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2016 Economic Outlook
Anika R. Khan, Senior EconomistJanuary 07, 2016
2
Five Key Themes
U.S. Economic Growth
Slow Global Growth
Slowing global growth will likely have limited direct effects on overall U.S. real GDP growth; however, indirect effects including monetary divergence where capital inflows into the U.S. continue to push up the dollar could be a source of pain this year
Risks to Outlook
The pace of growth is expected to be largely unchanged this year, however, there has been a shift in the underlying sectors adding to the headline. The recent sell off in the high yield market, namely ETFs, and declining energy prices could also add additional uncertainty
Data-DependentFederal Reserve
The Fed has started to normalize its short-term target rate, but will remain data-dependent paying close attention to labor market conditions, inflation, inflation expectations, financial market stability and international developments
China
Economic growth and labor market conditions in the U.S. are improving at a steady pace. Consumer spending and residential investment are expected to continue to strengthen in 2016. Moreover, momentum remains solid for final domestic demand
China’s economic growth continues to slow, bringing much of the commodity export-dependent world down with it. Residential and nonresidential construction are also showing marked declines
Economic Outlook 33
Economic Growth
We are now six years into the recovery and economic growth is increasing at a steady pace. Despite a slow start to the year, activity is expected to improve in line
with the previous year
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Real Private Final SalesReal GDP Forecast
-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: Q3 @ 2.0%GDP - Yr/Yr Percent Change: Q3 @ 2.1%
Forecast
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2000 2002 2004 2006 2008 2010 2012 2014 2016
Real Private Final Sales to Domestic PurchasersBars = CAGR Line = Yr/Yr Percent Change
Real Priv Fin Sales to Dom. Purch. - CAGR: Q3 @ 3.2%Real Priv Fin Sales to Dom. Purch. - Yr/Yr Pct Chg: Q3 @ 3.2%
Forecast
Economic Outlook 4
Consumer Spending
Solid improvement in consumer spending is helping to drive overall economic growth. Consumer balance sheets are healthy and increased purchasing power
due to the drop in gasoline prices is helping to fuel growth
-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: Q3 @ 3.0%PCE - Yr/Yr Percent Change: Q3 @ 3.1%
Forecast
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Real Disposable IncomeReal Consumer Spending
-19.9%
-2.3%
0.7%
1.4%
2.1%
2.2%
3.5%
4.0%
5.4%
7.3%
-24% -20% -16% -12% -8% -4% 0% 4% 8% 12%
Gas Stations
Electronics
"Core" Retail Sales
Total Retail Sales
Food, Beverages
Building Materials
Health, Pers. Care
Motor Veh. & Parts
Furniture
Nonstore Retailers
Retail SalesYear-over-Year Percent Change, SA
November 2015
5
Household Finances
Although consumer leverage remains elevated relative to historical norms, it is well off its prerecession high and debt service has returned to more sustainable
levels
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
60 65 70 75 80 85 90 95 00 05 10 15
Household Debt - Consumer & MortgageAs a Percent of Disposable Personal Income
Household Debt: Q3 @ 95.8%
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Debt ServiceDebt to Income
14.5%
15.0%
15.5%
16.0%
16.5%
17.0%
17.5%
18.0%
18.5%
14.5%
15.0%
15.5%
16.0%
16.5%
17.0%
17.5%
18.0%
18.5%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Financial Obligations Ratio-TotalAs a Percent of Disposable Personal Income
Total: Q3 @ 15.3%
Economic Outlook 66
GDP Components
Businesses still have a considerable amount of cash on the sidelines. We expect some of this money to be redirected into capital spending, but there are downside
risks due to the recent drop in oil prices
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Cash on SidelinesBusiness Fixed Investment
-30%
-20%
-10%
0%
10%
20%
30%
-30%
-20%
-10%
0%
10%
20%
30%
2000 2002 2004 2006 2008 2010 2012 2014
Capital Spending by TypeYear-over-Year Percent Change
Intellectual Property: Q3 @ 5.4%Equipment: Q3 @ 1.8%Structures: Q3 @ -1.2%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
U.S. Nonfin. Corporate Cash HoldingsTotal Assets Market Value, U.S. Nonfinancial Corporations
Cash Ratio: Q3 @ 4.1%4-Q Moving Average: Q3 @ 4.2%
77
Residential
Residential investment spending has made only a marginal contribution to real GDP growth. However, improving household formations suggest a pick up is
imminent
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Household FormationsResidential Investment Spending
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
85 88 91 94 97 00 03 06 09 12 15
Residential Investment SpendingBar = Compound Annual Rate Line = Percentage Points at Annual Rate
Residential Investment Spending: Q3 @ 8.2% (Right Axis)Contribution to U.S. Real GDP: Q3 @ 0.3% (Left Axis)
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
60 64 68 72 76 80 84 88 92 96 00 04 08 12
Household FormationsAverage of CPS/ASEC and CPS/HVS, In Millions
Survey Averages: 2014 @ 900K1948 to 2014 Average
8
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
2,500
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
2,500
66 70 74 78 82 86 90 94 98 02 06 10 14
U.S. Homeowners vs. RentersAnnual Change in Occupied Units, In Thousands
Renters: 2014 @ 1026.3 ThousandHomeowners: 2014 @ -234.5 Thousand
Series Break 1981
Homeowners vs. Renters
As the echo-boomers come into adulthood and have a higher propensity to rent, apartment demand should remain robust in the years
ahead
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
9
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 16
ISM Manufacturing & Non-Manufacturing Composite Index
ISM Manufacturing Index SA: Dec @ 48.2ISM Non-Manufacturing Index SA: Nov @ 55.9
Business Activity
Recent weakness has been concentrated in the goods
producing sector, while activity in the service sector
remains fairly strong
Source: Institute for Supply Management and Wells Fargo Securities, LLC
10
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
1948-1973 1974-1995 1996-2004 2005-2014
Labor Productivity and IncomeAverage Annual Percent Change
Labor ProductivityReal Disposable Income Per Capita
Productivity & Income
If labor productivity growth remains weak, the paltry
pace of real income growth seems set to continue
Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC
Valuations and the Credit Cycle
12
0
100
200
300
400
500
600
700
0
100
200
300
400
500
600
700
93 95 97 99 01 03 05 07 09 11 13 15
Aaa and Baa Corporate Bond SpreadsOver 10-Year Treasury, Basis Points, Shaded = FOMC Tightening
Baa Spread: Nov @ 308 bpsAaa Spread: Nov @ 180 bps
Credit Spreads
Past tightening cycles show that credit spreads have a
tendency to narrow
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
13
Late Stages of the Credit Cycle
Phases of the Credit Cycle Recovery Phase
Consolidation Phase Deterioration Phase
Material Deterioration During the advanced stage
of a credit cycle companies become more aggressive with their balance sheets.
Aggregate leverage is expected to rise throughout the year as borrowing outpaces earnings.
Debt-driven M&A, leveraged recaps and LBOs are all on the rise.
However, some sectors and companies are attempting to repair balance sheets.
Source: Wells Fargo Securities, LLC
A Typical Corporate Credit Cycle
RecoveryDeleverageProfits rise
Yields stabilizeSpreads gap tighter
ConsolidationLeverage troughs
Profits peakYields rise
Spreads tighten
DeteriorationReleverage
Profits decelerate/declineYields rise then decline
Spreads grind tighter then widen
Today’screditmarket
Economic Outlook 14
1,200
1,400
1,600
1,800
2,000
2,200
2,400
$0
$50
$100
$150
$200
$250
$300
J an-12 J ul-12 J an-13 J ul-13 J an-14 J ul-14 J an-15 J ul-15
U.S. M&A Volume and S&P 500 IndexBillions of Dollars; Index
US M&A Volume (3-MMA): Nov @ $273.6B (Left Axis)S&P 500 Index: Nov @ 2080.4 (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
Economic Outlook 15
50
100
150
200
250
50
100
150
200
250
02 03 04 05 06 07 08 09 10 11 12 13 14 15
Moody's/RCA Commercial Property Price IndexIndex; December 2000= 100
Commercial Property Price Index: Oct @ 209.0
CRE Valuations
Much of the surge in pricing continues to be driven by
increases in major markets for the apartment and office
central business district
Source: Real Capital Analytics, Inc. and Wells Fargo Securities, LLC
Economic Outlook 16
Apartment Effective Revenue Growth
Source: Reis, Inc. and Wells Fargo Securities, LLC
Los Angeles
Houston
Chicago
Dallas
Atlanta
PhoenixNorthern New Jersey
Orange County Denver
Suburban VirginiaSan Antonio
San DiegoPhiladelphia
Boston
Oakland
Seattle
Suburban Maryland
Central New JerseyBaltimore
San Francisco
Las Vegas
Riverside
TampaDetroit
Orlando
New York Metro
Indianapolis
Fort Worth
Kansas City
St. Louis
Raleigh
Miami
Columbus
Austin
Portland
Cleveland
Charlotte
Cincinnati
Minneapolis
San Jose
Washington, D.C.
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
-2% 0% 2% 4% 6% 8% 10% 12%
3-Mo
nth
Movi
ng A
vera
ge P
erce
nt C
hang
e
Year-over-Year Percent Change
Apartment Effective Revenue Growth: Q3 2015Year-over-Year Percent Change, 3-MMA; Sorted by Stock
Stock SizeLess than 150,000 Units150,000-200,000 UnitsMore Than 200,000 Units
Recovering Expanding
Contracting Decelerating
17
Five Key Themes
Lift-Off
Yield Curve & Term Premium
Decomposing the yield curve into the risk-neutral yield and the term premium, we find longer-dated U.S. Treasuries have been lower, principally due to a lower term premium
Fed Balance Sheet Operations
Fed balance sheet operations have had substantial effects on longer-term Treasury Yields, by reducing the term premiums on longer-dated Treasury securities
Data Dependent The Fed will remain data-dependent paying close attention
to labor market conditions, inflation, inflation expectations, financial market stability and international developments
Safe-Haven Flows & Policy
Divergence
The divergence between monetary policies of large economies will continue to put upward pressure on the dollar with continued flows into U.S. assets and longer-term U.S. Treasuries
The Fed has started to normalize its short-term target rate this past December, we expect to see some financial market volatility and a flatter yield curve
1818
Employment Situation
Slack in the labor market is steadily diminishing and wage growth is beginning to show some signs of picking up
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Unemployment RateUnemployment Rate
2%
4%
6%
8%
10%
12%
14%
16%
18%
2%
4%
6%
8%
10%
12%
14%
16%
18%
94 96 98 00 02 04 06 08 10 12 14
Unemployment RatesSeasonally Adjusted
FOMC Central Tendency for Longer RunUnemployment Rate: Nov @ 5.0%U-6 Unemployment Rate: Nov @ 9.9%
1%
2%
3%
4%
5%
6%
0%
5%
10%
15%
20%
25%
02 03 04 05 06 07 08 09 10 11 12 13 14 15
ECI Wage Growthvs. Small Business Plans to Raise Compensation and Avg. Hourly Earnings
NFIB Plans to Raise Compensation: Q3 @ 14.7% (Left Axis)Average Hourly Earnings (YoY): Q4 @ 2.3% (Right Axis)ECI Wages & Salaries (YoY): Q3 @ 2.1% (Right Axis)
19
0.5%
2.0%1.9%
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 18
PCE Deflator ForecastFed Central Tendency Forecast vs. Wells Fargo Forecast
Central Tendency Forecast RangeHistorical PCE DeflatorWells Fargo Economics Forecast FOMC
Dec. Forecast
Q4-over-Q4 Percent Change
Inflation
Members of the FOMC expect inflation to rise over the course of the year and
approach its long-run target this year as the economy
gradually strengthens and inflation expectations
remain stable
Source: U.S. Department of Commerce, Federal Reserve Board and Wells Fargo Securities, LLC
20
Inflation: Services vs. Goods
Services continue to underpin overall inflation, led by rising shelter costs as the housing market has recovered. Between 2008 and 2013, total prices were 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 16
U.S. "Core" CPI - Services vs. Goods Year-over-Year Percent Change
Core Services CPI: Nov @ 2.9%Core Goods CPI : Nov @ -0.6%
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 16
Shelter, OER & Rent CostsYear-over-Year Percent Change
Shelter: Nov @ 3.2%Rent: Nov @ 3.6%OER: Nov @ 3.1%
21
0
50
100
150
200
250
300
350
400
450
500
0
50
100
150
200
250
300
350
400
450
500
0 5 10 15 20 25 30
Cum
ulat
ive
Tigh
teni
ng (b
ps)
Length of Tightening Cycle (Months)
Historic Fed Tightening CyclesCumulative Tightening (bps) in Months
Past Tightening Cycles
There have been five tightening cycles in the
past 25 years
In the 2004 cycle, the Fed stayed on hold for 12 months and hiked rates 425 bps from
1.00%
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Tightening Last Cut Length of Cumulative Cumulative Tightening Terminal Cycle to First Hike Tightening Cycle Tightening First Year Fed Funds Rate
1983 - 1984 5.0 Months 16 Months 325 bps 200 bps 11.75%1986 - 1989 4.0 Months 28 Months 387 bps 100 bps 9.75%1994 - 1995 17 Months 13 Months 300 bps 250 bps 6.00%1999 - 2000 7 Months 12 Months 175 bps 175 bps 6.50%2004 - 2006 12 Months 25 Months 425 bps 200 bps 5.25%
Average 9 Months 18.8 Months 322.4 bps 185 bps 7.85%
Tightening Cycles Since 1983Historic Fed Tightening Cycles
22
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 2016
Federal Reserve Balance Sheet vs. S&P 500 Index Trillions, Index
Agencies & MBS: Dec @ $1,786.3B (Left Axis)Treasuries: Dec @ $2,461.6B (Left Axis)Other Securities: Dec @ $206.8B (Left Axis)S&P 500 Index: J an @ 2,043.9 (Right Axis)
Fed Balance Sheet
As expected, the Fed’s bond buying program ended in October. Now the focus is
on when the Fed will begin whittling down its balance
sheet
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Global Outlook
24
-1.5%
0.0%
1.5%
3.0%
4.5%
6.0%
7.5%
-1.5%
0.0%
1.5%
3.0%
4.5%
6.0%
7.5%
1980 1985 1990 1995 2000 2005 2010 2015
Real Global GDP GrowthYear-over-Year Percent Change, PPP Weights
Period Average
WFForecast
Global Real GDP Growth
Global real GDP growth has grown slightly below its
long-run average in recent years. Although we look for
global GDP to increase somewhat next year, we do not expect to see the robust pace of growth seen in the
previous expansion
Source: IHS Global Insight and Wells Fargo Securities, LLC
2525
Foreign Exchange Holdings
Foreign exchange reserves in emerging markets are steadily declining. Much of the drawdown is occurring to stabilize foreign currencies; however, the level is
still high relative to previous business cycles
Source: International Monetary Fund and Wells Fargo Securities, LLC
China Reserve DrawdownWorld Reserves
$0
$2
$4
$6
$8
$10
$12
$14
$0
$2
$4
$6
$8
$10
$12
$14
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
World Foreign Exchange ReservesTrillions of USD
Emerging Markets: Q1 @ $7.5 TrillionAdvanced Markets: Q1 @ $3.9 Trillion
$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
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Chinese Foreign Exchange ReservesTrillions of USD
Foreign Exchange Reserves: Nov @ $3.4 Trillion
2626
Foreign Exchange Holdings
Emerging market accumulation has reversed with China and Russia seeing the largest drawdown
Source: International Monetary Fund, Bloomberg LP and Wells Fargo Securities, LLC
Global Reserve DrawdownCurrent Accounts
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
91 93 95 97 99 01 03 05 07 09 11 13 15
Developing Economies Current AccountPercent of GDP
All Developing Economies: 2014 @ 0.5%Excluding MENA and China: 2014 @ -1.5%
Country Peak Current DrawdownChina $3,993.2B $3,514.1B -$479.1BRussia $473.1B $308.5B -$164.6BSaudia Arabia $731.2B $642.1B -$89.1BMalaysia $136.8B $90.1B -$46.6BTurkey $112.6B $100.1B -$12.5B
Billions of USDGlobal Foreign Exchange Reserves
27
0%
2%
4%
6%
8%
10%
12%
14%
0%
2%
4%
6%
8%
10%
12%
14%
2000 2002 2004 2006 2008 2010 2012 2014 2016
Chinese Real GDP ForecastYear-over-Year Percent Change
Year-over-Year Percent Change: Q3 @ 6.9%
Forecast
Chinese GDP Forecast
Growth in China is not expected to return to the
double-digit rate seen earlier in the decade
Source: IHS Global Insight and Wells Fargo Securities, LLC
28
-9%
-6%
-3%
0%
3%
6%
9%
12%
-9%
-6%
-3%
0%
3%
6%
9%
12%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Chinese PPIYear-over-Year Percent Change
Chinese PPI : Nov @ -5.9%
Chinese Producer Price Index
Chinese producer prices have been in negative
territory since early 2012
Source: Bloomberg LP and Wells Fargo Securities, LLC
29
-5%
0%
5%
10%
15%
20%
25%
30%
35%
47
48
49
50
51
52
53
J an-13 J ul-13 J an-14 J ul-14 J an-15 J ul-15 J an-16
Caixin China Manufacturing PMI vs. S&P 500 IndexSeasonally Adjusted; Year-over-Year Percent Change
Manufacturing PMI: Dec @ 48.2 (Left Axis)S&P 500 Index Year-over-Year: Dec @ -0.7% (Right Axis)
Manufacturing Activity vs. S&P 500
Manufacturing activity in China is starting to improve
somewhat, but is still weighing on the markets
Source: Bloomberg LP and Wells Fargo Securities, LLC
30
-40%
-20%
0%
20%
40%
60%
80%
-40%
-20%
0%
20%
40%
60%
80%
2000 2002 2004 2006 2008 2010 2012 2014 2016
Chinese TradeYear-over-Year Percent Change, 3-Month Moving Average
Exports: Nov @ -5.8%Imports: Nov @ -16.0%
Chinese Trade
Although Chinese trade has clearly weakened over the past few years, part of the
recent decline can be attributed to price effects.
Moreover, the direct effects to the U.S. appear to be
minimal. China accounts for just 7 percent of U.S. exports and less than 1 percent of real GDP
Source: IHS Global Insight and Wells Fargo Securities, LLC
31
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
50
70
90
110
130
150
170
190
210
230
250
270
94 96 98 00 02 04 06 08 10 12 14 16
Bloomberg Industrial Metals Index vs. Chinese GDPIndex, Year-over-Year Percent Change in Real GDP
Industrial Metals Index: Q4 @ 90.44 (Left Axis)Chinese Real GDP: Q3 @ 6.9% (Right Axis)
*Quarterly Average to Date
Chinese GDP vs Industrial Metals
A weakening Chinese economy has weighed
heavily on prices, specifically industrial
metals
Source: Bloomberg LP and Wells Fargo Securities, LLC
32
-12%
-8%
-4%
0%
4%
8%
-12%
-8%
-4%
0%
4%
8%
2002 2004 2006 2008 2010 2012 2014 2016
Eurozone Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change
Compound Annual Growth: Q3 @ 1.2%Year-over-Year Percent Change: Q3 @ 1.6%
Forecast
Eurozone GDP Forecast
The Eurozone has emerged from its double-dip
recession, but the recovery will lag the U.S.
Source: IHS Global Insight and Wells Fargo Securities, LLC
33
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
03 04 05 06 07 08 09 10 11 12 13 14 15
10-Year Government Bond YieldsPercent
I taly: Dec 31 @ 1.6%United States: Dec 31 @ 2.3%United Kingdom: Dec 31 @ 2.0%Germany: Dec 31 @ 0.6%
Yields
The U.S. will continue to be a safe haven for foreign
capital
Source: IHS Global Insight and Wells Fargo Securities, LLC
34
90
95
100
105
110
115
120
125
90
95
100
105
110
115
120
125
2010 2011 2012 2013 2014 2015
U.S. Trade Weighted Dollar IndexJ anuary 1997=100
Broad Currency Index: Dec-25 @ 122.7
Trade Weighted Dollar
We expect the dollar to continue to strengthen
against a broad basket of currencies as U.S. economic
growth improves and the Fed increases short-term
rates
Source: IHS Global Insight and Wells Fargo Securities, LLC
35
U.S. Forecast
Wells Fargo U.S. Economic Forecast
2013 2014 2015 2016 20171Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Real Gross Domestic Product 1 0.6 3.9 2.1 1.1 2.6 2.6 2.7 2.6 1.5 2.4 2.4 2.4 2.5Personal Consumption 1.8 3.6 3.0 2.8 2.7 2.7 2.7 2.6 1.7 2.7 3.1 2.8 2.5
Inflation Indicators 2
PCE Deflator 0.2 0.3 0.3 0.5 1.4 1.3 1.6 2.0 1.4 1.4 0.3 1.6 2.0Consumer Price Index - 0.1 0.0 0.1 0.5 1.8 1.6 1.8 2.2 1.5 1.6 0.2 1.9 2.2
Industrial Production 1 - 0.3 - 2.3 2.6 - 0.1 2.4 2.1 1.1 2.2 1.9 3.7 1.5 1.4 2.1Corporate Profits Before Taxes 2 4.6 0.6 - 4.7 5.0 4.3 4.8 4.6 4.6 2.0 1.7 1.3 4.6 4.4Trade Weighted Dollar Index 3 92.1 89.9 92.3 93.0 94.0 95.5 97.0 98.3 75.9 78.5 91.8 96.2 99.8Unemployment Rate 5.6 5.4 5.2 5.0 4.9 4.8 4.7 4.6 7.4 6.2 5.3 4.7 4.5Housing Starts 4 0.98 1.16 1.15 1.17 1.24 1.24 1.25 1.26 0.92 1.00 1.12 1.25 1.35
Quarter- End Interest Rates 5
Federal Funds Target Rate 0.25 0.25 0.25 0.50 0.50 0.75 1.00 1.25 0.25 0.25 0.31 0.88 1.88Conventional Mortgage Rate 3.77 3.98 3.89 3.96 4.10 4.15 4.17 4.20 3.98 4.17 3.90 4.16 4.3510 Year Note 1.94 2.35 2.06 2.28 2.45 2.50 2.55 2.60 2.35 2.54 2.16 2.53 2.80
Forecast as of: December 9, 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
ForecastActual2015 2016
ForecastActual
Appendix
Economic Outlook 37
Recent Special Commentary
Wells Fargo Economics Group Publications
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Date Title AuthorsU.S. Macro
December- 22 Our Favorite Charts of 2015 Silvia December- 16 FOMC Moves Forward In a Fog: Gradual, Data Dependent SilviaDecember- 10 Househould Debt: Opportunities/Risks in the Auto Sector Silvia & MoehringDecember- 09 The Great Divide: 2016 Annual Economic Outlook SilviaNovember- 23 Are Risks Brewing in Consumer Lending? Khan & Brown
U.S. RegionalDecember- 18 California Employment Conditions: November 2015 Vitner & BatchellerDecember- 16 North Carolina Economic Outlook: December 2015 Vitner & BatchellerDecember- 10 State GDP: Low Commodity Prices Hit Energy and Farm Economies Vitner & BatchellerNovember- 24 California Economic Outlook: November 2015 Vitner & BatchellerNovember- 20 Florida's Economy Continues to Add J obs at a Rapid Pace Vitner & Batcheller
Global EconomyJ anuary- 04 Singapore's Economy Ends a Week 2015 on a High Note Bryson & Nelson
December- 10 Turkey: Stronger Savings & Investment Needed Bryson & NelsonDecember- 10 Global Chartbook: December 2015 Quinlan, House & NelsonDecember- 03 Brazilian Economy Continues to Plunge AlemánDecember- 03 ECB Disappoints at Today's Policy Meeting Bryson
Interest Rates/Credit MarketDecember- 16 2016 Net Treasury Issuance Outlook Silvia, Vitner & BrownDecember- 09 Bank Lending Conditions: Support for Consumer Spending Silvia, Vitner & BrownNovember- 12 All Systems Go for a FOMC Move in December? Silvia, Vitner & BrownNovember- 04 Inflation Expectations Ease Further Silvia, Vitner & BrownOctober- 28 Debt Ceiling Debates and Their Effects on Yields and Volatility Silvia, Vitner & Brown
Real EstateDecember- 22 Nonresidential Construction Recap: December KhanDecember- 04 Housing Chartbook: November 2015 Vitner & KhanNovember- 30 Nonresidential Construction Recap: November KhanNovember- 24 Commercial Real Estate Chartbook: Q3 KhanNovember- 16 Are Risks Brewing in CRE Lending? Khan & Brown
A Sampling of Our Recent Special, Regional & Industry Commentary
Wells Fargo Securities, LLC Economics Group
38
John E. Silvia … ...................... . … [email protected]
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Diane Schumaker-Krieg ………………… ………[email protected] Head of Research & Economics
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Mark Vitner, Senior Economist……………....………. . [email protected]
Jay H. Bryson, Global Economist …………………....…… ….
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Anika R. Khan, Senior Economist … . [email protected]
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