View
214
Download
0
Category
Tags:
Preview:
Citation preview
John E. Silvia, Chief EconomistFebruary 12, 2015
The Great Inflation: Once in a LifetimeThe Economic Club of Las Vegas
Las Vegas 2
Where Are We Now?
Source:
Five benchmarks for good decision making
Inflation Interest Rates
Growth
Profits The Dollar
Las Vegas 3
Expectations for the Future
Wells Fargo vs. Consensus
How do we differ from consensus?
Sustained-trend growth
Employment—cyclical and structural change
Still cautious on consumer segments
Housing improving—multifamily especially
State and local governments—still restructuring
Unsustainable long-run fiscal policy
Europe weak growth path
China growth sub 7 percent
Las Vegas 4
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2000 2002 2004 2006 2008 2010 2012 2014 2016
U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change
GDP - CAGR: Q4 @ 2.6%
GDP - Yr/Yr Percent Change: Q4 @ 2.5%
Forecast
Sustained Growth in 2015
Following a poor start to the year, GDP growth has
rebounded smartly. Solid growth prospects in the
year ahead.
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Las Vegas 5
25
30
35
40
45
50
55
60
65
25
30
35
40
45
50
55
60
65
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
ISM Manufacturing & Non-Manufacturing Composite Index
ISM Non-Manufacturing Index SA: Dec @ 56.5
ISM Manufacturing Index SA: J an @ 53.5
Manufacturing & Services
Indexes on business activity suggest an improving near-
term outlook
Source: Institute for Supply Management and Wells Fargo Securities, LLC
Las Vegas 6
70
75
80
85
90
95
100
105
110
115
-60
-40
-20
0
20
40
60
80
100
120
04 05 06 07 08 09 10 11 12 13 14
Wells Fargo Small Business Survey & NFIBOverall Situation, NFIB Small Business Optimism 1986=100
Wells Fargo Overall Situation: Q4 @ 58.0 (Left Axis)
Small Business Optimism: Q4 @ 98.2 (Right Axis)
Small Businesses
Small Businesses:A full recovery in small
business optimism is still distant, taxes and
regulation the two big issues
Source: National Federation of Independent Businesses, Gallup, Wells Fargo Bank and Wells Fargo Securities, LLC
Las Vegas 7
250
300
350
400
450
500
550
600
650
700
250
300
350
400
450
500
550
600
650
700
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Initial Claims for UnemploymentSeasonally Adjusted, In Thousands
Year-over-Year Percent Change: J an-31 @ -15.2%Initial Claims: J an-31 @ 278.0 Thousand4-Week Moving Average: J an-31 @ 292.8 Thousand52-Week Moving Average: J an-31 @ 304.8 Thousand
Initial Unemployment Claims: Cyclical
Signaling continued, moderate job gains ahead
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Las Vegas 8
0%
1%
2%
3%
4%
5%
6%
7%
-9%
-6%
-3%
0%
3%
6%
9%
12%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Labor Income and Consumer SpendingYear-over-Year Percent Change of 3-MMA
Real Consumer Spending: Dec @ 2.8% (Left Axis)Wages & Salaries: Dec @ 5.2% (Left Axis)Average Hourly Earnings: J an @ 2.0% (Right Axis)
Wages & Salaries
Wages & salaries are best associated with consumer
spending
Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC
Las Vegas 9
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
2.8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Wages vs. Quit Rate Year-over-Year Percent Change, Rate; All Series are 3-MMA
Wages & Salaries: Dec @ 4.6% (Left Axis)Average Hourly Earnings: J an @ 2.0% (Left Axis)Quit Rate: Dec @ 1.9% (Right Axis)
Wages vs. Quit Rate
The rising quit rate indicates that workers are
feeling confident about opportunities available in
the labor market
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Las Vegas 10
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2000 2002 2004 2006 2008 2010 2012 2014 2016
Real Personal Consumption ExpendituresBars = CAGR Line = Yr/Yr Percent Change
PCE - CAGR: Q4 @ 4.3%PCE - Yr/Yr Percent Change: Q4 @ 2.8%
Forecast
Consumer Spending
Faster job growth, asset appreciation and more
access to credit are supportive to the consumer
spending outlook
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Las Vegas 11
0
10
20
30
40
50
60
70
80
0
10
20
30
40
50
60
70
80
2005 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Bloomberg Consumer Comfort by Income12-Week Moving Average
Income Between $25K and $39.9K: Feb-01 @ 35.2Income Between $50K and $74.9K: Feb-01 @ 50.1Income Between $75K and $99.9K: Feb-01 @ 55.0Income Over $100K: Feb-01 @ 66.9
Consumer Confidence: By Income Group
Confidence improves with income, but remains
historically low across all income ranges
Source: Bloomberg LP and Wells Fargo Securities, LLC
Las Vegas 12
2006 2007 2008 2009 2010 2011 2012 2013 2014
0%10%20%30%40%50%60%70%80%90%100%110%
New Auto SalesAs Percent of Total New Auto Sales by FICO Scores
Sub Prime (619 and below): Aug @ 19.7%
Near Prime (620-679): Aug @ 20.7%
Prime (680 and above): Aug @ 59.6%
Auto Lending: Slippery Slope
There has been an increase in auto sales to sub and
near-prime buyers
Source: CNW Research and Wells Fargo Securities, LLC
Las Vegas 13
0%
10%
20%
30%
40%
50%
60%
70%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Used Auto SalesAs Percent of Total Used Sales By FICO Scores
Sub-Prime: Aug @ 26.0%
Near Prime: Aug @ 33.7%
Prime: Aug @ 40.3%
Auto Lending: Slippery Slope
The rise in sub-prime auto sales has been most
prevalent in the used auto sales market
Source: CNW Research and Wells Fargo Securities, LLC
Las Vegas 14
0%
1%
2%
3%
4%
0%
1%
2%
3%
4%
81 84 87 90 93 96 99 02 05 08 11 14
Auto Delinquency RatesBalance Past Due 30+ Days
Auto Indirect Loans: Sep @ 1.05%
Auto Direct Loans: Sep @ 0.56%
Auto Lending: Slippery Slope
Auto delinquency rates remain at historically low
levels, but have seen a recent uptick
Source: American Bankers Association and Wells Fargo Securities, LLC
Las Vegas 15
0%
2%
4%
6%
8%
10%
12%
14%
16%
J an-03Apr-04
J ul-05Oct-06J an-08Apr-09
J ul-10
Oct-11
J an-13
Apr-14
Household Debt DelinquenciesPercent of Balance 90+ Days Past Due
Auto: Q3 @ 3.1%HELOC: Q3 @ 3.3%Mortgage: Q3 @ 3.2%Student Loans: Q3 @ 11.1%Other: Q3 @ 8.0%Credit Card: Q3 @ 7.5%
Household Debt Delinquencies: Student Loans the Exception
Tighter credit standards and a strengthening
economy have helped to improve the credit position of households over the past
3 years
Source: Federal Reserve Bank of New York and Wells Fargo Securities, LLC
Las Vegas 16
Inflation & Interest Rates
Inflation Interest Rates
Growth
Profits The Dollar
Core Inflation
MonetaryPolicy
YieldCurve
Real Interest Rates
Wage-Price Spiral
MarketExpectations
Key Driver
s
Las Vegas 1717
-2%
-1%
0%
1%
2%
3%
4%
5%
-2%
-1%
0%
1%
2%
3%
4%
5%
92 94 96 98 00 02 04 06 08 10 12 14
PCE Deflator vs. Core PCE DeflatorYear-over-Year Percent Change
PCE Deflator: Dec @ 0.7%"Core" PCE Deflator: Dec @ 1.3%
Inflation: Rising – Not Low
Inflation remains historically low, but has
picked up as growth accelerates and excess
slack lessens
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Las Vegas 1818
100
120
140
160
180
200
220
100
120
140
160
180
200
220
2010 2011 2012 2013 2014 2015
Industrial Metals Index Includes Aluminum, Copper, Nickel and Zinc
Bloomberg Industrial Metals Index: Feb-6 @ 119.1
Prices - Industrial Metals
Falling oil prices have spilled over into other
commodity prices, notable industrial metals
Source: Bloomberg LP and Wells Fargo Securities, LLC
Las Vegas 19
Inflation
Services continue to underpin overall inflation, led by rising shelter costs as the housing market has recovered. Between 2008 and 2013, total prices are up 8.2
percent vs. 16.8 percent for medical care.
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
92 94 96 98 00 02 04 06 08 10 12 14
U.S. "Core" CPI - Services vs. Goods Year-over-Year Percent Change
Core Services CPI : Dec @ 2.4%Core Goods CPI : Dec @ -0.8%
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Shelter CostsServices vs. Goods
-1%
0%
1%
2%
3%
4%
5%
6%
7%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
88 90 92 94 96 98 00 02 04 06 08 10 12 14
Shelter, OER & Rent CostsYear-over-Year Percent Change
Shelter: Dec @ 2.9%
Rent: Dec @ 3.4%
OER: Dec @ 2.6%
Las Vegas 20
1.1%
1.4%
2.1%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
PCE Deflator ForecastFed Central Tendency Forecast vs. Wells Fargo Forecast
Central Tendency Forecast Range
Historical PCE Deflator
Wells Fargo Economics Forecast FOMC Dec. Forecast
Q4-over-Q4 Percent Change
Inflation
The Fed anticipates a gradual firming of inflation,
but for slack in the labor market to keep inflation from overshooting in the
medium term
Source: U.S. Department of Commerce, Federal Reserve Board and Wells Fargo Securities, LLC
Las Vegas 21
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Appropriate Pace of Policy FirmingTarget Federal Funds Rate at Year-End
December 2014 Median Response
September 2014 Median Response
2015 2016 Longer Run2017
Pace of Policy Firming
The FOMC Committee downshifted its expectations for the Federal Funds rate path in the recent meeting, but still expects a fed funds rate of above 1 percent at
the end of 2015
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Las Vegas 22
0
10
20
30
40
50
60
70
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
12M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
U.S. Treasury Curve Roll ChartYield (Left); Basis Points (Right)
1Y Roll - 12/31/2013 (Right Axis)1Y Roll - 12/31/2014 (Right Axis)1Y Roll - 1/30/2015 (Right Axis)Yield Curve 12/31/2013 (Left Axis)Yield Curve 12/31/2014 (Left Axis)Yield Curve 1/30/2015 (Left Axis)
Treasury Curve
The short-end remains the steepest part of the curve,
while the long-end has flattened considerably
Source: Bloomberg LP and Wells Fargo Securities, LLC
Las Vegas 23
Yield Curve: Rates Rise Without Fed
The Fed will begin to raise the funds rate in mid-2015
Source: Bloomberg LP and Wells Fargo Securities, LLC
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Yield CurveU.S. Treasuries, Active Issues
February 4, 2015
J anuary 7, 2015
February 5, 2014
Las Vegas 24
Yield Spread
Flight to safety and search for yield from foreign
investors has caused the 10-year yield to drop to
historical lows
Source: Bloomberg LP and Wells Fargo Securities, LLC
1.0%
1.3%
1.6%
1.9%
2.2%
2.5%
2.8%
1.0%
1.3%
1.6%
1.9%
2.2%
2.5%
2.8%
J an-12 J ul-12 J an-13 J ul-13 J an-14 J ul-14 J an-15
U.S. Treasury 10-Year - 2-Year Spread
10-Year - 2-Year: Feb @ 1.30%
Las Vegas 25
0
100
200
300
400
500
600
700
0
100
200
300
400
500
600
700
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Aaa and Baa Corporate Bond SpreadsOver 10-Year Treasury, Basis Points
Baa Spread: J an @ 257 BpsAaa Spread: J an @ 158 Bps
Bear StearnsMarch 2008
Corporate Spreads: Positive for Issuance
Spreads have returned to a more normal level; bond
issuance is strong
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Las Vegas 26
Easier Lending Standards
More than a third of firms eased lending standards for student and auto loans last
year.
Source: Office of the Comptroller of the Currency and Wells Fargo Securities, LLC
0%
10%
20%
30%
40%
50%
60%
70%
0%
10%
20%
30%
40%
50%
60%
70%
Firms Easing Lending StandardsPercent of Firms, By Loan Type
2014
2006
Commercial Loans Retail Loans
Las Vegas 27
Interest Coverage Ratio
Small manufacturers are most able to cover their debt obligations, while
mining corporations exhibit the lowest coverage ratio.
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
Interest Coverage RatioOperating Income/Interest Expense, 4-Q Mov. Avg.
Q3 2014
Las Vegas 28
Debt Financing
Nonfinancial corporations are exposed to rising short-term interest rates as the
Fed rate hike draws nearer
Source: Federal Reserve Board and Wells Fargo Securities, LLC
24%
28%
32%
36%
40%
44%
48%
24%
28%
32%
36%
40%
44%
48%
70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15
Nonfinancial Corporate Debt FinancingShort-Term Debt As a Share of Total Credit Market Debt
Short Term Financing/Total Debt: Q3 @ 26.7%
Las Vegas 29
$0
$3
$6
$9
$12
$15
$18
$21
$24
$27
$30
$0
$3
$6
$9
$12
$15
$18
$21
$24
$27
$30
04 05 06 07 08 09 10 11 12 13 14
Investment Grade Corporate Issuance3-Month Moving Average, Billions of USD
Investment Grade Corporate: J an @ $18.9 Billion
Investment Grade Corporate Bonds
Businesses are taking advantage of low interest
rates
Source: IFR Markets and Wells Fargo Securities, LLC
Las Vegas 30
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
04 05 06 07 08 09 10 11 12 13 14
High Yield Corporate Issuance3-Month Moving Average, Billions of USD
High Yield Corporate I ssuance: Dec @ $21.2 Billion
High Yield Corporate Bonds
As investors search for yield among exceptionally low
interest rates, bond issuance has gained
momentum
Source: IFR Markets and Wells Fargo Securities, LLC
Las Vegas 31
1000
1200
1400
1600
1800
2000
$0
$100
$200
$300
$400
$500
2010 2011 2012 2013 2014
U.S. M&A Volume and S&P 500 IndexBillions of Dollars; Index
U.S. M&A Volume: Q3 @ $476.4B (Left Axis)S&P 500 Performance: Q3 @ 1972.3 (Right Axis)
M&A Volume
U.S. M&A and the S&P 500 remain correlated over time
Source: Thomson Reuters, Capital IQ and Wells Fargo Securities, LLC
Las Vegas 32
-30%
-20%
-10%
0%
10%
20%
30%
40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
90 92 94 96 98 00 02 04 06 08 10 12 14
Commercial and Industrial LoansAt Commercial Banks in the United States
Year-over-Year Change: Dec @ 13.3%
3-Month Annualized Rate: Dec @ 12.0%
Business Lending
Commercial and industrial lending has surged over the
past quarter, helped by easier credit and increased
demand
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Las Vegas 33
0%
2%
4%
6%
8%
10%
12%
14%
0%
2%
4%
6%
8%
10%
12%
14%
47 51 55 59 63 67 71 75 79 83 87 91 95 99 03 07 11
Corporate ProfitsAs a Percent of GDP
Rest of World: Q3 @ 2.3%
Domestic: Q3 @ 10.0%
NAFTA
China J oins WTO
Corporate Profits: Increasing Role of Global Profits
Profits as a percentage of GDP are historically high and are being boosted by
profits earned abroad post NAFTA
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Las Vegas 34
-9.0
-6.0
-3.0
0.0
3.0
6.0
9.0
12.0
-9.0
-6.0
-3.0
0.0
3.0
6.0
9.0
12.0
96 98 00 02 04 06 08 10 12 14
Manufacturing After-Tax ProfitsPer Dollar of Sales, in Cents
After-Tax Profits: Q3 @ 9.4 Cents
After-Tax Profits
Profit margins continue to improve
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Las Vegas 35
0%
20%
40%
60%
80%
100%
120%
0%
20%
40%
60%
80%
100%
120%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Non-Fin. Corporate Business: Corporate Interest As a Percentage of Pre-Tax Profits
Corporate Interest: Q3 @ 18.0%
Interest Expense
Corporate interest expenses remain low amid the low-
rate environment
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Las Vegas 36
Net Interest Margin v. Yield Curve
Net interest margin has followed a secular decline
and has decoupled from the yield curve in recent years.
Source: Federal Financial Institutions Examination Council, Federal Reserve Board and Wells Fargo Securities, LLC
-100
0
100
200
300
400
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Net Interest Margin v. Yield Curve SpreadAnnualized Percent NSA; Basis Points
10-Year-2-Year Spread: Q4 @ 174 bps (Right Axis)Net Interest Margin: Q3 @ 3.1% (Left Axis)
Las Vegas 37
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
After-Tax Corporate Profit GrowthYear-over-Year Percent Change, 2-Year Moving Average
After-Tax Profits: Q3 @ 5.3%
Corporate Profit Growth
Corporate profit growth remains firm—typical mid-
cycle slowdown
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Las Vegas 38
-$200
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
-$200
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
01 02 03 04 05 06 07 08 09 10 11 12 13 14
Domestic ProfitsFinancial and Nonfinancial Corporations, Billions of Dollars
Nonfinancial Corporations: Q3 @ $1,292.2B
Financial Institutions: Q3 @ $468.1B
Corporate Profits: Domestic Profits
Big gains in profits have been from nonfinancial
corporations
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Las Vegas 39
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
$5.0
$5.5
2007 2008 2009 2010 2011 2012 2013 2014 2015
Federal Reserve Balance Sheet vs. S&P 500 Index Trillions, Index
Agencies & MBS: Feb @ $1,776.3B (Left Axis)Treasuries: Feb @ $2,460.7B (Left Axis)Other Securities: Feb @ $224.5B (Left Axis)S&P 500 Index: Feb @ 2,054.9 (Right Axis)
Fed Balance Sheet: Challenge to Asset Values
We have seen a strong correlation in the expansion of the Fed’s balance sheet
and the rise in the S&P 500
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Las Vegas 40
Economic Conditions in the Eurozone
The Eurozone Economy
What can we expect moving forward?
Growth Exports via euro depreciation Companies, not countries
Euro Stoxx: up since 2012
Potential Growth Long-term: weaker Labor force growth Productivity
Eurozone share of Global GDP: 12% in 2014
Risks Russia: Service external debt Greece: Cash
Las Vegas 41
1500
2000
2500
3000
3500
4000
4500
5000
1500
2000
2500
3000
3500
4000
4500
5000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
European Equity Index
Euro Stoxx: J an-30 @ 3351.44
Global Economies: European Equity
The anticipation of the ECB’s policy move may
have helped to life equity prices in Europe in recent
months.
Source: Bloomberg LP and Wells Fargo Securities, LLC
Las Vegas 42
40
60
80
100
120
140
160
180
200
2200.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2.20
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Euro, Pound & Yen Exchange RatesUSD per Euro, USD per Pound Yen per USD
Dollars per Euro: Feb @ 1.14 (Left Axis)Dollars per Pound: Feb @ 1.53 (Left Axis)Yen per Dollar: Feb @ 118.64 (Right Axis, Inverted)
Global Economies: A Stronger Dollar
The dollar has appreciated against the euro, pound and
yen recently.
Source: Bloomberg LP and Wells Fargo Securities, LLC
Las Vegas 43
0.85
0.95
1.05
1.15
1.25
1.35
1.45
9.50
10.70
11.90
13.10
14.30
15.50
16.70
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dollar Exchange Rates: Canada & MexicoForeign Currency per U.S. Dollar
Mexican Pesos/U.S. Dollar: Feb @ 14.84 (Left Axis)Canadian Dollars/U.S. Dollar: Feb @ 1.25 (Right Axis)
Global Economies: A Stronger Dollar
The Canadian dollar and Mexican peso have both seen recent depreciation
against the U.S. dollar
Source: Bloomberg LP and Wells Fargo Securities, LLC
Las Vegas 44
14%
16%
18%
20%
22%
24%
26%
14%
16%
18%
20%
22%
24%
26%
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
U.S. Budget GapCBO Baseline Scenario Projections, Percent of GDP
Outlays: 2025 @ 22.3%
Revenues: 2025 @ 18.3%
Avg. Outlays1965-2013
Avg. Revenues1965-2013
Forecast
Federal Fiscal Policy: When Will We Discount Future Liabilities?
The federal government faces some significant fiscal
challenges—the current path is not sustainable
Source: Congressional Budget Office and Wells Fargo Securities, LLC
Las Vegas 4545
Federal Government Spending: Entitlements in the Driver’s Seat
The unfunded liabilities of the entitlement programs reflect a commitment to
spend in the future
Source: Congressional Budget Office and Wells Fargo Securities, LLC
$0.0T
$0.5T
$1.0T
$1.5T
$2.0T
$2.5T
$3.0T
$3.5T
$4.0T
$0.0T
$0.5T
$1.0T
$1.5T
$2.0T
$2.5T
$3.0T
$3.5T
$4.0T
2014 2016 2018 2020 2022 2024
U.S. Federal Government Mandatory OutlaysTrillions of U.S. Dollars, Projections Begin in 2014
Other Programs: 2025 @ $0.3TIncome Security: 2025 @ $0.4TSocial Security: 2025 @ $1.6THealthcare Programs: 2025 @ $1.7T
Las Vegas 4646
Federal Fiscal Policy
The composition of federal spending has shifted dramatically.The CBO projects that the debt-to-GDP ratio will reach nearly 80 percent by 2024.
Source: Congressional Budget Office and Wells Fargo Securities, LLC
Federal Debt Continues to RiseComposition of Federal Spending
18%
35%
62%
60%
59%
31%
22%
6%
7%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2050
2013
1970
Federal SpendingPercent of Total
Discretionary Mandatory Net Interest
Total Spending 1970: 19 percent of GDP
Total Spending 2013: 21 percent of GDP
Total Spending 2050: 29 percent of GDP
20%
30%
40%
50%
60%
70%
80%
20%
30%
40%
50%
60%
70%
80%
1974 1979 1984 1989 1994 1999 2004 2009 2014 2019 2024
U.S. Debt Held By The PublicCBO Baseline Projections Begin in 2014, Percent of GDP
Baseline Debt: 2025 @ 77.7%
Las Vegas 47
Potential Challenges to the Outlook
Outlook Risks
What are the primary risks to the outlook?
Fitful Fed exit brings questions for the dollar, inflation and interest rate outlook/ volatility/ confidence
Fiscal policy: tax increases and/or spending cuts face unsustainable long-run outlook
Housing: able to sustain growth on its own if rates rise?
European debt crisis weighs on global growth, interest rates and global credit stagnation over the long-run
China/global trade weakness hits U.S. exports, foreign earnings of U.S. corporations
Sustained lower oil prices– risk for overleveraged businesses and countries
Las Vegas 48
U.S. Forecast
2012 2013 2014 2015 2016
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Real Gross Domestic Product 1 - 2.1 4.6 5.0 2.6 1.5 2.4 2.9 2.9 2.3 2.2 2.4 2.8 2.9
Personal Consumption 1.2 2.5 3.2 4.3 3.5 2.7 2.7 2.6 1.8 2.4 2.5 3.2 2.6
Inflation Indicators 2
PCE Deflator 1.1 1.6 1.5 1.1 0.5 0.3 0.5 1.1 1.8 1.2 1.3 0.6 2.0
Consumer Price Index 1.4 2.1 1.8 1.2 0.2 0.0 0.3 1.2 2.1 1.5 1.6 0.4 2.4
Industrial Production 1 3.9 5.7 4.1 5.6 4.7 4.9 3.5 3.1 3.8 2.9 4.3 4.6 3.6
Corporate Profits Before Taxes 2 - 4.8 0.1 1.4 2.2 2.6 2.7 3.5 4.6 11.4 4.2 - 0.2 3.4 5.8
Trade Weighted Dollar Index 3 76.9 75.9 81.3 85.1 88.5 89.8 91.0 92.3 73.5 75.9 78.5 90.4 94.7
Unemployment Rate 6.6 6.2 6.1 5.7 5.6 5.5 5.4 5.3 8.1 7.4 6.2 5.4 5.1
Housing Starts 4 0.93 0.99 1.03 1.07 1.06 1.13 1.21 1.24 0.78 0.92 1.01 1.17 1.31
Quarter- End Interest Rates 5
Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.50 0.75 1.00 0.25 0.25 0.25 0.63 2.00Conventional Mortgage Rate 4.34 4.16 4.16 3.86 3.36 3.32 3.56 3.70 3.66 3.98 4.17 3.49 4.1810 Year Note 2.73 2.53 2.52 2.17 1.85 1.92 1.98 2.07 1.80 2.35 2.54 1.96 2.54
Forecast as of: February 11, 20151 Compound Annual Growth Rate Quarter-over-Quarter2 Year-over-Year Percentage Change3 Federal Reserve Major Currency I ndex, 1973=100 - Quarter End4 Millions of Units5 Annual Numbers Represent Averages
Forecast
2014
Actual
2015
ForecastActual
Wells Fargo U.S. Economic Outlook
Source: U.S. Department of Commerce, U.S. Department of Labor, Federal Reserve Board, Freddie Mac and Wells Fargo Securities, LLC
Appendix
Las Vegas 50
Recent Special Commentary
Wells Fargo Economics Group Publications
To join any of our research distribution lists please visit
our website: http://www.wellsfargo.com/
economics
Date Title Authors
U.S. Macro
February- 06 Did They Get You to Trade Cold Comfort for Change? Quinlan & House
February- 05 Wells Fargo Small Business Survey: Q1 2015 Vitner
February- 04 Millennials in the Economy VI: Liabilities of Young People House, Nelson & Moehring
February- 03 Inflation Chartbook: Q4 2014 Bullard, House & Nelson
U.S. Regional
February- 03 Colorado's Oil Exposure Vitner, Wolf & Moehring
J anuary- 23 California Employment Conditions: J anuary 2015 Vitner & Wolf
J anuary- 23 Florida Employment: Strong Gains in 2014 Vitner & Wolf
J anuary- 23 Texas Holds Strong Despited Oil Prices Vitner & Wolf
Global Economy
February- 06 Chilean Economy Leading The Latin America Region Aléman & Griffiths
February- 05 The Eurozone: the Good, the Bad and the Ugly Bryson & Griffiths
February- 04 Mixed Results on Gross Investment in Mexico Aléman & Griffiths
February- 03 Australia's Reserve Bank J oins the Surprise Party Quinlan & Griffiths
Interest Rates/Credit Market
February- 05 Small Business Lending Gets Only a Modest Lift Silvia, Vitner & Brown
J anuary- 28 Sizing Up Sector- Level Exposure to the Fed Move Silvia, Vitner & Brown
J anuary- 21 Stronger Loan Demand: Where are the Higher Rates? Silvia, Vitner & Brown
J anuary- 14 Is Short- Term Corporate Debt a Cause for Concern? Silvia, Vitner & Brown
Real EstateJ anuary- 29 Nonresidential Construction Recap: J anuary 2015 Khan
J anuary- 12 Dodge Momentum Index Ends 2014 on Good Note Khan
J anuary- 08 Housing Data Wrap- Up: J anuary 2015 Vitner & Khan
December- 23 Nonresidential Construction Recap: December 2014 Khan
Las Vegas
Wells Fargo Securities, LLC Economics Group
51
John E. Silvia … ...................... . … john.silvia@wellsfargo.com
Global Head of Research and Economics
Diane Schumaker-Krieg ………………… ……….diane.schumaker@wellsfargo.comGlobal Head of Research & Economics
Chief Economist
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
Nick Bennenbroek, Currency Strategist ……nicholas.bennenbroek@wellsfargo.com
Eugenio J. Alemán, Senior Economist… ………….
eugenio.j.aleman@wellsfargo.com
Anika R. Khan, Senior Economist … . anika.khan@wellsfargo.com
Senior Economists
Zachary Griffiths, Economic Analyst zachary.griffiths@wellsfargo.com
Mackenzie Miller, Economic Analyst mackenzie.miller@wellsfargo.com
Erik Nelson, Economic Analyst erik.f.nelson@wellsfargo.com
Alex Moehring, Economic Analyst alex.v.moehring@wellsfargo.com
Economists
Azhar Iqbal, Econometrician………………… ……………azhar.iqbal@wellsfargo.com
Tim Quinlan, Economist …………………… ……………..tim.quinlan@wellsfargo.com
Eric J. Viloria, Currency Strategist eric.viloria@wellsfargo.com
Sarah Watt House, Economist …………… …………sarah.house@wellsfargo.com
Michael A. Brown, Economist ……………… … michael.a.brown@wellsfargo.com
Michael T. Wolf, Economist ………………… … .
michael.t.wolf@wellsfargo.com
Economic Analysts
Administrative Assistants
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, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. 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 © 2015 Wells Fargo Securities, LLC.
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
Important Information for Non-U.S. Recipients
For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority’s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only.
Donna LaFleur, Executive Assistant.
donna.lafleur@wellsfargo.com
Cyndi Burris, Senior Administrative Assistant cyndi.burris@wellsfargo.com
Recommended