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U.S. Economic Outlook Mark Vitner, Managing Director & Senior Economist September 16, 2016 Five Key Themes Weaker real GDP over the past three quarters Economic Outlook Weaker Global Growth exaggerates the extent of the slowdown in the U.S. economy. Growth is solid, albeit unspectacular. Brexit is weighing on global economic growth, pulling at industries closely tied to it. With demand growing more slowly, inflation will likely remain below 2 percent. The Fed’s more hawkish recent tone is aimed at avoiding Monetary Policy another taper tantrum. The economy is closer to full employment than widely thought and the Fed will need to raise interest rates modestly in coming quarters. Easier monetary policy has paved the way for a more The Housing Recovery substantial housing recovery. Single-family construction is gaining steam, while low rates continue to pull money into private equity and keep the apartment boom going. Energy prices have stabilized, allowing drilling to rise. The Mix of Growth is Shifting Economic Outlook Farm incomes continue to struggle with low commodity prices. Sluggish global growth and caution ahead of the election continue to weigh on many manufacturers. 2 Economic Growth Real GDP growth has been solid but unspectacular. Most of the recent volatility in growth has been due to reductions in inventories, swings in international trade and the slowdown in energy production. Private final domestic demand has also moderated but is growing solidly. Real GDP Forecast Real Private Final Sales U.S. Real GDP Real Private Final Sales to Domestic Purchasers Bars = CAGR Line = Yr/Yr Percent Change Bars = CAGR 10% 10% 8% 8% 6% Line = Yr/Yr Percent Change 8% GDP - CAGR: Q2 @ 1.1% 8% GDP - Yr/Yr Percent Change: Q2 @ 1.2% 6% 6% Forecast 6% 4% 4% 4% 2% 2% 2% 2% 0% 0% 0% 0% -2% -2% -2% -2% -4% -4% -4% -4% -6% -6% -6% -6% -8% -8% -8% -8% -10% -10% -12% 2000 Forecast 4% -10% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 3 Real Priv Fin Sales to Dom. Purch. - CAGR: Q2 @ 3.0% Real Priv Fin Sales to Dom. Purch. - Yr/Yr Pct Chg: Q2 @ 2.3% -10% -12% 2002 2004 2006 2008 2010 2012 2014 2016 2018 Employment Situation While the monthly data have been volatile, the employment data look much stronger than the GDP data, which has raised questions about the quality and sustainability of economic growth. The unemployment rate is now below 5 percent and local area labor markets are tightening. Nonfarm Employment Unemployment Rate Unemployment and Wage Rates Nonfarm Employment Change Change in Employment, In Thousands 600 400 200 200 0 12% 600 400 Wages for Production & Nonsupervisory Workers, SA 12% 10% 10% 8% 8% 6% 6% 4% 4% 0 -200 -200 -400 -400 -600 -600 -800 -800 2% 2% Unemployment Rate: Aug @ 4.9% Hourly Earnings - Yr/Yr % Change: Aug @ 2.5% Monthly Change: Aug @ 151K -1,000 0% -1,000 Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 0% 65 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 4 70 75 80 85 90 95 00 05 10 15 Oil Prices & Inventory Oil prices have bounced off their recent lows but it is still too early to say that prices have bottomed. There is still a great deal of oil in inventory around the world and production remains strong overseas. The breakeven price for oil production in the U.S. has also fallen. Oil Prices Oil Inventory U.S. Crude Oil Inventory Baker-Hughes Rig Count vs. Oil Prices Oil Rotary Rigs; USD per Barrel 1,800 1,600 580 $180 Oil Rig Count: Aug-26 @ 406 (Left Axis) WTI: Aug-19 @ $48.5 (Right Axis) $160 $140 1,200 $120 1,000 $100 550 550 520 520 490 490 460 460 430 430 400 400 370 370 340 340 310 800 $80 600 $60 400 $40 200 $20 310 $0 280 0 06 07 08 09 10 11 12 13 14 15 280 05 16 Source: Baker Hughes Inc., EIA and Wells Fargo Securities Economic Outlook 580 Oil Inventory: Aug-26 @ 523.5 Million Barrels 1,400 05 4-Week Moving Average, Millions of Barrels 5 06 07 08 09 10 11 12 13 14 15 16 Home Sales The pace of new and existing home sales remain at healthy levels. Home sales continue to be supported by low mortgage rates New Home Sales 10% Existing Home Sales New Home Sales vs. Mortgage Rates Existing Home Sales Seasonally Adjusted Annual Rate, In Thousands Seasonally Adjusted Annual Rate, In Millions 1,750 7.5 7.5 Existing Home Sales: Jul @ 5.39M 9% 1,500 8% 1,250 7.0 7.0 6.5 6.5 6.0 6.0 7% 1,000 5.5 5.5 6% 750 5.0 5.0 4.5 4.5 5% 500 4.0 4.0 3.5 3.5 4% 250 Mortgage Rate: Jul @ 3.4% (Left Axis) New Home Sales: Jul @ 654,000 (Right Axis) 3% 0 93 95 97 99 01 03 05 07 09 11 13 3.0 15 Source: U.S. Department of Commerce, National Association of Realtors, FHLMC and Wells Fargo Securities Economic Outlook 3.0 04 6 05 06 07 08 09 10 11 12 13 14 15 16 Interest Rates Appropriate Pace of Policy Firming Target Federal Funds Rate at Year-End 5.0% The Fed has consistently delayed and scaled back their timeline and the ultimate magnitude for normalizing the federal funds rate. We expect the Fed to move much more cautiously, raising the federal funds rate a quarter percentage point just once this year and two times in 2017 and 2018, provided the economy continues to grow steadily. 4.5% 4.0% 5.0% June 2016 Median Response March 2016 Median Response December 2015 Median Response December 2014 Median Response Futures Market: September 5 4.5% 4.0% 3.5% 3.5% 3.0% 3.0% 2.5% 2.5% 2.0% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5% 0.0% 2016 2017 2018 Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities Economic Outlook 7 Longer Run 0.0% Sovereign Yields 10-Year Government Bond Yields Percent 5% 4% Lower interest rates in other developed economies continue to hold down U.S. interest rates. Negative interest rates do not appear to be sparking business investment or stronger growth in Germany or Japan. 5% Japan: Aug-25 @ -0.10% United States: Aug-25 @ 1.58% Germany: Aug-25 @ -0.14% United Kingdom: Aug-25 @ 0.57% 3% 3% 2% 2% 1% 1% 0% 0% -1% -1% 10 11 12 13 14 Source: Federal Reserve Board, IHS Global Insight and Wells Fargo Securities Economic Outlook 4% 8 15 16 Regional Trends Year-over-Year Employment Growth by State (July 2016) Job growth has been strongest in the Pacific Northwest and Southeast. With its more diversified economy, Texas has been better able to withstand the slide in energy prices and cutback in oil and gas exploration. Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities Economic Outlook 10 Personal Income Growth Year-over-Year Percent Change Q1 2016 Incomes have risen the fastest along the coasts and have weakened the most in North Dakota, Wyoming and Oklahoma. Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 11 South Carolina Employment Growth by MSA South Carolina Employment Growth: July 2016 Year-over-Year Percent Change, 3-Month Moving Average Charleston, Myrtle Beach and Charlotte have seen the strongest employment growth over the past year 3-Month Moving Average Percent Change 2.0% Expanding Recovering Population Size Less than 250,000 Charlotte 250,000-500,000 1.0% Charleston Augusta Augusta Greenville Columbia Florence 0.0% Spartanburg Myrtle Beach -1.0% Sumter Decelerating Contracting -2.0% -1% 0% 1% 2% 3% Year-over-Year Percent Change Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook More than 500,000 12 4% 5% South Carolina South Carolina Gross State Product & U.S. GDP Year-over-Year Percent Change 5% South Carolina’s economy has grown relatively in line with the nation over the past three years. 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% -1% -1% -2% -2% -3% -3% -4% U.S. GDP: 2015 @ 2.4% South Carolina GDP: 2015 @ 1.9% -5% -4% -5% 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 5% 13 South Carolina - Employment Situation South Carolina employment rose a steady 2.4 percent over the year. The professional & business services sector saw the largest payroll gains. The unemployment rate continues to decline, but remains slightly higher than the national average. Nonfarm Employment Unemployment Rate South Carolina Nonfarm Employment South Carolina vs. U.S. Unemployment Rate Seasonally Adjusted 3-Month Moving Averages 6% 12% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% -6% -6% 12% South Carolina: Jul @ 5.2% United States: Aug @ 4.9% 10% QCEW: Yr/Yr Pct. Change: Mar @ 2.7% Nonfarm: Yr/Yr Pct. Change: Jul @ 2.4% Household: Yr/Yr Pct. Change: Jul @ 2.7% -8% -10% 92 94 96 98 00 02 04 06 08 10 12 14 8% 6% 6% 4% 4% 2% 16 2% 90 Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook 8% -8% -10% 90 10% 14 92 94 96 98 00 02 04 06 08 10 12 14 16 South Carolina – Housing Market Housing Permits Home Prices South Carolina Housing Permits Core Logic HPI: SC vs. U.S. Thousands of Permits, Annual Rate 60 60 Single-Family: Jul @ 23,088 Single-Family, 12-MMA: Jul @ 24,401 Multifamily, 12-MMA: Jul @ 5,941 50 50 Single-Family Average (1998-2003): 26,279 40 40 30 30 20 20 10 10 Year-over-Year Percent Change 20% Thousands Thousands The housing market in South Carolina has seen solid recovery in comparison to other states. Single-family permits continue to post gains and are at their highest post-recession level. South Carolina’s home prices have risen in line with the nation in recent years. 16% 16% 12% 12% 8% 8% 4% 4% 0% 0% -4% -4% -8% -8% -12% -12% United States: Jul @ 6.0% South Carolina: Jul @ 5.7% -16% 0 0 90 92 94 96 98 00 02 04 06 08 10 12 14 -16% -20% 16 -20% 90 Source: U.S. Department of Commerce, CoreLogic and Wells Fargo Securities Economic Outlook 20% 15 92 94 96 98 00 02 04 06 08 10 12 14 16 Employment Growth by County Lancaster County has seen impressive job growth at 9.2 percent year over year. Cabarrus, Mecklenburg and Iredell counties have also recorded notable employment gains, each up more than 3.5 percent over the year. Unemployment has declined across counties. Nonfarm Employment Unemployment Rates Charlotte Employment Growth by County Charlotte Unemployment Rate by County QCEW, Year-over-Year Percent Change 3-Month Moving Avg. Lancaster Percent Chester 9.2% Cabarrus Lancaster 4.6% Mecklenburg Rowan 3.8% Iredell Cleveland 3.6% Rowan York 3.3% Union Gaston 3.1% York Iredell 3.0% Cleveland 2.7% Lincoln Stanly 2.3% Gaston Mecklenburg 2.0% Stanly Lincoln 1.5% Chester March 2016 0.4% 0% 2% 4% 6% 8% 10% July 2016 Union July 2015 3% Source: U.S. Department of Labor and Wells Fargo Securities Economic Outlook Cabarrus 16 4% 5% 6% 7% 8% 9% 10% Population Growth by County Charlotte Population Growth by County Year-over-Year Population Change in Thousands Mecklenburg 22.1 York 6.1 Cabarrus 4.8 Union 4.4 Iredell 3.0 Lancaster Mecklenburg County continues to account for the bulk of the region’s population gains 2.7 Gaston 2.4 Lincoln 1.2 Rowan 0.5 Stanly 0.1 Chester -0.1 Cleveland -0.1 -5 0 2015 5 Source: U.S. Department of Commerce and Wells Fargo Securities Economic Outlook 17 10 15 20 25 U.S. Forecast Wells Fargo U.S. Economic Forecast q 3 2 01 6 Actual 2 01 6 Forecast 2016 2017 Actual 2014 2015 2018 2016 Forecast 2017 2018 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 0.8 1.1 3.1 2.4 2.1 2.2 2.1 2.0 2.1 2.2 2.2 2.2 2.4 2.6 1.5 2.2 2.1 1.6 4.4 3.8 2.5 2.3 2.6 2.5 2.2 2.5 2.5 2.5 2.5 2.9 3.2 2.8 2.7 2.5 -3.4 -0.9 3.2 3.3 3.2 3.3 3.0 3.1 2.9 3.1 3.2 3.0 6.0 2.1 -0.5 2.9 3.0 Equipment -9.5 -3.7 3.0 3.5 3.0 2.7 2.2 2.2 2.1 2.2 2.3 2.2 5.4 3.5 -2.0 2.4 2.2 Intellectual Property Products 3.8 8.6 4.3 3.5 3.7 4.3 4.0 4.2 4.2 4.1 4.2 4.0 3.9 4.8 4.9 4.2 4.1 Structures 0.1 -8.4 2.0 2.5 2.8 3.0 3.2 3.5 3.5 3.5 3.5 3.5 10.3 -4.4 -4.9 2.0 3.3 Residential Construction 7.8 -7.7 0.0 7.5 7.5 7.5 7.0 7.0 6.0 6.0 6.0 6.0 3.5 11.7 5.3 5.4 6.4 Government Purchases 1.6 -1.5 0.9 1.2 1.2 1.0 1.0 0.9 1.2 1.0 0.9 0.9 -0.9 1.8 0.9 0.9 1.0 0.0 0.1 0.0 -0.6 -0.6 -0.5 -0.6 -0.5 -0.5 -0.4 -0.4 -0.3 -0.1 -0.7 -0.2 -0.5 -0.5 -0.4 -1.3 0.3 0.4 0.2 0.1 0.1 0.2 0.0 0.0 0.0 0.0 -0.1 0.2 -0.4 0.1 0.1 196 146 200 170 165 160 155 150 150 145 145 140 251 229 178 158 145 4.9 4.9 4.9 4.7 4.7 4.6 4.6 4.5 4.4 4.4 4.3 4.3 6.2 5.3 4.8 4.6 4.4 1.1 1.1 1.1 1.4 2.1 2.1 2.3 2.3 2.4 2.4 2.4 2.4 1.6 0.1 1.2 2.2 2.4 Real Gross Domestic Product Personal Consumption 1 Business Fixed Investment Net Exports Inventories 2 2 Nonfarm Payroll Change 3 Unemployment Rate Consumer Price Index 4 5 Quarter-End Interest Rates Federal Funds Target Rate 0.50 0.50 0.50 0.75 0.75 1.00 1.00 1.25 1.25 1.50 1.50 1.75 0.25 0.27 0.56 1.00 1.50 Conventional Mortgage Rate 3.69 3.57 3.58 3.59 3.61 3.62 3.66 3.69 3.73 3.82 3.85 4.02 4.17 3.85 3.61 3.65 3.86 2 Year Note 0.73 0.58 0.74 0.84 0.93 1.13 1.20 1.36 1.44 1.59 1.64 1.88 0.46 0.69 0.72 1.16 1.64 10 Year Note 1.78 1.49 1.53 1.56 1.59 1.62 1.68 1.73 1.78 1.88 1.92 2.10 2.54 2.14 1.59 1.66 1.92 Forecast as of: September 7, 2016 1 C ompound Annual Growth Rate Quarter-over-Quarter 2 Percentage Point C ontribution to GDP 4 Year-over-Year Percentage C hange 5 Annual Numbers Represent Averages 3 Average Monthly C hange Source: IHS Global Insight and Wells Fargo Securities Economic Outlook 18 Issues to Watch Technological Shifts Monetary Policy Income Inequality Presidential Election Compensation Costs Manufacturing Activity Fallout from Bursting Asset Bubbles Economic Outlook Brexit Impacts on Global Growth 19 Appendix Economic Outlook Group Publications A Sampling of Our Recent Special, Regional & Industry Commentary a Recent Special Commentary Date To join any of our research distribution lists please visit: http://www.wellsfargo.com/ economicsemail Economic Outlook Authors U.S. Macro What's a Good Print for Payrolls? Silvia, Iqbal & House Are Grocery Store Sales Making a Comeback? Alemán August-24 Global Influences on U.S. Growth and Employment Bryson & House August-18 Will U.S. Export Growth Stregthen Anew Bryson & Pershing August-17 Dragging Anchor Quinlan & House August-30 New Jersey Economic Outlook: August 2016 Vitner, Feik August-26 Washington, D.C. Looks to Leverage Its Global Ties Vitner & Batcheller August-24 Global Influences Help Fuel Orange County's Growth Vitner & Batcheller August-24 Global Economic Headwinds Slow Colorado's Exports Vitner & Batcheller August-23 Kansas City Strives to Expand Its Global Reach Vitner & Batcheller August-30 August-29 To view any of our past research please visit: http://www.wellsfargo.com/ economics Title U.S. Regional Global Econom y September-09 Global Chartbook: September 2016 Byrson, House, Causey & Pershing September-07 RBA on Hold as Aussie GDP Growth Slows Slightly Quinlan & Causey September-07 Chile's Economic Weakness Persists in July Alemán September-06 Brazilian Economic Prospects Improve a Bit Alemán September-06 Strong Swiss GDP Growth, Weak Fundamentals Bryson & Pershing September-07 Is the Fed Hogging All the Treasuries Silvia & Pugliese August-31 All Growth Can Be Divided into Threet Parts Silvia & Iqbal August-24 If Not Normal, Where Are We in the Cycle? Late Silvia August-17 Normal as an Evolving Target Silvia August-10 Managing Expectations to Avoid Another Tantrum Silvia & Vitner August-11 Real Estate Commercial Real Estate Chartbook: Q2 Khan, Causey & Tysinger July-06 International Home Buying: 2016 Vitner, Khan & Batcheller June-28 Brexit Vote Could Pump More Dollars into U.S. CRE Khan June-01 Housing Chartbook: June 2016 Vitner, Khan & Batcheller May-20 Commercial Real Estate Chartbook: Q1 Khan & Causey Interest Rates/Credit Market 21 Wells Fargo Securities Economics Group Global Head of Research and Economics Economists Diane Schumaker-Krieg ………………… …[email protected] Global Head of Research & Economics Eric J. Viloria, Currency Strategist …… Sarah House, Economist [email protected] Michael A. Brown, Economist Chief Economist [email protected] [email protected] Jamie Feik, Economist John E. Silvia [email protected] [email protected] Economic Analysts Senior Economists Erik Nelson, Currency Analyst Mark Vitner, Senior Economist [email protected] Jay H. Bryson, Global Economist …[email protected] Sam Bullard, Senior Economist [email protected] Nick Bennenbroek, Currency Strategist Anika R. Khan, Senior Economist Eugenio J. Alemán, Senior Economist Misa Batcheller, Economic Analyst Michael Pugliese, Economic Analyst [email protected] Julianne Causey, Economic Analyst [email protected] E. Harry Pershing, Economic Analyst [email protected] May Tysinger, Economic Analyst [email protected] [email protected] [email protected] [email protected] [email protected] Administrative Assistants [email protected] Azhar Iqbal, Econometrician [email protected] Donna LaFleur, Executive Assistant [email protected] Tim Quinlan, Senior Economist [email protected] Dawne Howes, Administrative Assistant [email protected] Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. 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This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only. Economic Outlook 22