U.S. Economic Outlook

U.S. Economic Outlook Jackson, Wyoming John E. Silvia, Chief Economist July 2017

Optimism About Policy Changes Meets the Reality of Policy Making

 Economic activity has once again gotten off to a slow Economic Outlook

start. We look for real GDP to grow 2.2 percent in 2017 and 2.7 percent in 2018.

 Tax cuts and infrastructure spending might still happen Fiscal Policy

but will take longer to be enacted and will likely be smaller than had been hoped for.

 We expect the Fed to hike rates one more time in 2017.

Monetary Policy

Monetary policy is focusing on normalizing interest rates and offsetting typical late cyclical imbalances. The post-financial crisis period appears to be ending.

 Manufacturing survey data, such as the ISM index, Manufacturing

remains stronger than the hard data found in the recent durable goods orders report. A pickup in global growth could help close this gap.

 The split between consumer confidence and retail sales Consumers

appears to be driven by optimism about employment prospects and some unusual seasonal hurdles for retail sales. Years of sluggish income growth are also a factor.

2

Economic Growth

Real GDP growth has once again gotten off to a slow start but should rise 2 percent this year.

Private final demand is far less volatile and should rise more solidly. The adoption of more growth-oriented fiscal policies will have little immediate impact.

Real GDP Forecast

Real Private Final Sales

U.S. Real GDP Bars = CAGR

Real Private Final Sales to Domestic Purchasers

Line = Yr/Yr Percent Change

Bars = CAGR

10%

Line = Yr/Yr Percent Change

10%

8%

8%

8%

6%

6%

6%

4%

4%

2%

2%

2%

2%

0%

0%

0%

0%

-2%

-2%

-2%

-2%

-4%

-4%

-4%

-4%

-6%

-6%

-6%

-6%

-8%

-8%

-8%

-8%

-10%

-10%

-12% 2000

GDP - CAGR: Q1 @ 1.2% 8%

GDP - Yr/Yr Percent Change: Q1 @ 2.0%

6% Forecast

4%

-10% 2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

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

3

Forecast

Real Priv Fin Sales to Dom. Purch. - CAGR: Q1 @ 2.7% Real Priv Fin Sales to Dom. Purch. - Yr/Yr Pct Chg: Q1 @ 2.9%

4%

-10% -12%

2002

2004

2006

2008

2010

2012

2014

2016

2018

Employment Situation: Labor Market Tightening

While the monthly data have been volatile, nonfarm employment looks stronger than GDP. Job growth is more closely aligned with private domestic demand, which remains fairly robust.

The unemployment rate has broken out to the downside recently, but wage gains are unmoved.

Nonfarm Employment

Unemployment Rate Unemployment and Wage Rates

Nonfarm Employment Change 600

Change in Employment, In Thousands

400

200

200

0

12%

600

400

Wages for Production & Nonsupervisory Workers, SA

12%

10%

10%

8%

8%

6%

6%

4%

4%

0

-200

-200

-400

-400

-600

-600

-800

-800

2%

2% Unemployment Rate: May @ 4.3% Hourly Earnings - Yr/Yr % Change: May @ 2.4%

Monthly Change: May @ 138K -1,000

0%

-1,000

0% 65

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

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

4

70

75

80

85

90

95

00

05

10

15

Employment Population Ratio vs. Hourly Earnings

Employment-Population Ratio vs. Hourly Earnings Ratio and Year-over-Year Percent Change

66

One reason that wages have been so slow to recover is that there are so many potential workers outside the labor force.

These displaced workers either do not have the skills, experience or live close enough to where job opportunities are being created. Moreover, in some cases, capital is being substituted for labor.

5%

64

4%

62 3% 60 2% 58 1%

56 Employment-Population Ratio: May @ 60.0 (Left Axis)

Hourly Earnings: May @ 2.5% (Right Axis) 54

0% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

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

5

Household Debt Surpasses 2008 Peak

U.S. Household Debt Per Capita Thous. of USD, Inflation-Adjusted Values Based to Q1 2009

$55

Nominal debt per capita still remains short of its 2008 level.

After adjusting for inflation, blue line, it is even clearer that the average household’s debt portfolio is smaller relative to a decade ago.

$55

$50

$50

$45

$45

$40

$40

$35

$35

$30

$30

$25

$25

Nominal Debt per Capita: Q1 @ $47,651 Real Debt per Capita: Q1 @ $41,455

$20

$20 03

04

05

06

07

08

09

10

11

Source: Federal Reserve Bank of New York and Wells Fargo Securities

6

12

13

14

15

16

17

Debt Service Ratio: Challenges Ahead?

Household Debt Service Ratio 13.5%

Debt Payments as a Percent of Disposable Personal Income

13.5%

DSR: Q1 @ 10.0%

While household debt has hit a new high, the debt service ratio remains historically low.

13.0%

13.0%

12.5%

12.5%

12.0%

12.0%

11.5%

11.5%

11.0%

11.0%

10.5%

10.5%

10.0%

10.0%

9.5%

9.5% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Source: Federal Reserve Board and Wells Fargo Securities

7

Household Debt Delinquencies: Student Loan Remain Elevated

Household Debt Delinquencies Percent of Balance 90+ Days Past Due 18% 16% 14%

Delinquency rates for auto loans appear to be edging higher.

Student loan debt remains problematic, particularly for students who borrowed but did not complete their education.

18%

Credit Card: Q1 @ 7.5% Other: Q1 @ 7.2% Student Loans: Q1 @ 11.0% Mortgage: Q1 @ 1.7% Auto: Q1 @ 3.8% HELOC: Q1 @ 2.1%

16% 14%

12%

12%

10%

10%

8%

8%

6%

6%

4%

4%

2%

2%

0%

0% 03

04

05

06

07

Source: FRBNY and Wells Fargo Securities

8

08

09

10

11

12

13

14

15

16

17

New vs. Used Vehicle Prices

New vs. Used Vehicle Prices Year-over-Year Percent Changes

20%

20%

New Vehicles: May @ 0.3% Used Vehicles: May @ -4.3%

Used vehicle prices have contracted recently, while new vehicle prices have only experienced minimal growth.

15%

15%

10%

10%

5%

5%

0%

0%

-5%

-5%

-10%

-10%

-15%

-15% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

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

9

Inflation: Upward Trend - Slowly

PCE Deflator & "Core" PCE Deflator Line = Yr/Yr Percent Change

5%

5%

4%

4%

3%

3% Forecast

Inflation has been trending higher following years of underperformance.

2%

2%

1%

1%

0%

0%

-1%

-2% 2000

-1%

PCE Deflator - Yr/Yr Percent Change: Q1 @ 2.0% "Core" PCE Deflator - Yr/Yr Percent Change: Q1 @ 1.7%

-2% 2002

2004

2006

2008

2010

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

10

2012

2014

2016

2018

Single-Family Starts Are Gaining Momentum, as Apartments Begin to Moderate

Millions of Units

2.4 2.1

2.4

Multifamily Starts Multifamily Forecast Single-Family Starts Single-Family Forecast

2.1

1.8

After a very slow start, we see single-family homebuilding steadily gaining momentum over the next few years.

Apartment construction is showing topping out but should remain near recent levels.

1.8 Forecast

1.5

1.5

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 16 18 20

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

11

Thousands

Housing Starts

Household Formations

Household Formations

The number of owner-occupied homes rose faster than renteroccupied housing in Q1 for the first time since 2006.

3.0

3.0 Renters: Q1 @ 365K Homeowners: Q1 @ 854K

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 02

03

04

05

06

07

08

09

10

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

12

11

12

13

14

15

16

17

Thousands

Thousands

In Thousands, Year-over-Year Difference

Interest Rates: Fed Path for Short Rates

Appropriate Pace of Policy Firming Target Federal Funds Rate at Year-End 5.0% 4.5% 4.0%

The era of ultra-low interest rates has ended.

The FOMC policy statement implies the Fed will take their time normalizing monetary policy, utilizing a mix of language and policy actions.

5.0% June 2017 Median Response March 2017 Median Response December 2016 Median Response December 2015 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%

2017

2018

2019

Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities

13

Longer Run

0.0%

Regional Trends

Year-over-Year Percent Change in Real GDP Growth by State (Q4 2016)

The West Coast is growing solidly, led by the gains in the tech sector and a rebound in homebuilding.

The Southeast continues to benefit from an influx of new businesses and residents.

Economic conditions are rebounding in the energy producing states.

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

15

GDP Growth by State 2016

GDP by State: Fastest Growth in 2016 Year-over-Year Percent Change, Annual

Washington Oregon Utah New Hampshire

Florida

Technology is a recurring theme among the majority of fastest growing states.

Georgia California Nevada Hawaii Arizona South Carolina 0%

1%

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

16

2%

3%

4%

Year-over-Year Employment Growth by State

Job growth has been strongest in the Pacific Northwest and Southeast

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

17

20 Largest MSA Population Gains

20 Largest MSA Population Gains

Population growth has been highly concentrated in a relative handful of metropolitan areas.

The universe of metros that young people are moving to is even smaller, which has left many markets not on this list with a relatively poor demographic underpinning.

Components of Change in Population from 2010 to 2016, Thous.

Houston, TX Dallas, TX New York City, NY Atlanta, GA Miami, FL Washington, D.C. Los Angeles, CA Phoenix, AZ Seattle, WA San Francisco, CA Austin, TX Denver, CO Orlando, FL Riverside, CA San Antonio, TX Charlotte, NC Tampa, FL Boston, MA Net Migration San Diego, CA Natural Increase Las Vegas, NV -200

0

200

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

18

400

600

800

1000

U.S. Economic Forecast

Wells Fargo U.S. Economic Forecast q 2 2 01 7

Actual 2016

2 01 7

Forecast 2017

2018

2014

Actual 2015

2016

Forecast 2017 2018

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

0.8

1.4

3.5

2.1

1.2

2.5

2.9

2.6

2.7

2.8

2.8

2.6

2.4

2.6

1.6

2.2

2.7

1.6

4.3

3.0

3.5

0.6

3.3

2.5

2.3

2.7

2.9

3.0

2.9

2.9

3.2

2.7

2.5

2.7

-3.4

1.0

1.4

0.9

11.4

5.5

4.4

4.7

4.7

4.9

4.8

4.6

6.0

2.1

-0.5

5.1

4.8

Equipment

-9.5

-2.9

-4.5

1.9

7.2

5.9

3.9

4.3

3.8

4.3

4.2

3.7

5.4

3.5

-2.9

3.2

4.2

Intellectual Property Products

3.8

9.0

3.2

1.3

6.7

5.9

4.7

5.0

5.1

4.8

4.7

4.5

3.9

4.8

4.7

4.9

4.9

Structures

0.1

-2.1

12.0

-1.9

28.4

4.9

5.2

5.5

6.0

6.3

6.5

6.7

10.3

-4.4

-2.9

9.4

5.9

Residential Construction

7.8

-7.8

-4.1

9.6

13.7

3.0

6.5

6.3

5.8

5.6

5.4

5.4

3.5

11.7

4.9

5.8

5.7

Government Purchases

1.6

-1.7

0.8

0.2

-1.1

-0.7

1.2

1.3

1.8

1.7

1.5

1.4

-0.9

1.8

0.8

-0.2

1.4

0.0

0.2

0.9

-1.8

0.1

-0.5

-0.3

-0.2

-0.3

-0.4

-0.4

-0.4

-0.1

-0.7

-0.1

-0.4

-0.3

-0.4

-1.2

0.5

1.0

-1.1

0.6

0.4

0.1

0.0

0.0

0.0

0.0

-0.1

0.2

-0.4

0.1

0.1

196

164

239

148

166

156

150

145

145

140

140

135

250

226

187

154

140

4.9

4.9

4.9

4.7

4.7

4.3

4.2

4.2

4.1

4.1

4.0

4.0

6.2

5.3

4.9

4.4

4.1

1.1

1.1

1.1

1.8

2.6

2.1

2.2

2.0

1.8

2.3

2.3

2.2

1.6

0.1

1.3

2.2

2.1

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

0.50

0.50

0.50

0.75

1.00

1.25

1.50

1.50

1.50

1.75

2.00

2.25

0.25

0.27

0.52

1.31

1.88

Conventional Mortgage Rate

3.69

3.57

3.46

4.20

4.20

4.19

4.33

4.36

4.41

4.45

4.49

4.58

4.17

3.85

3.65

4.27

4.48

2 Year Note

0.73

0.58

0.77

1.20

1.27

1.50

1.75

1.85

1.95

2.05

2.20

2.40

0.46

0.69

0.83

1.59

2.15

10 Year Note

1.78

1.49

1.60

2.45

2.40

2.40

2.55

2.60

2.70

2.75

2.80

2.90

2.54

2.14

1.84

2.49

2.79

Forecast as of: June 7, 2017 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: IHS Global Insight and Wells Fargo Securities

19

International Forecast

Wells Fargo International Economic Forecast (Year-over-Year Percent C hange)

GDP

CPI

2016

2017

2018

2016

2017

Global (PPP Weights) Global (Market Exchange Rates)

3.1% 2.7%

3.3% 3.0%

3.4% 3.2%

3.1% 3.1%

3.2% 3.2%

Advanced Economies 1 United States Eurozone United Kingdom Japan Korea Canada

1.8% 1.6% 1.7% 1.8% 1.0% 2.8% 1.4%

2.1% 2.2% 1.8% 1.5% 1.2% 2.8% 2.3%

2.3% 2.7% 2.0% 1.7% 0.9% 2.7% 1.9%

0.7% 1.3% 0.2% 0.7% -0.1% 1.0% 1.4%

1.9% 2.2% 1.8% 2.4% 0.2% 2.0% 1.8%

Developing Economies 1 China India2 Mexico Brazil Russia

4.3% 6.7% 8.2% 2.3% -3.6% -0.2%

4.4% 6.5% 7.1% 1.9% 0.7% 1.2%

4.4% 6.0% 7.0% 2.4% 2.1% 2.0%

5.5% 2.0% 5.0% 2.8% 8.7% 7.1%

4.4% 1.3% 3.5% 6.0% 4.2% 4.2%

Forecast as of: June 7, 2017 1

Aggregated Using PPP Weights

2

Forecasts Refer to Fiscal Year

Source: International Monetary Fund and Wells Fargo Securities

20

Appendix

Economic Outlook Group Publications A Sampling of Our Recent Special, Regional & Industry Commentary Recent Special Commentary Date

Title

Authors

U.S. Macro

To view any of our past research please visit: http://www.wellsfargo.com/ economics

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

Economic Outlook

June-12 May-24 May-17 April-26 April-24

Capitol Hill Update: Debt Ceiling Concerns Mount Capitol Hill Update: The Presidents FY 2018 Budget Finally Making a Big Production Out of It? Grading the Labor Market Ahead of Graduation Day Eat More Chicken, Beef, Pork, and Fish

June-16 June-16 June-16 June-16 June-15

California Recovers April Cuts in May as Unemployment Falls Florida Posts the Largest State Job Gain in May Texas Jobless Rate Dips Down to 4.8 Percent North Carolina's Unemployment Rate Falls to 4.5 Percent New Jersey Cuts Jobs in May a the Labor Force Shrinks

Vitner, Vitner, Vitner, Vitner, Vitner,

June-23 June-16 June-15 June-12 June-08

Global Econom y Argentina's Economic Recovery Strengthened in Q1 2017 As Other Banks Take Punchbowl, BoJ Says: The Night is Young Global Chartbook: June 2017 Turkish Q1 GDP Surprises to the Upside Heads Up: Italian Political Risk Looms Large

Alemรกn Quinlan Alemรกn, Causey & Pershing Bryson & Pershing Bryson

June-21 June-14 June-14 June-07 May-31

Interest Rates/Credit Market Isolationism Fails in Economics FOMC: Model Dominates the Outlook Over Current Inflation Altering Patterns in Non-Financial Corporate Finance Quarterly Census of Employment and Wages (QCEW): Q4 2016 Price Shocks: Too Much, Not Enough, Just Misleading?

Silvia Silvia & Pugliese Silvia Vitner & Feik Silvia & Pugliese

June-05 May-16 May-11 May-01 April-03

Real Estate Housing Chartbook: June 2017 Housing Headwinds Still Outweigh Credit Score Modifications Watching For CRE Inflection Points Amid Shifts in Policy: Q1 Chartbook Housing Provides Lift to Q1 GDP Growth The New Normal for Housing: What Will It Take to Get There?

Vitner & Batcheller Vitner & Khan Khan & Causey Vitner & Batcheller Vitner & Batcheller

Brown & Pugliese Brown & Pugliese Quinlan & House House Alemรกn

U.S. Regional

22

Feik & Feik & Feik & Feik & Feik &

Carmichael Carmichael Carmichael Carmichael Carmichael

Wells Fargo Securities Economics Group Global Head of Research, Economics & Strategy

Economists

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

Sarah House, Economist

……

michael.a.brown@wellsfargo.com

Jamie Feik, Economist

Chief Economist John E. Silvia

sarah.house@wellsfargo.com

Michael A. Brown, Economist

jamie.feik@wellsfargo.com

Erik Nelson, Currency Strategist

erik.f.nelson@wellsfargo.com

john.silvia@wellsfargo.com Economic Analysts

Senior Economists

Michael Pugliese, Economic Analyst

michael.d.pugliese@wellsfargo.com

Julianne Causey, Economic Analyst

julianne.causey@wellsfargo.com

Mark Vitner, Senior Economist

mark.vitner@wellsfargo.com

Jay H. Bryson, Global Economist

…jay.bryson@wellsfargo.com

Sam Bullard, Senior Economist

sam.bullard@wellsfargo.com

E. Harry Pershing, Economic Analyst

nicholas.bennenbroek@wellsfargo.com

Hank Carmichael, Economic Analyst

Nick Bennenbroek, Currency Strategist Anika R. Khan, Senior Economist Eugenio J. Alemán, Senior Economist

john.h.carmichael@wellsfargo.com

anika.khan@wellsfargo.com eugenio.j.aleman@wellsfargo.com

Azhar Iqbal, Econometrician

azhar.iqbal@wellsfargo.com

Tim Quinlan, Senior Economist

tim.quinlan@wellsfargo.com

Eric J. Viloria, Currency Strategist

edward.h.pershing@wellsfargo.com

Administrative Assistants

eric.viloria@wellsfargo.com

Donna LaFleur, Executive Assistant

donna.lafleur@wellsfargo.com

Dawne Howes, Administrative Assistant

dawne.howes@wellsfargo.com

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Economic Outlook

23