The Economic Outlook - GFOAA · The Economic Outlook Tim Quinlan, Senior Economist February 2020...
Transcript of The Economic Outlook - GFOAA · The Economic Outlook Tim Quinlan, Senior Economist February 2020...
The Economic Outlook
Tim Quinlan, Senior Economist February 2020
Economics 2
Situational Awareness
The current expansion is the longest on record, but has also been the weakest of the post-WWII era
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Length of U.S. ExpansionY-axis=End of Recession, X-axis=Months as of February 2020
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4.1%
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Strength of U.S. ExpansionY-axis=Start of Expansion, X-axis=Avg GDP Growth through Q4-2019
The Longest… …but the Weakest
Source: National Bureau of Economic Research, U.S. Department of Commerce and Wells Fargo Securities
Economics 3
Effects on the U.S. Economy from Wuhan Coronavirus
We can draw comparisons to the SARS outbreak of 2002-2003
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Consumer SpendingYear-over-Year Percent Change of 3-MMA, Blue Bar=SARS Outbreak
Durables: Dec @ 4.0%Nondurables: Dec @ 2.7%Services: Dec @ 4.1%Personal Spending: Dec @ 3.8%
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Total Industrial Production GrowthOutput Growth by Volume, Blue Bars=SARS Outbreak
Year-over-Year Percent Change: Dec @ -1.0%3-Month Annual Rate: Dec @ 0.0%
Consumption Production
Source: U.S. Department of Commerce, Federal Reserve Board and Wells Fargo Securities
Economics 4
Source: U.S. Department of Commerce, Energy Information Administration and Wells Fargo Securities
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U.S. Crude Oil ProductionMillions of Barrels Per Day
U.S. Crude Oil Production: Nov @ 12.88 mbpd
…Greater Production
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Consumer Purchases of Gas & Other Energy GoodsPercent of Total Nominal PCE
Gas and Other Energy Goods: Q4 @ 2.4%
Less Consumption…
Consumers spend relatively less on gasoline than they did 40 years ago, and the United States is a major producer of crude oil.
Effects on U.S. Economy in Event of Escalation with Iran
Economics 5
Source: U.S. Department of Commerce and Wells Fargo Securities
3-Month Moving AverageYear-over-Year Percent Change
Non-discretionary spending is steady and though consumers pare sometimes back consumption this category doesn’t turn negative in an economic downturn.
Discretionary spending is more susceptible to variation, though it notably takes a recession to cause consumers to cut spending on non-essential goods and services.
Effects on U.S. Economy in Event of Escalation with Iran
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Consumer SpendingYear-over-Year Percent Change
Discretionary Spending: Dec @ 4.9%Non-discretionary Spending: Dec @ 5.0%
Gulf War: Operation Desert Storm
9/11Terrorist Attack
Beginning of Iraq war
AirstrikesAgainst Iraq U.S. Announces
Death of Osama Bin Laden
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Consumer SpendingYear-over-Year Percent Change of 3-Month Moving Averages
Discretionary Spending: Dec @ 3.7%Non-discretionary Spending: Dec @ 4.4%
Economics 6
Warning Signs Less Urgent
Three rate cuts from the FOMC have restored some slope to the yield curve
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Yield Curve Spread10-Yr Yield Less Effective Fed Funds Rate, Basis Points
10Y-Fed Funds: Jan @ 17.8 bps-25%
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Global Export VolumeYear-over-Year Percent Change
Real Exports: Nov @ -1.4%Average 1992-Present: 4.9%
Yield Curve No Longer Inverted Although Global Trade is Still Slowing
Source: Federal Reserve Board, IHS Markit, and Wells Fargo Securities
Economics
Economic Growth Outlook
Despite being late in the cycle, we see a path for slow growth
in 2020 & 2021
Source: U.S. Department of Commerce and Wells Fargo Securities
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U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change
GDP - CAGR: Q4 @ 2.1%GDP - Yr/Yr Percent Change: Q4 @ 2.3%
Forecast
Economics 8
Baseline Outlook for Business Fixed Investment
There are headwinds for the manufacturing sector but aside from the ISM, the survey data suggest moderation in the pace of growth rather than sustained declines
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Nondefense Capital Goods Shipments, Ex-AircraftSeries are 3-Month Moving Averages
3-Month Annual Rate: Dec @ -0.7%Year-over-Year Percent Change: Dec @ 0.2%
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Real Business Fixed InvestmentBars = CAGR Line = Yr/Yr Percent Change
Non-Res Fixed Invest - CAGR: Q4 @ -1.5%Non-Res Fixed Invest - Yr/Yr Percent Change: Q4 @ -0.1%
Forecast
Slipping into Negative Territory for Cap-Ex But We See Scope for Moderate Growth
Source: U.S. Department of Commerce and Wells Fargo Securities
Economics 9
Impact of Tax Cuts & Job Act on Capex Spending
The tax cuts were great for profits and animal spirits and firms did increase capex but M&A activity grew twice as fast and share buybacks grew more than 3X as fast
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Cash Use by S&P 500 FirmsYear-over-Year Percent Change
Dividends: 2018 @ 8%Repurchase: 2018 @ 64%Acquisitions: 2018 @ 42%CapEx: 2018 @ 18%
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Capex Plans Six Months AheadFed Manuf. PMIs (Diffusion Indices); NFIB % Increasing Capex
PMI Capex Plans: Jan @ 16.3 (Left Axis)Small Business Plans (3-Mo. Avg.): Jan @ 28.6% (Right Axis)
Capex vs. Other Options for Cash Capex Plans
Source: Bloomberg LP, Federal Reserve System, NFIB and Wells Fargo Securities
Economics 10
The Boeing Effect
The stoppage of 737 Max shipments has boosted inventories and weighed on equipment spending. With production now stopped, the Max issues are set to subtract about 0.5 points
from GDP growth.
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U.S. Nondefense Aircraft & PartsYear-over-Year Percent Change of 3-Month Moving Averages
Shipments: Dec @ -31.7%Inventories: Dec @ 20.5%
Mid-March 2019:737 MAX Deliveries
Suspended
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InventoriesPercentage Point Contibution to Real GDP Growth
Inventories: Q4 @ -1.1%
Forecast
Swapping Equipment Spending for Inventories… …but Inventory Growth Is Now Set to Slow
Source: U.S. Department of Commerce and Wells Fargo Securities
Economics
The Deteriorating Budget Dynamic
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Federal Budget: Deteriorating in an Expansion4-Quarter Moving Sum, Percent of GDP, Wells Fargo Forecast in Blue
Federal Budget Balance: Q4 @ -4.7%
Expansions have traditionally been associated with balanced budgets and low unemployment. However, since 2016, that has changed. What does this new deteriorating federal budget
dynamic mean for the next recession?
Source: U.S. Department of Commerce and Wells Fargo Securities
Economics
Debt Ratios in the United States
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Debt in the United StatesPercent of GDP
Government: Q3 @ 101.8%Household: Q3 @ 74.2%Business: Q3 @ 74.2%
Corporate debt is trending higher while government debt ratios have not improved with the stronger economy
Source: Bank for International Settlements and Wells Fargo Securities
Economics 13
Clouds for Outlook Here As Well
Do low interest rates mean we can safely ignore elevated corporate debt?The baseline is that the trade war does not escalate, but that’s not guaranteed.
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Corporate Debt as a Share of GDPNonfinancial Corporations
Nonfinancial Corporate Debt: Q3 @ 46.9%$0
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Cost of the Trade WarAnnualized Cost Based on Value of Goods x Tariff Rate
2018 U.S. Import Levels, Billions of USD
U.S. implements 25% tariff on ~$45B
from China
U.S. implements 10% tariffon ~$207B from China
Tariff raised to 25% on ~$207B
from China
U.S. implements 15% tariff on ~$111B from China
U.S. reduces 15% tariff on ~$111B from China to 7.5%
Corporate Debt is at Record High Does Trade War Stop Escalating?
Source: Federal Reserve Board, Office of the U.S. Trade Representative, U.S. Department of Commerce and Wells Fargo Securities
Economics
Household Balance Sheets
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U.S. Household DebtTrillions of Dollars
Other Consumer Debt: Q4 @ $432BHE Revolving Credit: Q4 @ $390BCredit Card Debt: Q4 @ $927BAuto Loans: Q4 @ $1,331BStudent Loan Debt: Q4 @ $1,508BMortgage Debt: Q4 @ $9,557BTotal: Q4 @ $14,145B
Household debt in the United States is higher now than it was at the height of the prior cycle, which has brought dire warnings about leverage and the inevitable comparisons
to debt levels in 2008. Are such concerns justified?
Source: Federal Reserve Bank of New York and Wells Fargo Securities
Economics 15
The Shifting Composition of Debt is more Troubling
Since Q3-2008—the prior peak in household debt—the growth in household debt has been concentrated in student and auto loans. Younger households tend to experience this in more
pronounced ways—they owe more in student loans than they do on a mortgage.
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AutoLoan
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U.S. Household Debt by CategoryPercent Change from Q3-2008 to Q4-2019
Largest to Smallest Amount Outstanding
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Debt Share by Product Type and AgeQ4-2019
Mortgage Student Loans Auto Loans Credit Cards Other HELOC
Change since 2009 Debt by Age
Source: Federal Reserve Bank of New York and Wells Fargo Securities
Economics 16
Student Loan Debt
Just 17 years ago, student loans were the smallest category of household debt. Today it is second only to mortgages comprising more than a third of non-mortgage household debt.
Mortgage, 68.3%
HELOC, 3.3%
Auto Loan, 8.9%
Credit Card, 9.5%
Student Loan, 3.3%
Other, 6.6%
Other, 31.7%
U.S. Houehold Debt, Q1-2003
Mortgage, 67.6%
HELOC, 2.8%
Auto Loan, 9.4%
Credit Card, 6.6%
Student Loan, 10.7%
Other, 3.1%
Other, 32.4%
U.S. Houehold Debt, Q4-2019
That Was Then This is Now
Source: Federal Reserve Bank of New York and Wells Fargo Securities
Economics 17
Household Balance Sheets
The cost of financing has gone down on trend, but financing student loans has become the biggest monthly cost after mortgage or (more likely) rent
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Household DebtPercentage of Disposable Income
Mortgage: Q4 @ 57.4% (Left Axis)Auto Loans: Q4 @ 8.0% (Right Axis)Student Loans: Q4 @ 9.1% (Right Axis)Credit Cards: Q4 @ 5.6% (Right Axis)
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Household Financial Obligations RatioPercent of Disposable Personal Income
Total FOR: Q3 @ 15.0%
Household Debt Financial Obligations Ratio
Source: Federal Reserve Bank of New York, Federal Reserve Board and Wells Fargo Securities
Economics
Consumer Confidence
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Consumer ConfidenceConf. Board Index 100=1985, SA, Univ. of Mich. Index 100=1966, NSA
The Conference Board: Jan @ 131.6 (Left Axis)University of Michigan: Jan @ 99.1 (Right Axis)
Confidence remains high, but could the trade war derail consumer spending?
Source: The Conference Board, The University of Michigan and Wells Fargo Securities
Economics
Real PCE Forecast
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Real Personal Consumption ExpendituresBars = CAGR Line = Yr/Yr Percent Change
PCE - CAGR: Q4 @ 1.8%PCE - Yr/Yr Percent Change: Q4 @ 2.6%
Forecast
Rather than seeing household debt as an immediate catalyst for recession, we see a shift in the composition of debt which will likely weigh on consumer spending for years to come. Consumer
spending growth is set to moderate but remain positive throughout the forecast horizon.
Source: U.S. Department of Commerce and Wells Fargo Securities
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Economics
Labor Market: Wages
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Wage Growth in High & Low Pay IndustiresAvg. Hourly Wages, Year-over-Year Percent Change of 3-MMA
Highest Paying Industries (Top 40%): Dec @ 2.8%Lowest Paying Industries (Bottom 40%): Dec @ 4.3%
Wages are really picking up for workers in lower-paying industries
Source: U.S. Department of Labor and Wells Fargo Securities
Economics 21
Demographics
Millennials are reaching major life milestones at a later age. Still, demographics are slowly shifting back toward homeownership. The oldest cohort of Millennials will turn 39 this year,
an age at which, historically, homeownership trends increase.
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Average Age of Major Life EventsAverage Age
First Marriage, Males: 2019 @ 29.8 YearsFirst Marriage, Females: 2019 @ 28.0 YearsFirst Child, Females: 2018 @ 26.9 Years
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U.S. Adult Population DistributionMillions of Persons in Age Group, 2018
Millennials: 28% Boomers: 28%Gen X: 25% Silent & Greatest: 10%
Gen Z: 9%
“Delayed Adulthood” Population
Source: U.S. Department of Commerce, Centers for Disease Control & Prevention and Wells Fargo Securities
Economics 22
Mortgages
Mortgage applications have rebounded as rates have come back down
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Mortgage ApplicationsIndex 1990=100, 4-Week Moving Average
Purchases: Feb-07 @ 290.7 (Left Axis)Refinances: Feb-07 @ 2,770.5 (Right Axis)
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Conventional Mortgage Rate vs. 10-Year Treasury Yield
10-Year Yield: Feb-12 @ 1.61 %Conventional 30-Year Fixed Mortg. Rate: Feb-12 @ 3.45%
Mortgage Applications Rates
Source: Mortgage Bankers Association, Bloomberg LP and Wells Fargo Securities
Economics 23
Turnover and Inventory
Housing turnover remains below its historic norms and has kept inventories low
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Single-Family Home InventoryMillions of Units
New Homes: Dec @ 0.33MExisting Homes: Dec @ 1.22M
Mortgage Applications Rates
Source: U.S. Department of Commerce and Wells Fargo Securities
Economics
Housing
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Housing StartsMillions
Multifamily StartsMultifamily ForecastSingle-Family StartsSingle-Family Forecast
Forecast
We see single-family homebuilding gaining momentum over the next few years. Apartment construction is showing signs of topping out but should remain near recent levels.
Source: U.S. Department of Commerce and Wells Fargo Securities
The Alabama & Mobile Economy
Economics
Year-over-Year Percent Change in Real GDP by State, Q3-2019
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Source: U.S. Department of Commerce and Wells Fargo Securities
WY
WV
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WA
VT
VA
UT
TX
TN
SD
SC
RIPA
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OK
OH
NY
NV
NM
NJ
NH
NE
ND
NC
MT
MS
MO
MN
MI
ME
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MA
LA
KYKS
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GA
FL
DE
CT
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AZAR
AL
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2.4
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HI0.7
DC1.2
2.6% - 3.0%
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Less than 1%1.0% - 2.0%
United States = 2.1%
More than 4.0%
Economics
Year-over-Year Employment Growth by State, December 2019
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Source: U.S. Department of Labor and Wells Fargo Securities
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WV
WI
WAVT
VA
UT
TX
TN
SD
SC
RI
PA
OR
OK
OH
NY
NV
NM
NJ
NH
NE
ND
NC
MT
MS
MO
MN
MI
ME
MA
LA
KYKS
INIL
ID
IA
GA
FL
CT
COCA
AZAR
AL
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2.5-0.4
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3.3
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AK-0.1
United States = 1.4%
Less than 1.0%
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Greater than 3.0%
DCMD1.2
DE1.3
DC1.3
Economics
Alabama: Economic Growth
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Alabama Real GDP Growth vs. U.S. Year-over-Year Percent Change
Alabama: Q3 @ 2.1%United States: Q4 @ 2.3%
Economic output in Alabama has continued to be supportive of the national average
Source: U.S. Department of Commerce and Wells Fargo Securities
Economics 29
Alabama: Population
Population growth remains positive, though exceptionally modest, in Alabama
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50
60
70
80
91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
Components of Population Change: ALIn Thousands
Natural Increase: 2019 @ 3.4KInt'l Migration: 2019 @ 2.8KDomestic Migration: 2019 @ 9.4KPopulation Growth: 2019 @ 15.5K
-0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5%
Anniston, AL
Gadsden, AL
Decatur, AL
Montgomery, AL
Mobile, AL
Florence, AL
Dothan, AL
Birmingham, AL
Alabama
Tuscaloosa, AL
Huntsville, AL
Auburn, AL
Daphne, AL
Alabama Population GrowthAvgerage Annual Percent Change, 2014-2019
Population By Metro
Source: U.S. Department of Commerce and Wells Fargo Securities
Economics 30
Alabama: Labor Market
Alabama continues to see healthy gains in employment, while Mobile has caught up to the national average over the past year. Employment by industry has been mixed in Mobile.
-8%
-6%
-4%
-2%
0%
2%
4%
6%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
Nonfarm Employment GrowthYear-over-Year Percent Change of 3-Month Moving Average
Alabama: Dec @ 2.3%Mobile, AL: Dec @ 1.4%United States: Jan @ 1.4% -1% 0% 1% 2% 3% 4%
Information
Other Services
Financial Activities
Leisure and Hospitality
Manufacturing
Prof. & Bus. Svcs.
Educ. & Health Services
Government
Trade, Trans. & Utilities
Total Nonfarm
Mobile MSA Employment Growth By Industry
Number of Employees
Less
More
Year-over-Year Percent Change, 3-MMA
December 2019
Nonfarm Employment By Industry
Source: U.S. Department of Labor and Wells Fargo Securities
Economics
Alabama: Labor Market
31
December 2019
0% 1% 2% 3% 4% 5% 6%
Information
Construction
Other Services
Financial Activities
Leisure & Hospitality
Educ. & Health Services
Prof. & Bus. Svcs.
Manufacturing
Trade, Trans. & Utilities
Government
Total Nonfarm
Alabama Employment Growth By IndustryYear-over-Year Percent Change, 3-MMA
Number of Employees
Less
More
Employment growth has been strong across most major industries with professional & business services and leisure & hospitality as notable stand outs
Source: U.S. Department of Labor and Wells Fargo Securities
Economics
Alabama: Labor Market
32
0.8%
0.9%
1.0%
1.2%
1.4%
1.8%
1.8%
1.9%
1.9%
2.2%
2.4%
2.7%
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
Dothan
Anniston
Gadsden
Mobile
Florence
Decatur
Tuscaloosa
Montgomery
Birmingham
Alabama
Auburn
Huntsville
Alabama Employment Growth By MSAYear-over-Year Percent Change
December 2019
Employment gains have been felt across every major metro in Alabama over the past year
Source: U.S. Department of Labor and Wells Fargo Securities
Economics 33
Alabama: Labor Market
Due to only modest population growth, Alabama’s unemployment rate is lower than the national average. Labor force participation remains well below the nation but has shown signs of
improvement.
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
Alabama Unemployment RateSeasonally Adjusted, 12-Month Moving Averages
United States: Jan @ 3.6%Alabama: Dec @ 3.3%
56%
58%
60%
62%
64%
66%
68%
56%
58%
60%
62%
64%
66%
68%
91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
Alabama Labor Force Participation RateSeasonally Adjusted, 3-Month Moving Averages
Alabama: Dec @ 58.6%United States: Jan @ 63.3%
Unemployment Participation
Source: U.S. Department of Labor and Wells Fargo Securities
Economics 34
Alabama: Housing Market
Alabama continues to see steady single-family construction, though permits remain below their long-term average. Prices continue to trend higher but remain well below the national average.
0
5
10
15
20
25
30
35
0
5
10
15
20
25
30
35
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
Alabama Housing PermitsThousands of Permits, Annual Rate
Single-Family: Dec @ 12,276Single-Family, 12-MMA: Dec @ 13,962Multifamily, 12-MMA: Dec @ 2,206
Single-Family Average (1998-2003): 17,013
60
80
100
120
140
160
180
200
220
60
80
100
120
140
160
180
200
220
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
CoreLogic HPI: AL vs. U.S.Index, 2000=100, Not Seasonally Adjusted
United States: Dec @ 212.0Alabama: Dec @ 157.1
Permits Prices
Source: U.S. Department of Commerce, CoreLogic Inc. and Wells Fargo Securities
Monetary Policy & Rates
Economics
Yield Curve: Flatter and Higher, At Least in the Near Term
36
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%
Wells Fargo Rates ForecastThrough 2021
Q4 2021
Q4 2020
Q4 2019
The yield curve is expected to flatten in the near-term
Source: IHS Markit and Wells Fargo Securities
Economics 37
Labor Turnover
Job openings have rolled over but remain near a record high, while quits are near levels last seen in 2001. Has such labor conditions translated to wage growth?
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
01 03 05 07 09 11 13 15 17 19
Job OpeningsMillions of Openings, Seasonally Adjusted
Total Job Openings: Dec @ 6.42MThree-Month Moving Average: Dec @ 6.86M
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1.0
1.5
2.0
2.5
3.0
3.5
4.0
01 03 05 07 09 11 13 15 17 19
Quits vs. LayoffsMillions of Workers, SA
Quits: Dec @ 3.49MLayoffs: Dec @ 1.90M
Openings Separations
Source: U.S. Department of Labor and Wells Fargo Securities
Economics
Inflation
38
-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 16 18 20
PCE Deflator vs. Core PCE DeflatorYear-over-Year Percent Change
PCE Deflator: Dec @ 1.6%Core PCE Deflator: Dec @ 1.6%
Inflation should move back up to the Fed’s target, but is not expected to break meaningfully higher
Source: U.S. Department of Commerce and Wells Fargo Securities
Economics
Trade War Industry Exposure
39
33%
63%
47%
92%
47%
36%
17%
16%
2%
21%
31%
20%
38%
6%
33%
0% 20% 40% 60% 80% 100%
ConsumerGoods
IndustrialSupplies
Capital Goodsex. Trans.
TransportationEquipment
Total
When & What: Imports Exposed to TariffsShare of U.S. imports from China exposed to tariffs by Category
Sep. 2018 Sep. 2019 Not Exposed
The early rounds of tariffs focused on intermediate goods, but now consumer goods are in the crosshairs of tariffs
Source: U.S. Department of Commerce, Office of the United States Trade Representative and Wells Fargo Securities
Economics 40
Trade War: Inflation
Tariffs are now hitting some consumer goods categories directly, but the overall impact to inflation should be minimal given the majority of consumer spending goes toward services
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
Core Goods vs. Core Services CPIYear-over-Year Percent Change
Core Services CPI: Dec @ 3.0%Core Goods CPI: Dec @ 0.1%Core CPI: Dec @ 2.3%
-0.24
-0.20
-0.16
-0.12
-0.08
-0.04
0.00
0.04
0.08
0.12
0.16
-0.24
-0.20
-0.16
-0.12
-0.08
-0.04
0.00
0.04
0.08
0.12
0.16
12 13 14 15 16 17 18 19
Selected CPI Goods Categories Exposed to TariffsBars=% Point Contribution to 12-Month change in CPI,
Line=Total Contribution from these categories, Through Dec-19
Audio Equipment Jewelry WatchesWomen's Footwear Boy & Girl Foot. Men's FootwearBoys' Apparel Men's Apparel Misc. HouseholdCleaning Product Window Coverings Medical Equip.Hardware & Supplies Paper Products Misc. Pers. ProductsMusic Instruments Other Vid. Equip. Dishes & FlatwareIndoor Plants Other Appliances Major AppliancesSewing Supplies Rec. Books NewspapersPhoto. Equip. Other Furniture Living & Dining Furn.
U.S. implements 10% tariff on
~$207B from China
Goods vs. Services CPI Inflation for Goods Exposed to Tariffs
Source: U.S. Department of Labor and Wells Fargo Securities
Economics
FOMC
41
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
00 02 04 06 08 10 12 14 16 18 20 22
Federal Funds Target RateUpper Bound
Federal Funds: Feb @ 1.75%
Forecast
The FOMC will likely keep rates on hold for some time
Source: Bloomberg LP, Federal Reserve Board and Wells Fargo Securities
Economics
“It’s easier to get into something than to get out of it” – Donald Rumsfeld
42
$0T
$1T
$2T
$3T
$4T
$5T
$6T
$0T
$1T
$2T
$3T
$4T
$5T
$6T
07 08 09 10 11 12 13 14 15 16 17 18 19 20
Federal Reserve Total AssetsTrillions of U.S. Dollars
Other: Feb-05 @ $174BRepos & Disc. Window: Feb-05 @ $175BFederal Agency Debt: Feb-05 @ $2BMBS: Feb-05 @ $1,387BTreasuries: Feb-05 @ $2,428B
Prior to the 2008, Fed’s holdings were about $900B of mostly Treasuries. Balance sheet briefly held a commercial paper and currency swaps to help mitigate the liquidity challenges in the
financial system. Now mostly MBS and Treasuries.
Source: Federal Reserve System and Wells Fargo Securities
Economics
Trade and the U.S. Economy
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Contributions to U.S. Real GDP Growth Percentage Points at Annual Rate
All Other Components: Q4 @ 0.59%Net Exports: Q4 @ 1.48%
At the risk of sounding complacent…Of the C+I+G+NX,
the NX is often the least consequential factor
Source: U.S. Department of Commerce and Wells Fargo Securities
43
Economics
Retaliatory Tariff Timeline
44
Source: Office of the United States Trade Representative, U.S. Department of Commerce, Pearson Institute for International Economics, Washington Post, Reuters, Ministry of Economic Development of the Russian Federation, European Commission and Wells Fargo Securities
Date in Effect SizeValue of Goods
(Billions )Goods Targeted Country
% of Exports
A pr 2 , 2 01 8 1 5 % - 2 5 % $3 .0 V a r iety Ch in a 0.1 9 %
Ju n 5 / Ju l 5 , 2 01 8 7 % - 2 5 % $3 .6 V a r iety Mex ico 0.2 3 %
Ju n 2 1 , 2 01 8 4 % - 7 0% $1 .8 V a r iety Tu r key 0.1 2 %
Ju n 2 2 , 2 01 8 2 5 % $3 .2 V a r iety E.U. 0.2 1 %
Ju l 1 , 2 01 8 1 0% - 2 5 % $1 2 .7 V a r iety Ca n a da 0.8 2 %
Ju l 6 , 2 01 8 2 5 % $3 4 .0 V a r iety Ch in a 2 .2 0%
Ju l 6 , 2 01 8 2 5 % - 4 0% - V a r iety Ru ssia -
A u g 2 3 , 2 01 8 2 5 % $1 6 .0 V a r iety Ch in a 1 .03 %
Sep 2 4 , 2 01 8 5 % - 1 0% $6 0.0 V a r iety Ch in a 3 .8 8 %En a ct ed T ot a l - $ 134.3 8.07%
Pr oposed 5 % - 5 0% $0.2 V a r iety In dia 0.02 %Pr oposed $2 0.0 V a r iety E.U. 1 .2 9 %
Proposed T ot a l - $ 20.2 1.22%
En a ct ed + Proposed - $ 154.5 9.29%
Retaliatory Tariff Timeline
Economics
Global GDP Growth
45
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
1980 1985 1990 1995 2000 2005 2010 2015 2020
Real Global GDP GrowthYear-over-Year Percent Change, PPP Weights
Global GDP: 2018 @ 3.7%Average 1980-Present: 3.5%
Period AverageWF
Forecast
We expect to see trend-like growth in coming years.
IMF 2019 Global Growth Forecast 3.0% OECD 2019 Global Growth Forecast 3.0%
Source: International Monetary Fund and Wells Fargo Securities
Economics 46
Elections & Markets
There is no discernable trend favoring either political party
Source: Bloomberg LP and Wells Fargo Securities
-45%
-30%
-15%
0%
15%
30%
45%
60%
75%
-45%
-30%
-15%
0%
15%
30%
45%
60%
75%
Inauguration Yr. 2, Jan. Yr. 3, Jan. End of Yr. 3
S&P 500 During Presidents' First 3 YearsIndex, Inaguration=0%
Obama+56%
Clinton+42%
H.W. Bush+46%
Trump+42%
Reagan+25%
Carter+5%
Nixon+0%
W. Bush-17%
Economics
2020 Macro Events Calendar
47
January 14: Public comment period ends in USTR DST tariff case (Europe tariffs)
January 15: Phase I trade deal with China signed in Washington, D.C.
January 21: World Economic Forum in Davos begins
January 31: Britain to formally leave the E.U. (Britain now subject to 11-month transition period)
February 3: Iowa Caucuses
February 4: President Trump’s State of the Union Address
March 3: Super Tuesday (Primaries in multiple states)
March 5: 178th Meeting of the OPEC Conference
June 10: G7 Summit hosted at Camp David begins
July 13: Democratic National Convention in Milwaukee, Wisconsin beings
August 24: Republican National Convention in Charlotte, North Carolina begins
September 15: 75th Session of the UN General Assembly in New York City
September 28: First Presidential Debate
October 2: September Jobs Report (Final Jobs Report prior to Election)
November 3: Election Day
November 21: G20 Summit hosted in Riyadh, Saudi Arabia beginsSource: USTR, Federal Reserve Board, U.S. Department of Labor and Wells Fargo Securities
Economics
Wells Fargo Securities Economics Group
48
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