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
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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
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nicholas.bennenbroek@wellsfargo.com
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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
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tim.quinlan@wellsfargo.com
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edward.h.pershing@wellsfargo.com
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Economic Outlook
23