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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0 10 20 30 40 50 60 70 80 90 100 110 120 130

1949

1954

1958

1961

1970

1975

1980

1982

1991

2001

2009

Length of U.S. ExpansionY-axis=End of Recession, X-axis=Months as of February 2020

7.7%

4.1%

6.7%

5.1%

5.3%

4.5%

4.3%

4.4%

3.8%

2.9%

2.3%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

1949

1954

1958

1961

1970

1975

1980

1982

1991

2001

2009

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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90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

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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90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

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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60 64 68 72 76 80 84 88 92 96 00 04 08 12 16

U.S. Crude Oil ProductionMillions of Barrels Per Day

U.S. Crude Oil Production: Nov @ 12.88 mbpd

…Greater Production

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60 64 68 72 76 80 84 88 92 96 00 04 08 12 16 20

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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88 90 92 94 96 98 01 03 05 07 09 11 14 16 18

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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88 90 92 94 96 98 01 03 05 07 09 11 14 16 18

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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54 58 62 66 70 74 78 82 86 90 94 98 02 06 10 14 18

Yield Curve Spread10-Yr Yield Less Effective Fed Funds Rate, Basis Points

10Y-Fed Funds: Jan @ 17.8 bps-25%

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92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

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


7

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00 02 04 06 08 10 12 14 16 18 20

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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04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

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


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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2013 2014 2015 2016 2017 2018

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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07 08 09 10 11 12 13 14 15 16 17 18 19 20

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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10 11 12 13 14 15 16 17 18 19 20

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


Economics

The Deteriorating Budget Dynamic

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76 80 84 88 92 96 00 04 08 12 16 20

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?


Economics

Debt Ratios in the United States

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30%

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80 83 86 89 92 95 98 01 04 07 10 13 16 19

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.

28%

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78 82 86 90 94 98 02 06 10 14 18

Corporate Debt as a Share of GDPNonfinancial Corporations

Nonfinancial Corporate Debt: Q3 @ 46.9%$0

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$120

Nov-17 Mar-18 Jul-18 Nov-18 Mar-19 Jul-19 Nov-19

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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03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

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.

11.6%2.8%

146.8%

64.5%

8.0% 5.0%

-43.6%-60%

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Total Mortgage StudentLoan

AutoLoan

CreditCard

Other HELOC

U.S. Household Debt by CategoryPercent Change from Q3-2008 to Q4-2019

Largest to Smallest Amount Outstanding

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100%

18-29 30-39 40-49 50-59 60-69 70+

Debt Share by Product Type and AgeQ4-2019

Mortgage Student Loans Auto Loans Credit Cards Other HELOC

Change since 2009 Debt by Age


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


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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90%

03 05 07 09 11 13 15 17 19

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)

14.5%

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80 84 88 92 96 00 04 08 12 16

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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140

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94 96 98 00 02 04 06 08 10 12 14 16 18 20

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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00 02 04 06 08 10 12 14 16 18 20

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.


19

Economics

Labor Market: Wages

20

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92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

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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16 26 36 46 56 66 76 86 96

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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04 06 08 10 12 14 16 18 20

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 TurnoverNew and Existing Sales Divided By Houshold Stock

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Single-Family Home InventoryMillions of Units

New Homes: Dec @ 0.33MExisting Homes: Dec @ 1.22M

Mortgage Applications Rates


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.


The Alabama & Mobile Economy

Economics

Year-over-Year Percent Change in Real GDP by State, Q3-2019

26


WY

WV

WI

WA

VT

VA

UT

TX

TN

SD

SC

RIPA

OR

OK

OH

NY

NV

NM

NJ

NH

NE

ND

NC

MT

MS

MO

MN

MI

ME

MD

MA

LA

KYKS

INIL

ID

IA

GA

FL

DE

CT

COCA

AZAR

AL

3.6

0.0

1.3

3.1

2.5

1.5

3.7

4.5

1.4

0.4

2.8

3.41.9

2.4

2.7

1.2

1.4

2.9

3.5

1.4

2.4

1.6

1.3

1.9

2.1

1.3

2.0

0.4

0.5

1.4

1.3

2.3

1.4

1.00.7

0.81.2

2.8

0.6

1.5

2.4

-0.1

1.2

3.32.4

2.71.9

2.1

AK2.7

HI0.7

DC1.2

2.6% - 3.0%

2.1% - 2.5%

3.1% - 4.0%

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

27


WY

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

-1.2

-0.5

0.4

2.5-0.4

1.1

3.3

2.7

1.6

1.1

1.4

1.7

0.5

1.9

-0.3

0.5

1.1

1.9

1.7

0.9

0.8

1.6

0.6

2.0

1.0

0.5

0.6

0.1

0.4

1.0

1.2

0.4

0.61.5

0.10.7

2.9

-0.1

1.5

2.4

0.2

2.01.8

2.91.5

2.2

HI0.8

AK-0.1

United States = 1.4%

Less than 1.0%

1.0%-1.5%

1.6%-2.0%

2.1%-3.0 %

Greater than 3.0%

DCMD1.2

DE1.3

DC1.3

Economics

Alabama: Economic Growth

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-4%

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4%

6%

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


Economics 29

Alabama: Population

Population growth remains positive, though exceptionally modest, in Alabama

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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


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


Economics


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


Economics


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


Economics 33


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


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


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


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


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


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

Jay H. Bryson, Acting Chief Economist …[email protected]

Mark Vitner, Senior Economist [email protected]

Sam Bullard, Senior Economist [email protected]

Nick Bennenbroek, Macro Strategist [email protected]

Tim Quinlan, Senior Economist [email protected]

Azhar Iqbal, Econometrician [email protected]

Sarah House, Senior Economist [email protected]

Charlie Dougherty, Economist [email protected]

Erik Nelson, Macro Strategist [email protected]

Michael Pugliese, Economist [email protected]

Brendan McKenna, Macro Strategist [email protected]

Economists & Macro Strategists Economic Analysts

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