Download Our Favorite Charts of 2016

December 21, 2016
Economics Group
Our Favorite Charts of 2016
Special Commentary
The Gettysburg Address, containing just 272 words, is famous for its concise yet powerful message. Oft-forgotten, however,
is that President Lincoln was not scheduled to be the featured speaker. Edward Everett assumed that role, and in a speech
preceding Lincoln’s, he delivered a 13,607-word oration. Everett wrote to Lincoln the next day: “I should be glad, if I could
flatter myself that I came as near to the central idea of the occasion, in two hours, as you did in two minutes.”
While economic phenomena frequently demand complex and detailed analysis, it’s often the simple and succinct approach
that proves most effective and memorable. Enclosed you’ll find the charts we believe tell the economic story of 2016, and we
hope that our explanations heed the lessons history has to offer on brevity.
Thank you for subscribing to our commentary, and we wish you and your families the best in 2017.
This report is available on wellsfargo.com/economics and on Bloomberg at WFRE.
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
Doing More with Less
Manufacturing employment in the United States peaked in 1979, well before the implementation
of NAFTA and the advent of Chinese industrial prowess. Although manufacturing employment has
declined nearly 40 percent on balance since 1979, manufacturing production has doubled over
that period. In other words, American manufacturers have been able to increase output over the
past three decades by lifting productivity. In short, foreign trade may have played a role in
reducing employment in the manufacturing sector since 1979, but the imperative to lift
productivity would have depressed factory jobs even if NAFTA had never come into existence.
For further reading, see “U.S. Trade with Canada and Mexico: A Short Primer” available upon
request.
Production & Jobs in Manufacturing Sector
Index, Jan 1979=100
240
240
200
200
160
160
120
120
80
80
40
40
Manufacturing Production: November @ 202.6
Manufacturing Employment: November @ 63.2
0
0
79
84
89
94
99
04
09
14
Source: U.S. Departments of Commerce & Labor and Wells Fargo Securities
2
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
Reaching the Economy’s Full Potential
Despite continued employment gains, real GDP growth once again disappointed in 2016. Sluggish
labor productivity growth, or output per hour worked, has played a key role in this disconnect
between employment and economic output. Productivity growth over the past few years has
languished near historic lows and has led the Fed and other forecasters to downwardly revise their
estimates of potential GDP growth. Productivity growth is a fundamental driver of rising living
standards over the long-run, and, without an improvement, a tight labor market and acceleration in
wages will come with the trade-off of lower corporate profits or higher inflation.
For further reading, see “Working Hard or Hardly Working?” available on request.
Nonfarm Productivity
Two-Year Moving Average, Year-over-Year Percent Change
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
Labor Productivity: Q3 @ 0.4%
-1%
-1%
60
64
68
72
76
80
84
88
92
96
00
04
Source: U.S. Department of Labor and Wells Fargo Securities
3
08
12
16
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
A Bigger Slice of the Pie
Labor’s share of income in the economy has been getting squeezed since the early 1990s and is
illustrative of many households’ economic anguish that was a defining factor in the 2016 election.
Although still quite low compared to prior periods, labor’s share of the pie has been growing
more recently. A rising share of labor income is typically only seen in the second half of an
expansion and is another indication that the economic cycle is in late innings. However, given the
low starting point, the income shift this time around may be less ominous and instead help to
sustain consumer spending. For firms facing higher input costs though, the relatively stronger
position of households may encourage them to test their pricing power and lead to higher
inflation.
For further reading, see our series on full employment, available upon request.
Labor Income Share
Compensation of Employees as a Share of Gross Domestic Income
60%
60%
59%
59%
58%
58%
57%
57%
56%
56%
55%
55%
54%
54%
53%
53%
52%
52%
51%
51%
Labor Income Share: Q3 @ 53.7%
50%
50%
47
52
57
62
67
72
77
82
87
92
97
02
07
12
17
Source: U.S. Department of Labor and Wells Fargo Securities
4
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
Feeling the Squeeze
While nominal wages are rising at the fastest pace of the expansion, labor productivity has
continued to languish. As a result, unit labor costs have drifted higher and will likely put further
pressure on company profit margins over the next year unless companies can pass on costs via
higher selling prices. Companies have thus far been hesitant to pass on higher costs. Profits as a
share of GDP have fallen over the past two years, indicating compression in corporate margins.
For further reading, see our Annual Economic Outlook
Nonfinancial Domestic Profits
Share of Gross Value Added of Nonfinancial Corporations
16%
16%
14%
14%
12%
12%
10%
10%
8%
8%
6%
6%
4%
4%
2%
United States: Q3 @ 13.4%
2%
1980-2015 Average: 11.2%
0%
0%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Source: U.S. Department of Commerce and Wells Fargo Securities
5
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
The Missing Middle
Income growth has improved across the income distribution, but the top and bottom quintiles
have experienced the fastest growth since the recession ended according to Bureau of Labor
Statistics data. All quintiles have seen slower income growth relative to past cycles. Labor
productivity and inflation are fundamental drivers of nominal wage growth and both have
increased at a particularly slow pace this cycle, which has weighed on income growth.
For further reading, see our series on full employment, available upon request.
Income Growth During Economic Recoveries
Percent Change 6 Years After Recession End, Before-Tax Income
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
0%
Avg of Prior 2 Recoveries
2009-2015
-5%
-5%
Lowest
Quintile
Second
Quintile
Middle
Quintile
Fourth
Quintile
Highest
Quintile
Source: U.S. Department of Labor and Wells Fargo Securities
6
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
Generational Growing Pains
Wage growth has strengthened over 2016, but remains well below its pre-recession pace.
Compositional shifts in the workforce, however, help to explain why growth in average hourly
earnings remains relatively subdued. An increasing number of Baby Boomers who are at the peak
of their careers and command high average hourly earnings are retiring. At the other end of the
jobs ladder, Millennials with relatively little experience—and therefore low average hourly
earnings—have been entering the workforce in droves. Looking at the Atlanta Fed Wage tracker,
which includes only workers who were employed one year to the next, shows wage growth has
been noticeably stronger over the past year and much closer to rates that prevailed in prior cycles.
For further reading, see our series on full employment, available upon request.
Average Hourly Earnings
vs. Atlanta Fed Wage Growth Tracker; YoY % Chg. of 3-MMA
6%
6%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
Atlanta Fed Wage Growth Tracker: Nov @ 3.9%
Average Hourly Earnings (Prod. & Supervisory): Nov @ 2.4%
Average Hourly Earnings (Total Private): Nov @ 2.6%
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
7
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
Mobile Millennials
The two fastest growing categories of consumer spending among Millennials (Ages 18-34) are food
away from home and entertainment, underscoring the current nonmaterial nature of Millennial
spending. There are some early signs however that this trend may be reversing as home ownership
and transportation spending have begun to recover. It is difficult to say for certain how much of the
overall trends in consumer spending by category is driven by pure demographic change and those
driven by cyclical factors. That said, there is clear evidence of increased diversity of the Millennial
generation relative to prior age demographics, which suggests, based on prior evidence, a structural
change in the tastes and preferences of the population.
For further reading, see “Non-Material Millennials” available upon request.
Millennial Expenditure Growth
Year-over-Year Percent Change & Change from 2012 to 2015
20.0%
Year-over-Year Percent Change
Recovering
Expanding
Share of Average Total
Expenditures
<5.5%
15.0%
Food away from
Home
5.5% - 8.0%
10.0%
>8.0%
Transportation
5.0%
Housing-Owned
Alcohol
Entertainment
0.0%
Apparel
Housing-Rented
Food at Home
-5.0%
Decelerating
Contracting
-10.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Percent Change from Three Years Ago
Source: U.S. Department of Labor and Wells Fargo Securities
8
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
Two-Percent Inflation: Time to Pop the Champagne?
Disinflationary fears finally began to dissipate in 2016 after the stabilization and subsequent
recovery in energy prices put headline inflation on more firm footing. Core inflation, which
excludes the volatile food and energy components, is also running near 2 percent across a variety
of metrics amid relatively strong inflation for services such as shelter and medical care. The
inflation side of the Fed’s dual mandate is now within sight and should be supportive of multiple
rate hikes in 2017.
For further reading, see our Annual Economic Outlook
Alternative Inflation Measures
Year-over-Year Percent Change
5%
5%
Core CPI: Nov @ 2.1%
Core PCE: Oct @ 1.7%
Cleveland Fed Median CPI: Nov @ 2.5%
Atlanta Fed Sticky CPI: Nov @ 2.5%
Dallas Fed Trimmed-Mean PCE: Oct @ 1.8%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
05
06
07
08
09
10
11
12
13
14
15
16
17
Source: U.S. Department of Commerce, U.S. Department of Labor, Federal Reserve
System and Wells Fargo Securities
9
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
Appreciating Appreciation
After more than a decade, U.S. home prices rose to an all-time high in 2016, according to the S&P
CoreLogic Case-Shiller U.S. National Home Price Index. The new record marks the end to a four
and a half year recovery, as home prices have climbed more than 35 percent above the trough
reached in 2012, recouping the losses that occurred during the housing bust. Adjusted for
inflation, however, prices remain about 16 percent below their 2006 peak. We expect the pace of
home price appreciation to slow modestly in the year ahead, rising about 4.4 percent year over
year in 2017.
For more, see “2017 U.S. Housing Market Outlook” available upon request.
U.S. Real vs. Nominal Home Prices
S&P CoreLogic Case-Shiller Home Price Index Jan. 2000=100
200
200
180
180
160
160
140
140
120
120
100
100
* Real = HPI Deflated w/CPI
80
80
Real Home Price: Sep @ 129.8
Nominal Home Price: Sep @ 184.8
60
60
00
02
04
06
08
10
12
14
16
Source: S&P, U.S. Department of Labor and Wells Fargo Securities
10
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
The Trend Goes On
Earlier in the year, Moody’s/RCA Commercial Property Price Index (CPPI), which measures the
change in commercial property prices by key property types, softened due to a steep decline in the
office-central business district (CBD) in major markets. The overall index stands nearly 50 percent
above its prerecession peak, with much of the increase concentrated in apartment and office-CBD
properties in major markets. Despite reaching cycle-highs, the overall rate of growth has started to
slow. Some of this is attributable to lower transaction volume and tighter lending standards, but
we are also seeing slower cross-border transactions as investors look beyond key sectors and reach
for yield.
For further reading, see our latest Commercial Real Estate Chartbook, available upon request.
Commercial Property Price Index
Index
300
300
Apartment: Oct @ 274.9
Retail: Oct @ 183.2
Industrial: Oct @ 183.6
Office - CBD: Oct @ 281.2
Office - Suburban: Oct @ 149.3
250
250
200
200
150
150
100
100
50
50
05
06
07
08
09
10
11
12
13
14
Source: Real Capital Analytics, Inc. and Wells Fargo Securities
11
15
16
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
We’ve Seen This Horror Movie Before…or Have We?
House prices in China are on the rise again as shown by a nationwide index of house prices that
has surpassed the previous peak reached in April 2014. Although house prices appear to be rising
everywhere, prices in the so-called Tier-1 cities of Beijing, Guangzhou, Shanghai and Shenzhen
have skyrocketed. The People’s Bank of China (PBoC) has guided interest rates lower over the
past year or so and the government has instructed banks to relax lending standards. Not only
have these policies stimulated more home-buying, which has pushed up house prices, but they
have also caused housing starts to strengthen this year. However, based on China’s lower
financial leverage position and smaller residential mortgage exposure to the financial system
compared to the U.S. during the height of the housing bubble, we believe that most households in
China could withstand a meaningful decline in house prices and not deal a devastating blow to
the country’s financial system.
For further reading, see our Annual Economic Outlook.
China House Price Index by City Type
Existing Homes; 2011=100
190
180
170
190
Tier I Cities: Nov @ 177.9
180
Tier II Cities: Nov @ 110.8
Tier III Cities: Nov @ 99.9
170
160
160
150
150
140
140
130
130
120
120
110
110
100
100
90
2011
90
2012
2013
2014
2015
2016
Source: CEIC and Wells Fargo Securities
12
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
SOEing the Seeds of Destruction
Some analysts fret about a “hard landing” in the Chinese economy, caused by excessive debt. We
have never placed much stock in these doomsday prognostications. That said, the debt-to-GDP
ratio of the Chinese business sector exceeds 170 percent at present—the comparable ratio in the
United States is about 70 percent—so debt issues in China should not be idly dismissed. Rather
than a sudden implosion of the Chinese economy, we worry that China may eventually slip into a
Japanese-like stagnation.
State-owned enterprises (SOEs) in China are inefficient relative to their private-sector
counterparts, as illustrated by slower growth in value added in the former. However, SOEs employ
more than 60 million individuals, so the Chinese government is not likely to close them down, at
least not in a rapid manner. In our view, the government will continue to lean on Chinese banks to
keep the SOEs afloat. Over time, capital may become increasingly misallocated to inefficient SOEs.
The Chinese economy could eventually face its own “zombification” just as Japan did when its
asset-price bubbles popped in the early 1990s.
For more, see “Does China Face a Japanese-Like “Lost Decade”?” available upon request.
Chinese Industrial Value Added
Year-over-Year Percent Change
28%
24%
28%
State-Owned: Oct @ 3.4%
All: Oct @ 6.2%
20%
20%
16%
16%
12%
12%
8%
8%
4%
4%
0%
0%
-4%
-4%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 16
Source: CEIC and Wells Fargo Securities
13
24%
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
Low Rates and High Debt: A Ticking Time Bomb?
While U.S. Treasury yields are often viewed through a financial market lens, it is important to
remember that they represent the cost of financing the national debt. Despite a doubling in the
size of the debt as a share of the economy since 2008, historically low Treasury yields have kept
net interest spending by the federal government near record lows. A sustained upward shift in the
yield curve, however, will begin to gradually boost the share of budget resources needed to service
the national debt. As President Trump and Congress weigh fiscal policy changes next year, rising
interest rates represent another potential budgetary challenge for policymakers.
For more, see our coverage of the Monthly Treasury Statement, available on request.
Net Interest Outlays vs. Federal Debt
4.0%
12-Month Moving Sum, Total Debt Held by the Public
80%
Net Interest as a Share of GDP: Sep @ 1.3% (Left Axis)
3.5%
Public Debt as a Share of GDP: Sep @ 75.7% (Right Axis)
70%
3.0%
60%
2.5%
50%
2.0%
40%
1.5%
30%
1.0%
20%
0.5%
10%
0.0%
0%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Source: U.S. Department of the Treasury, U.S. Department of Commerce and
Wells Fargo Securities
14
Our Favorite Charts of 2016
December 21, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
Probing for Risks with a Probit Model
Our recession forecasting approach uses a Probit model to predict the chances of a recession
during the next six months. Our preferred model has served us well; it started predicting (in realtime) a significantly higher probability of recession back in 2007. We also never joined the
“double-dip” camp back in 2010-2012, largely because our Probit model did not indicate a highlikelihood of recession during that time period.
In addition to our preferred model, we have built eight different models to capture the range of
recession risk posed by alternative model specifications. The current average probability of these
models (based on Q3 data) is 13.4 percent, and this method successfully predicted all recessions
since 1980 without producing any false positives.
For further reading, see “Recession Talks in the Spotlight: Should We Worry?” available upon
request.
Recession Probability Based on Probit Model
Average of All Models
100%
100%
Two-Quarter Ahead Recession Probability: Q3 @ 13.4%
90%
90%
80%
80%
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Source: Wells Fargo Securities
15
Wells Fargo Securities Economics Group
Diane Schumaker-Krieg
Global Head of Research,
Economics & Strategy
704-410-1801
212-214-5070
[email protected]
John E. Silvia, Ph.D.
Chief Economist
704-410-3275
[email protected]
Mark Vitner
Senior Economist
704-410-3277
[email protected]
Jay H. Bryson, Ph.D.
Global Economist
704-410-3274
[email protected]
Sam Bullard
Senior Economist
704-410-3280
[email protected]
Nick Bennenbroek
Currency Strategist
212-214-5636
[email protected]
Anika R. Khan
Senior Economist
212-214-8543
[email protected]
Eugenio J. Alemán, Ph.D.
Senior Economist
704-410-3273
[email protected]
Azhar Iqbal
Econometrician
704-410-3270
[email protected]
Tim Quinlan
Senior Economist
704-410-3283
[email protected]
Eric Viloria, CFA
Currency Strategist
212-214-5637
[email protected]
Sarah House
Economist
704-410-3282
[email protected]
Michael A. Brown
Economist
704-410-3278
[email protected]
Jamie Feik
Economist
704-410-3291
[email protected]
Erik Nelson
Currency Analyst
212-214-5652
[email protected]
Misa Batcheller
Economic Analyst
704-410-3060
[email protected]
Michael Pugliese
Economic Analyst
704-410-3156
[email protected]
Julianne Causey
Economic Analyst
704-410-3281
[email protected]
E. Harry Pershing
Economic Analyst
704-410-3034
[email protected]
Donna LaFleur
Executive Assistant
704-410-3279
[email protected]
Dawne Howes
Administrative Assistant
704-410-3272
[email protected]
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