growth at 1.5-2 percent in the year ahead. Consumer and housing lead, but exports will remain a drag.
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
-8%
-8%
-10% 2000
-10% 2002
2004
2006
2008
2010
Source: U.S. Department of Commerce and Wells Fargo Securities
Wells Fargo Economic Outlook
8%
3
2012
2014
2016
Recession in 2016?
Recession Probability Based on Probit Model Model with LEI
120%
120% Two-Quarter Ahead Recession Probability: Q2 @ 10.4%
Threshold: Two-Consecutive Quarters > 50% 100%
The probability of recession in the next six months is very low, according to our model
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Source: Wells Fargo Securities
Wells Fargo Economic Outlook
4
Inflation: Rising—But Less Than Market/FOMC Expect
PCE Deflator vs. Core PCE Deflator Year-over-Year Percent Change
5%
Inflation remains historically low, but we expect to see a pickup in coming quarters – average less than 2% since 1991
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
-1%
PCE Deflator: May @ 0.9% "Core" PCE Deflator: May @ 1.6% FOMC's 2.0% Inflation Target
-2%
-2% 92
94
96
98
00
02
04
06
Source: U.S. Department of Commerce and Wells Fargo Securities
Wells Fargo Economic Outlook
5
08
10
12
14
16
Inflation: A Divide in Goods vs. Services
Core Goods vs. Core Services CPI Year-over-Year Percent Change
7%
7% Core Services CPI: May @ 3.2%
6%
Inflation for services has been much firmer than for commodities
6%
Core Goods CPI: May @ -0.5%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
-1%
-2%
-2%
-3%
-3% 88
90
92
94
96
98
00
02
Source: U.S. Department of Labor and Wells Fargo Securities
Wells Fargo Economic Outlook
6
04
06
08
10
12
14
16
Inflation Expectations
Med. Inflation Expectations 5 to 10-Years Ahead U. of Mich. Consumer Sentiment, Breakeven Rate of Inflation, 3-MMA
3.8%
3.8% Median Inflation Expect. For 5-10 Yrs: Jun @ 2.4% Fed 5-Year Five Years Forward: Jun @ 1.6%
Long-term inflation expectations have fallen alongside oil, keeping some FOMC members worried about the future path of inflation
3.4%
3.4%
3.0%
3.0%
2.6%
2.6%
2.2%
2.2%
1.8%
1.8%
1.4%
1.4% 99
01
03
05
07
09
Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities
Wells Fargo Economic Outlook
7
11
13
15
Pace of Policy Firming: Two Increases in 2016
Appropriate Pace of Policy Firming Target Federal Funds Rate at Year-End
5.0% 4.5% 4.0%
Normalization is underway, but there remains wide variation between the market and Fed officials themselves about the appropriate path of the fed funds rate
5.0%
June 2016 Median Response March 2016 Median Response December 2015 Median Response December 2014 Median Response Futures Market: July 6
4.5% 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%
2016
2017
2018
Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities
Wells Fargo Economic Outlook
8
Longer Run
0.0%
Brexit
U.K. Real Investment Spending Bars = Compound Annual Rate
30%
Line = Yr/Yr % Change
30%
Forecast
Uncertainty related to the ultimate relationship between the UK and the EU will likely depress investment spending in the UK
20%
20%
10%
10%
0%
0%
-10%
-10%
-20%
-20%
-30%
-30%
Gross Fixed Capital Formation: Q1 @ -0.2% Gross Fixed Capital Formation: Q1 @ 0.7%
-40%
-40% 00
02
04
06
08
Source: IHS Global Insight and Wells Fargo Securities
Wells Fargo Economic Outlook
9
10
12
14
16
Brexit
U.K. Real GDP Bars = Compound Annual Rate
6%
Line = Yr/Yr % Change
6%
Forecast
In our view, further contraction in investment will lead to a modest U.K. recession later this year and into early 2017
3%
3%
0%
0%
-3%
-3%
-6%
-6%
-9%
-9% Compound Annual Growth: Q1 @ 1.8% Year-over-Year Percent Change: Q1 @ 2.0%
-12%
-12% 00
02
04
06
08
Source: IHS Global Insight and Wells Fargo Securities
Wells Fargo Economic Outlook
10
10
12
14
16
Brexit
Bank of England Policy Rate 7.00%
7.00% Bank of England: Jul-1 @ 0.50%
If, as we expect, the British economy is headed for a modest recession, then the BoE will likely cut further
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%
0.00% 00
02
04
06
Source: Bloomberg LP and Wells Fargo Securities
Wells Fargo Economic Outlook
11
08
10
12
14
16
Brexit
U.K. and Euro Exchange Rates
The pound has depreciated since the Brexit vote
1.50
1.16
1.45
1.14
1.40
1.12
1.35
1.10
1.30
1.08
USD per GBP: Jul-08 @ 1.29 (Left Axis) USD per EUR: Jul-08 @ 1.10 (Right Axis) 1.25 Jun-1
Jun-8
Jun-15
Source: Bloomberg LP and Wells Fargo Securities
Wells Fargo Economic Outlook
12
Jun-22
Jun-29
Jul-6
1.06 Jul-13
Brexit
Exports to the United Kingdom As a Percent of Total Exports, 2014
The UK accounted for less than 4 percent of American exports of goods in 2015, which is equivalent to only 0.4 percent of U.S. GDP
20%
20%
15%
15%
10%
10%
5%
5%
0%
0% IRE
NLD
BEL
DNK
SWE
Source: IHS Global Insight and Wells Fargo Securities
Wells Fargo Economic Outlook
13
FRA
SPA
GER
EU Avg.
U.S.
Brexit
Americans own $1.3 trillion worth of British securities, most of which are equities. That said, total household balance sheets in the U.S. have $70 trillion worth of financial assets.
U.S. Holdings
U.K. Holdings
U.S. Holdings of U.K. Portfolio Assets
U.K. Holdings of U.S. Portfolio Assets In Billions of Dollars
In Billions of Dollars $1,400
$1,700
$1,400 Short-Term Debt Securities Long-Term Debt Securities
$1,200
$1,500
Equities
$1,200
$1,000
$1,000
$800
$1,700 Short-Term Debt Securities Long-Term Debt Securities Equities
$1,500
$1,300
$1,300
$1,100
$1,100
$900
$900
$700
$700
$500
$500
$800
$600
$600
$400
$400 2010
2011
2012
2013
$300
2014
Note: This includes private and public institutions Source: IHS Global Insight and Wells Fargo Securities
Wells Fargo Economic Outlook
$300 2010
14
2011
2012
2013
2014
2015
Brexit
Anglo-Saxon Trade
Singapore
United States
South Korea “Breakaways”
Bangladesh
India
Canada
Wells Fargo Economic Outlook
15
Five Takeaways
Growth
Inflation
Interest Rates
Continued moderate growth led by domestic consumer and housing
Rising, but is the pace slow enough to delay Fed move?
Rising short rates, but flat long rates as capital flows favor the U.S.
Dollar
Stronger dollar as rates and growth favor U.S.
Profits
A late cycle slowdown
Wells Fargo Economic Outlook
16
U.S. Forecast
Wells Fargo U.S. Economic Forecast q 2 2 01 6
Actual 2015
2 01 6
Forecast 2016
2017
2013
Actual 2014
2015
Forecast 2016 2017
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
0.6
3.9
2.0
1.4
1.1
2.3
2.1
1.9
1.8
2.4
2.5
1.4
1.5
2.4
2.4
1.8
2.1
1.8
3.6
3.0
2.4
1.5
4.3
2.7
2.0
2.3
3.2
3.1
1.9
1.7
2.7
3.1
2.7
2.7
1.6
4.1
2.6
-2.1
-4.5
1.1
0.6
3.4
3.1
2.9
2.8
2.5
3.0
6.2
2.8
-0.5
2.6
Equipment
2.3
0.3
9.9
-2.1
-8.7
1.6
-1.0
3.5
3.0
2.7
2.2
1.7
3.2
5.8
3.1
-1.1
2.2
Intellectual Property Products
7.4
8.3
-0.8
-0.1
4.4
4.2
4.8
5.3
4.9
4.8
4.8
4.7
3.8
5.2
5.7
3.2
4.9
Structures
-7.4
6.2
-7.2
-5.1
-7.9
-5.0
-2.5
0.0
0.5
0.5
1.0
1.0
1.6
8.1
-1.5
-4.8
-0.2
Residential Construction
10.1
9.4
8.2
10.1
15.6
0.0
9.0
8.5
8.5
8.5
8.0
8.0
9.5
1.8
8.9
8.9
7.9
Government Purchases
-0.1
2.6
1.8
0.1
1.3
-0.3
1.8
1.7
1.2
1.0
1.0
0.9
-2.9
-0.6
0.7
1.0
1.2
-1.9
0.2
-0.3
-0.1
0.1
0.1
-0.7
-0.6
-0.6
-0.6
-0.6
-0.5
0.2
-0.2
-0.6
-0.1
-0.6
0.9
0.0
-0.7
-0.2
-0.2
-0.4
0.2
0.1
0.0
-0.1
0.0
-0.1
0.0
0.0
0.2
-0.2
0.0
190
251
192
282
196
147
175
170
165
160
155
150
193
251
229
172
158
5.6
5.4
5.2
5.0
4.9
4.9
4.8
4.7
4.7
4.6
4.6
4.5
7.4
6.2
5.3
4.8
4.6
-0.1
0.0
0.1
0.4
1.1
1.1
1.3
1.7
2.4
2.3
2.3
2.3
1.5
1.6
0.1
1.3
2.3
Real Gross Domestic Product Personal Consumption
1
Business Fixed Investment
Net Exports Inventories
2 2
Nonfarm Payroll Change
3
Unemployment Rate Consumer Price Index
4 5
Quarter-End Interest Rates Federal Funds Target Rate
0.25
0.25
0.25
0.50
0.50
0.50
0.50
0.75
0.75
1.00
1.00
1.25
0.25
0.25
0.27
0.56
1.00
Conventional Mortgage Rate
3.77
3.98
3.89
3.96
3.69
3.57
3.46
3.53
3.57
3.60
3.64
3.67
3.98
4.17
3.85
3.56
3.62
2 Year Note
0.56
0.64
0.64
1.06
0.73
0.58
0.66
0.83
0.92
1.13
1.22
1.35
0.31
0.46
0.69
0.70
1.16
10 Year Note
1.94
2.35
2.06
2.27
1.78
1.49
1.41
1.50
1.55
1.60
1.66
1.71
2.35
2.54
2.14
1.55
1.63
Forecast as of: July 13, 2016 1
C ompound Annual Growth Rate Quarter-over-Quarter
2
Percentage Point C ontribution to GDP
4
Year-over-Year Percentage C hange
5
Annual Numbers Represent Averages
3
Average Monthly C hange
Source: U.S. Department of Commerce, U.S. Department of Labor, Federal Reserve Board, Freddie Mac and Wells Fargo Securities
Wells Fargo Economic Outlook
17
Appendix
Wells Fargo Economics Group Publications
Recent Special Commentary Date
Title
Authors
U.S. Macro
To join any of our research distribution lists please visit our website: http://www.wellsfargo.com/ economics
Wells Fargo Economic Outlook
June-30
Job Quality and the Missing Middle
House & Batcheller
June-30
Brexit and the U.S. Economy
Vitner
June-24
Brexit—Now What?
Bryson
June-23
Can labor force participation ever recover?
House
June-08
Where's the Rebound in Inflation Expectations?
House
June-23 June-22 June-22 June-17 June-17
U.S. Regional California mid-year economic update: June 2016 State GDP Q4: Output continues to grow as headwinds come and go Healthcare, technology and construction drive incomes in Q1 Florida Employment Conditions: May 2016 North Carolina Employment Conditions: May 2016
Vitner & Batcheller Vitner & Feik Vitner Vitner, Feik & Batcheller Vitner, Feik & Batcheller
June-28
Korea and Global Trade Dynamics
Quinlan
June-21
Chilean economy struggles in early 2016
Alemán
June-09
Global Chartbook: June 2016
Alemán, House & Nelson
June-01
Disappointing Swiss GDP Growth in Q1-2016
Bryson
June-01
Indian GDP Growth Bests Expectations in Q1-2016
Bryson
July-06 July-06 July-01 June-28 June-22
Interest Rates/Credit Market Argentina Sets the GDP Record Straight Go Your Own Way: Policy with Imperfect Information U.K. Recession Post-Brexit Referendum? The Referendum & the Reckoning: Rates Implicaions of Brexit Profits, Corporate Financing and Capital Investment
Alemán Silvia Bryson Silvia Silvia & Moehring
July-06
Real Estate International Home Buying: 2016
Vitner, Khan & Batcheller
June-28
Brexit Vote Could Pump More Dollars into U.S. CRE
Khan
June-01
Housing Chartbook: June 2016
Vitner, Khan & Batcheller
May-20
Commercial Real Estate Chartbook: Q1
Khan & Causey
April-29
Is the Housing Market Finally Becoming Unstuck?
Vitner, Khan & Batcheller
Global Econom y
19
Wells Fargo Securities Economics Group Global Head of Research and Economics
Economists
Diane Schumaker-Krieg ………………… ….diane.schumaker@wellsfargo.com Global Head of Research & Economics
Eric J. Viloria, Currency Strategist
……
Sarah House, Economist
…………… …………
Michael A. Brown, Economist ……………… …
Chief Economist
eric.viloria@wellsfargo.com sarah.house@wellsfargo.com michael.a.brown@wellsfargo.com
Jamie Feik, Economist John E. Silvia …
...................... …
jamie.feik@wellsfargo.com
john.silvia@wellsfargo.com
.
Economic Analysts Senior Economists Mark Vitner, Senior Economist……………....………. .
Erik Nelson, Currency Analyst mark.vitner@wellsfargo.com
Misa Batcheller, Economic Analyst
erik.f.nelson@wellsfargo.com misa.n.batcheller@wellsfargo.com
Jay H. Bryson, Global Economist …………………....…… ….jay.bryson@wellsfargo.com
Michael Pugliese, Economic Analyst
michael.d.pugliese@wellsfargo.com
Sam Bullard, Senior Economist
Julianne Causey, Economic Analyst
julianne.causey@wellsfargo.com
sam.bullard@wellsfargo.com
Nick Bennenbroek, Currency Strategist ……nicholas.bennenbroek@wellsfargo.com Anika R. Khan, Senior Economist …
. anika.khan@wellsfargo.com Administrative Assistants
Eugenio J. Alemán, Senior Economist… …………eugenio.j.aleman@wellsfargo.com Azhar Iqbal, Econometrician………………… …………… azhar.iqbal@wellsfargo.com
Donna LaFleur, Executive Assistant.
donna.lafleur@wellsfargo.com
Tim Quinlan, Senior Economist …………… ……………. .tim.quinlan@wellsfargo.com
Dawne Howes, Administrative Assistant
dawne.howes@wellsfargo.com
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Wells Fargo Economic Outlook
20