U.S. Economic Outlook Charlie Dougherty, Vice President & Economist September 18, 2018
Economic Growth Expected to Accelerate in 2018 U.S. Real GDP Bars = CAGR Line = Yr/ Yr Percent Change 10% 10% GDP - CAGR: Q2 @ 4.2% 8% 8% GDP - Yr/Yr Percent Change: Q2 @ 2.9% 6% 6% Forecast 4% 4% After a slow start, real GDP 2% 2% rebounded strongly in the second quarter. 0% 0% -2% -2% We expect the economy to continue to expand and grow -4% -4% nearly 3 percent for the year. -6% -6% -8% -8% -10% -10% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: U.S. Department of Commerce and Wells Fargo Securities 2 Economic Outlook
Employment Situation: Employment Growth Strong U.S. Nonfarm Employment Change Change in Employment, In Thousands 600 600 400 400 200 200 0 0 -200 -200 Hiring has had a strong start to -400 -400 the year, continuing the steak of 90+ months of positive gains. -600 -600 -800 -800 -1,000 -1,000 Monthly Change: Aug @ 201K 12-Month Average Change: Aug @ 194K -1,200 -1,200 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: U.S. Department of Labor and Wells Fargo Securities 3 Economic Outlook
Employment Situation: Tightening Labor Market Unemployment v. Labor Force Participation 16 Years and Over, Seasonally Adjusted 11% 68% 10% 67% 9% 66% The unemployment rate has fallen considerably over the 8% 65% course of the recovery. 7% 64% Strong employment growth has 6% 63% also helped counter the 5% 62% downward pressure on labor force participation from an 4% 61% aging population. 3% 60% Unem ploym ent Rate: Aug @ 3.9% (Left Axis) Labor Force Participation Rate: Aug @ 62.7% (Right Axis) 2% 59% 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Source: U.S. Department of Labor and Wells Fargo Securities 4 Economic Outlook
Workers’ Earnings Drift Upward Average Hourly Earnings vs. Atlanta Fed Wage Growth Tracker; 3-MMA of YoY % Chg. 6% 6% 5% 5% Wage growth has picked up 4% 4% modestly but remains a missing piece to the recovery thus far. 3% 3% Earnings have been limited by lower-skilled workers entering 2% 2% the workforce and Baby Boomers beginning to retire. 1% 1% Atlant a Fed Wage Growth Tracker: Jul @ 3.3% Average Hourly Earnings (Prod. & Supervisory): Jul @ 2.7% Average Hourly Earnings (Total Private): Jul @ 2.7% 0% 0% 97 99 01 03 05 07 09 11 13 15 17 Source: U.S. Department of Labor, Federal Reserve Bank of Atlanta and Wells Fargo Securities 5 Economic Outlook
Income Growth Real PCE vs. Real Disposable I ncome Year-over-Year Percent Change 8% 8% 6% 6% 4% 4% 2% 2% Stronger employment and wage 0% 0% growth has boosted incomes and supported consumer spending. -2% -2% -4% -4% Real PCE: Jul @ 2.8% Real Disposable Incom e: Jul @ 2.9% -6% -6% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: U.S. Department of Commerce and Wells Fargo Securities 6 Economic Outlook
Consumers Household Net Worth vs. Consumer Confidence Thousands of 2009 Dollars, Index $300 160 140 $250 120 100 $200 The recovery in household 80 wealth has helped to fuel consumer confidence and $150 60 spending 40 $100 20 Real Per Capita Net Worth: Q1 @ $270,797.6 (Left Axis) Consum er Confidence: Q2 @ 126.9 (Right Axis) $50 0 90 93 96 99 02 05 08 11 14 17 Source: Federal Reserve Board, Conference Board and Wells Fargo Securities 7 Economic Outlook
Inflation PCE Deflator & "Core" PCE Deflator Year-over-Year Percent Change 5% 5% 4% 4% 3% 3% Forecast Inflationary pressures have 2% 2% increased recently and are now at the Fed’s 2 percent 1% 1% benchmark. 0% 0% -1% -1% PCE Deflator : Q2 @ 2.2% "Core" PCE Deflator: Q2 @ 1.9% -2% -2% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: U.S. Department of Commerce and Wells Fargo Securities 8 Economic Outlook
Interest Rates The Fed is expected to hike rates two more times this year, bringing the fed funds rate closer to a more “normal” level and flattening the yield curve. Monetary Policy Interest Rates Federal Funds Target Rate Wells Fargo Rates Forecast Upper Bound, Percent Through 2020 7.0% 7.0% 4.5% 4.5% Federal Funds: Q2 @ 2.00% 4.0% 4.0% 6.0% 6.0% 3.5% 3.5% 5.0% 5.0% 3.0% 3.0% 4.0% 4.0% 2.5% 2.5% Forecast 2.0% 2.0% 3.0% 3.0% 1.5% 1.5% 2.0% 2.0% 1.0% 1.0% Q4 2020 Q4 2019 1.0% 1.0% 0.5% 0.5% Q4 2018 0.0% 0.0% 0.0% 0.0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: U.S. Department of Commerce, Freddie Mac and Wells Fargo Securities 9 Economic Outlook
Federal Fiscal Policy Outlook Key Tax Law Changes Individual Tax Code Changes Business Tax Code Changes • • Bill slashes marginal tax rates across the Permanently reduces the corporate tax board rate to 21% from the current 35% federal rate starting in 2018 • Limits state & local income and property tax deductions to $10,000 • Corporate AMT repealed • Pass-throughs would be allowed to deduct • Business interest expense deductions up to 20 percent of income are capped at 30 percent of EBITDA for 4 years and 30 percent of EBIT • Doubles the standard deduction and the thereafter child tax credit • The bill allows for full and immediate • Caps mortgage interest deduction at $750K expensing of business capital • Doubles the estate tax exemption investments. This provision expires in • Keeps the Alternative Minimum Tax (AMT) five years. but lifts the threshold to $500K • Ends the current worldwide corporate • Maintains several deductions including tax system by switching to a territorial medical expenses, student loans and system. Existing profits held abroad private activity bonds (PABs) are taxed at 15.5 percent for cash and • Repeals Obamacare individual mandate cash equivalents and 8 percent for • Individual cuts expire on December 31, reinvested foreign earnings. 2025 10 Economic Outlook
Federal Fiscal Policy Outlook Increase in BCA Budget Caps Billions of USD $350 $350 Defense Spending Nondefense Spending $300 $300 $250 $250 $200 $200 The budget deal reached in February provides additional $150 $150 fiscal stimulus to the U.S. economy $100 $100 $50 $50 $0 $0 FY 2014/ 2015 FY 2016/ 2017 FY 2018/ 2019 Source: Congressional Budget Office and Wells Fargo Securities 11 Economic Outlook
Budget Deficit U.S. Federal Budget Balance Billions of Dollars $400 $400 $200 $200 $0 $0 -$200 -$200 -$400 -$400 The Tax Cuts and Jobs Act, budget deal and mandatory -$600 -$600 spending have the deficit on -$800 -$800 track to breach $1 trillion while -$1,000 -$1,000 the economy is still in an -$1,200 -$1,200 expansion -$1,400 -$1,400 Federal Budget Balance: FY 2017 @ -$665.8B -$1,600 -$1,600 WF Forecast: FY 2018 @ -$775.0B -$1,800 -$1,800 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: U.S. Department of the Treasury and Wells Fargo Securities 12 Economic Outlook
Business Investment Real Business Fixed Investment Bars = CAGR Line = Yr/ Yr Percent Change 30% 30% 20% 20% Forecast 10% 10% Business fixed investment 0% 0% growth should be bolstered by -10% -10% tax reform, an area that has lagged outside of the tech and -20% -20% energy sector. -30% -30% Non-Res Fixed Invest - CAGR: Q2 @ 8.6% Non-Res Fixed Invest - Yr/Yr Percent Change: Q2 @ 7.0% -40% -40% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: U.S. Department of Commerce and Wells Fargo Securities 13 Economic Outlook
Business Activity I SM Manufacturing I ndex & Real GDP Index, 3-Month Moving Average, Year-over-Year Percent Change 65 6% 60 4% 55 2% 50 0% Underlying manufacturing 45 -2% activity continues to look strong, supporting the case for solid 40 -4% economic momentum. 35 -6% 30 -8% I SM Manufacturing Index: Aug @ 59.9 (Left Axis) Real GDP, Year-over-Year Percent Change: Jun @ 3.0% (Right Axis) 25 -10% 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Source: Institute for Supply Management and Wells Fargo Securities 14 Economic Outlook
Small Business Optimism Small business optimism spiked following the presidential election and remains at an all time high. Business owners have become much less worried about the regulatory environment. Sm all Business Optim ism Sm all Business Concerns Major New Regulatory Changes NFIB Small Business Optimism Number of Rules Reviewed By the OIRA Each Year Overall Index 1986 = 100 800 800 110 110 700 700 105 105 600 600 500 500 100 100 400 400 95 95 300 300 200 200 90 90 100 100 85 85 0 0 94 96 98 00 02 04 06 08 10 12 14 16 Small Business Optimism : Jul @ 107.9 80 80 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Clinton Bush Obama Trump Source: National Federation of Independent Business (NFIB), Office of Information and Regulatory Affairs and Wells Fargo Securities 15 15 15 Economic Outlook
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