eugenio j. aleman, director and senior economist march 11 ...“the u.s. economy and its lingering...

“The U.S. Economy and Its Lingering Fiscal Issues”Eugenio J. Aleman, Director and Senior Economist

March 11, 2013

Economics 2

Let’s Look at the Federal Government

Government outlays have come down considerably

Source: U.S. Department of the Treasury and Wells Fargo Securities, LLC

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

60 65 70 75 80 85 90 95 00 05 10

Federal Government Outlay GrowthYear-over-Year Percent Change, 12-Month Moving Average

Federal Government Outlay Growth: Jan @ 0.5%

Economics 3


Strong fiscal reaction to avoid a depression

17%

18%

19%

20%

21%

22%

23%

24%

25%

26%

17%

18%

19%

20%

21%

22%

23%

24%

25%

26%

69 72 75 78 81 84 87 90 93 96 99 02 05 08 11

Total Outlays as Percent of Nominal GDP12-Month Moving Average

Total Outlays as a Percent of GDP: Dec @ 22.7%


Economics 4


Very large drop in government receipts

-20%

-10%

0%

10%

20%

30%

40%

-20%

-10%

0%

10%

20%

30%

40%

68 71 75 79 83 86 90 94 98 01 05 09

Federal Government Receipts GrowthYear-over-Year Percent Change, 12-Month Moving Average

Federal Government Receipts Growth: Jan @ 9.1%


Economics 5


Fiscal Conservatism? Where? When?

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$400

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$400

67 71 75 79 83 87 91 95 99 03 07 11

Federal Budget Surplus or Deficit12-Month Moving Sum in Billions of Dollars

Surplus or Deficit: Jan @ -$1,030 Billion


Economics 6

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

U.S. Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change

Real GDP: Q4 @ 0.1%

Real GDP: Q4 @ 1.6%

Real GDP Growth

U.S. real GDP growth has recovered but remains weak

Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Economics 7

U.S. Nonfarm Employment

Employment turned the corner in October of 2010, but it is still

weak

Source: U.S. Department of Labor and Wells Fargo Securities, LLC

-1,000

-800

-600

-400

-200

0

200

400

600

-1,000

-800

-600

-400

-200

0

200

400

600

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Nonfarm Employment ChangeChange in Employment, In Thousands

Monthly Change: Feb @ 236.0 Thousand

Economics 8

U.S. Employment By Industry

While employment growth has been broad based, the government sector has continued to struggle


-2% -1% 0% 1% 2% 3% 4%

Information

Other Services

Construction

Financial Activities

Manufacturing

Leisure & Hospitality

Prof. & Bus. Svcs.

Educ. & Health Svcs.

Government

Trade, Trans. & Utilities

Total Nonfarm

U.S. Employment by IndustryYear-over-Year Percent Change of 3-M Moving Average

February 2013

Number of Employees

Less

More

Economics 9

U.S. Employment By Industry

As a percentage of total non-farm payrolls


Manufacturing, 8%

Natural Resources and

Mining, 1%

Information, 2%

Other Services, 4%

Financial Activities, 5%

Lesiure and Hospitality, 10%

Professional and Business

services, 12%Education and

Health Services, 14%

Government, 15%

Trade, Transportation and Utilities,

29%

U.S. Employment Composition

Economics 10

Government Employment

It is not the Federal Government!


Federal Government,

13%

State Government,

23%

Local Government,

64%

U.S. Government Employment Composition

Economics 11

Unemployment Rate

Not as high as during the 1980s recession, but more damaging


2%

4%

6%

8%

10%

12%

2%

4%

6%

8%

10%

12%

60 65 70 75 80 85 90 95 00 05 10

Unemployment RateSeasonally Adjusted

Unemployment Rate: Feb @ 7.7%

Economics 12

63%

64%

65%

66%

67%

68%

63%

64%

65%

66%

67%

68%

90 92 94 96 98 00 02 04 06 08 10 12

Labor Force Participation Rate16 Years and Over, Seasonally Adjusted

Labor Force Participation Rate: Feb @ 63.5%

The Employment Situation

One of the reasons for the decline in the unemployment

rate is tied to the drop-off in the labor force participation rate


Economics 13

Mean Duration of Unemployment

Duration of unemployment shows a struggling labor market


8

12

16

20

24

28

32

36

40

44

8

12

16

20

24

28

32

36

40

44

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Mean Duration UnemploymentAverage Weeks Unemployed

Average Duration of Unemployment: Feb @ 36.9

Economics 14

Unemployment by Education Level

College graduates have the edge even in the worst recession since

the depression


0%

2%

4%

6%

8%

10%

12%

14%

0%

2%

4%

6%

8%

10%

12%

14%

No High SchoolDiploma

High SchoolDiploma

Some College College Degree

Unemployment Rate by Education LevelFebruary 2013

Economics 15

Consumer Price Index

Consumer prices are slowing once again


-12%

-9%

-6%

-3%

0%

3%

6%

9%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

92 94 96 98 00 02 04 06 08 10 12

U.S. Consumer Price IndexBoth Series are 3-Month Moving Averages

CPI 3-Month Annual Rate: Jan @ 0.3%

CPI Year-over-Year: Jan @ 1.7%

Economics 16

The U.S. Economy

The Humpty-Dumpty Economy

The U.S. Economy sat on a wall,The U.S. Economy had a great fall.

All the king's Treasury-men,And all the king's Federal Reserve-men,

Couldn't put The U.S. Economy together again.

On this side of the wall:Inflation & stagnation = stagflation

On this side of the wall:1930’s depression/

Japan-like depression

Economics 17

Helicopter Ben to the Rescue

The Helicopter Effect!

Economics 18

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

2000 2002 2004 2006 2008 2010 2012

U.S. Federal Reserve Target Rate

U.S. Target Rate: Feb @ 0.25%

Federal Reserve Target Rate

Monetary policy remains extremely expansive

Source: Federal Reserve Board and Wells Fargo Securities, LLC

Economics 19

Federal Reserve Balance Sheet

A Monetary Tsunami?


$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

2007 2008 2009 2010 2011 2012 2013

Federal Reserve Balance Sheet Trillions

Other: Feb @ $232.6BForeign Swaps: Feb @ $5.2BPDCF & TAFCommercial Paper & Money MarketRepos & Dis. Window: Feb @ $0.0BAgencies & MBS: Feb @ $1,095.0BTreasuries: Feb @ $1,734.5B

Economics

The Housing Market Today

Economics

Your House As Seen By:

You…

Economics


Your Buyer…

Economics


Your Lender…

Economics


Your Appraiser…

Economics


And…Your County’s Tax Assessor…

Economics 26

New Home Sales

New home sales are still low but improving


100

300

500

700

900

1,100

1,300

1,500

100

300

500

700

900

1,100

1,300

1,500

89 91 93 95 97 99 01 03 05 07 09 11 13

New Home SalesSeasonally Adjusted Annual Rate, In Thousands

New Home Sales: Jan @ 437,000

3-Month Moving Average: Jan @ 402,667

Economics 27

0.0

0.4

0.8

1.2

1.6

2.0

2.4

0.0

0.4

0.8

1.2

1.6

2.0

2.4

87 89 91 93 95 97 99 01 03 05 07 09 11 13

Housing Starts Seasonally Adjusted Annual Rate, In Millions

Housing Starts: Jan @ 890K

Housing Starts

As well as housing starts


Economics 28

2.0

3.0

4.0

5.0

6.0

7.0

2.0

3.0

4.0

5.0

6.0

7.0

86 88 90 92 94 96 98 00 02 04 06 08 10 12

Existing Single-Family Home Resales Seasonally Adjusted Annual Rate - In Millions

Existing Home Sales: Jan @ 4.3 Million

Existing Home Sales

Existing home sales are relatively strong


Economics 29

-24%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

-24%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

97 99 01 03 05 07 09 11 13

Home PricesYear-over-Year Percentage Change

Median Sale Price: Jan @ $174,100Median Sale Price, 3-M Mov Avg: Jan @ 10.9%FHFA Purchase Only Index: Dec @ 5.8%S&P Case-Shiller Composite-10: Dec @ 5.9%

Home Prices

Home prices are finally showing signs of recovery

Source: National Association of Realtors, FHFA, S&P Case-Shiller and Wells Fargo Securities, LLC

Economics 30

Home Mortgages

Home mortgages have been declining for the past four years


-10%

-5%

0%

5%

10%

15%

20%

25%

-10%

-5%

0%

5%

10%

15%

20%

25%

1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013

Real Estate LendingBy Commerical Banks, Year-over-Year Percent Change

Real Estate Loans: Jan @ 1.3%

Economics 31

Negative Equity

O…M…G…?

Source: FHFA and Wells Fargo Securities, LLC

18.5

18.6

18.6

19.9

20.0

20.3

22.1

22.3

22.9

23.8

25.4

28.3

32.0

35.6

38.6

42.1

56.9

22.0

0% 10% 20% 30% 40% 50% 60% 70%

Utah

Washington

Oregon

New Jersey

Virginia

New Hampshire

Rhode Island

Idaho

Maryland

Ohio

Illinois

California

Michigan

Georgia

Arizona

Florida

Nevada

US

Negative Equity Mortgages - By StatePercent of Mortgages Outstanding

As of Q3 2012

Economics 32

ISM Manufacturing Index

Manufacturing has weakened but it is back to expansion

territory

Source: Institute for Supply Management and Wells Fargo Securities, LLC

30

35

40

45

50

55

60

65

30

35

40

45

50

55

60

65

87 89 91 93 95 97 99 01 03 05 07 09 11 13

ISM Manufacturing Composite IndexDiffusion Index

ISM Manufacturing Index: Feb @ 54.2

12-Month Moving Average: Feb @ 51.8

Economics 33

0

20

40

60

80

100

120

0

20

40

60

80

100

120

40 45 50 55 60 65 70 75 80 85 90 95 00 05 10

Manufacturing Output and EmploymentEmployment in Millions; Output 2007= 100

Manufacturing Employment: Jan @ 12.0 M (Left Axis)

Manufacturing Output: Jan @ 95.4 (Right Axis)

U.S. Manufacturing

The Manufacturing Myth!


Economics 34

ISM Non-Manufacturing Index

But the service economy continues to move along

Source: Institute for Supply Management and Wells Fargo Securities, LLC

35

40

45

50

55

60

65

35

40

45

50

55

60

65

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

ISM Non-Manufacturing Composite Index

ISM Non-Manufacturing Index SA: Feb @ 56.0

Economics 35

-$12

$0

$12

$24

$36

$48

$60

-$12

$0

$12

$24

$36

$48

$60

2007 2008 2009 2010 2011 2012

Revolving & Nonrevolving DebtMonth-over-Month Change, 3-M Mov. Avg., Billions of Dollars

Revolving: Jan @ -$0.7 BillionNonrevolving: Jan @ $16.5 Billion

Consumer Credit

Credit card lending is non-existent


Economics 36

Household Debt

Households are deleveraging fast…but not fast enough!


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

Household Debt - Consumer & MortgageAs a Percent of Disposable Personal Income

Household Debt: Q4 @ 100.4%

Economics 37

Household Debt

Households are ready to borrow again

Source: The Conference Board and Wells Fargo Securities, LLC

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Household Debt Service RatioDebt Payments as a Percent of Disposable Personal Income

DSR: Q3 @ 10.6%

Economics 38

20

40

60

80

100

120

140

160

20

40

60

80

100

120

140

160

87 89 91 93 95 97 99 01 03 05 07 09 11 13

Consumer Confidence IndexConference Board

Confidence Yr/Yr % Chg: Feb @ -2.8%Confidence: Feb @ 69.612-Month Moving Average: Feb @ 66.6

Consumer Confidence

Consumer confidence is still very weak for a strong recovery

Source: The Conference Board and Wells Fargo Securities, LLC

Economics 39

0%

3%

6%

9%

12%

15%

0%

3%

6%

9%

12%

15%

60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11

Personal Saving Rate Disp. Personal Income Less Spending as a % of Disp. Income

Personal Saving Rate: Jan @ 2.4%Personal Saving Rate, 12-Month M.A.: Jan @ 3.8%

Personal Saving Rate

The best news is that the saving rate has improved


Economics 40

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012

Conventional Mortgage Rate vs. 10-Year Treasury YieldPercent

Conventional 30-Year Fixed Mortg. Rate: Feb @ 3.53%

10-Year Yield: Feb @ 2.02%

Mortgage and Treasury Rates

Mortgage interest are starting to edge up from a very low base

Source: Freddie Mac, Federal Reserve Board and Wells Fargo Securities, LLC

Economics 41

Wells Fargo International Economic Forecast(Year-over-Year Percent Change)

GDP CPI

2012 2013 2014 2012 2013 2014

Global (PPP weights) 2.7% 2.8% 3.7% 4.2% 3.9% 4.3%Global (Market Exchange Rates) 1.5% 1.6% 2.4% n/a n/a n/a

Advanced Economies1 1.2% 1.2% 2.3% 2.1% 1.3% 1.8%United States 2.2% 2.0% 2.3% 2.1% 1.6% 2.1%Eurozone -0.5% -0.1% 1.8% 2.5% 1.3% 1.7%United Kingdom 0.2% 1.1% 2.0% 2.8% 2.5% 2.1%Japan 1.9% 0.4% 2.5% 0.0% -0.2% 0.1%Korea 2.1% 2.8% 4.3% 2.2% 2.6% 3.1%Canada 1.8% 1.5% 2.6% 1.5% 1.1% 2.0%

Developing Economies1 4.4% 4.7% 5.4% 6.7% 7.0% 7.2%China 7.7% 8.1% 8.4% 2.7% 3.0% 3.5%India 5.0% 5.7% 6.5% 9.7% 9.0% 9.3%Mexico 4.1% 3.3% 3.4% 4.1% 4.1% 4.8%Brazil 0.8% 2.2% 4.2% 5.4% 6.3% 6.1%Russia 3.4% 3.1% 3.7% 5.1% 6.0% 5.5%

Forecast as of: February 6, 20131Aggregated Using PPP Weights

Global Forecast

Growth will remain positive but weak

Source: Wells Fargo Securities, LLC

Economics

Wells Fargo Securities, LLC Economics Group

42

John Silvia … ....................... … [email protected]

Global Head of Research and Economics

Diane Schumaker-Krieg ………………… ………[email protected]

Global Head of Research & Economics

Chief Economist

Mark Vitner, Senior Economist……………....………. . [email protected]

Jay Bryson, Global Economist …………………....………[email protected]

Eugenio Aleman, Senior Economist ……………[email protected]

Sam Bullard, Senior Economist …………………………[email protected]

Anika Khan, Senior Economist .… . [email protected]

Senior EconomistsSarah Watt, Economic Analyst …………………………… [email protected]

Kaylyn Swankoski, Economic Analyst [email protected]

Zachary Griffiths, Economic Analyst [email protected]

Sara Silverman, Economic Analyst [email protected]

Economists

Azhar Iqbal, Econometrician………………………………[email protected]

Tim Quinlan, Economist …………………………………[email protected]

Michael A. Brown, Economist ………………… [email protected]

Economic Analysts

Administrative Assistants

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eugenio j. aleman, director and senior economist march 11 ...“the u.s. economy and its lingering...

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