2016 Economic Outlook Anika R. Khan, Senior Economist March 17, 2016

Economic Outlook 22 Economic Growth We are now six years into the recovery and economic growth is increasing at a steady pace. Despite a slow start to the year, activity is expected to improve in line with the previous year Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Real Private Final SalesReal GDP Forecast

Economic Outlook 3 Business Activity Recent weakness has been concentrated in the goods producing sector, while activity in the service sector remains fairly strong Source: Institute for Supply Management and Wells Fargo Securities, LLC

Economic Outlook 4 Recession Probability Recession model has ticked up, but still no recession in our outlook Source: Wells Fargo Securities, LLC

Economic Outlook 5 Credit Spreads Past tightening cycles show that credit spreads have a tendency to narrow Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Economic Outlook 6 Late Stages of the Credit Cycle Phases of the Credit Cycle  Recovery Phase  Consolidation Phase  Deterioration Phase Material Deterioration  During the advanced stage of a credit cycle companies become more aggressive with their balance sheets.  Aggregate leverage is expected to rise throughout the year as borrowing outpaces earnings.  Debt-driven M&A, leveraged recaps and LBOs are all on the rise.  However, some sectors and companies are attempting to repair balance sheets. Source: Wells Fargo Securities, LLC

Economic Outlook 7 Wages & Salaries Wage growth is beginning to show signs of picking up which should be an added boost to consumer spending Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC

Economic Outlook 8 Consumer Spending Solid improvement in consumer spending is helping to drive overall economic growth. Consumer balance sheets are healthy and increased purchasing power due to the drop in gasoline prices is helping to fuel growth Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Retail Sales Real Consumer Spending

Economic Outlook 99 Household Balance Sheets Asset prices have risen much faster than income and the ratio of household assets to after-tax income has surged, indicating that spending gains have become more dependent upon wealth. Source: Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities, LLC Assets-to-Disposable Income RatioHousehold Wealth

Economic Outlook 10 Household Finances Although consumer leverage remains elevated relative to historical norms, it is well off its prerecession high and debt service has returned to more sustainable levels Source: Federal Reserve Board and Wells Fargo Securities, LLC Debt Service Debt to Income

Economic Outlook 11 Wages & Salaries and Consumer Credit Wages & salaries move inversely with credit card delinquencies Source: U.S. Department of Labor, FRBNY and Wells Fargo Securities, LLC

Economic Outlook 12 Household Debt & Delinquencies Student loan debt has soared over the past decade and is now the second largest debt of U.S. households and has the highest delinquency rate Source: Federal Reserve Board and Wells Fargo Securities, LLC Household DebtHousehold Debt Delinquencies

Economic Outlook 13 Consumer Confidence Consumer confidence has improved and is approaching levels consistent with modest growth in consumer spending Source: The Conference Board and Wells Fargo Securities, LLC 13

Economic Outlook 14 Consumer Confidence Consumers continue to indicate that they plan on taking a vacation, which should continue to bode well for the lodging industry Source: The Conference Board and Wells Fargo Securities, LLC

London 15 Personal Income Income growth has finally begun to turn around but still lags prior recoveries Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Economic Outlook 16 Oil Prices As global oil prices bottom out, discretionary consumer spending has picked up as consumers take advantage of lower gasoline prices. However, any boost in consumption may be offset by the negative effects on capital spending Source: U.S. Energy Information Administration, U.S. Department of Commerce and Wells Fargo Securities, LLC WTI Oil PricesBrent Oil Prices

Economic Outlook 17 Consumer and Fuel Prices The decline in gasoline prices represents a boon to households across the income spectrum Source: U.S. Department of Labor and Wells Fargo Securities, LLC Total Spending Spending Share

Economic Outlook 18 Employment Situation Slack in the labor market is steadily diminishing and wage growth is beginning to show some signs of picking up Source: U.S. Department of Labor and Wells Fargo Securities, LLC Unemployment Rate

Economic Outlook 19 Employment Situation The increase in employment for the year old cohort (Millennials) should help spur travel activity Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Economic Outlook 20 Inflation Members of the FOMC expect inflation to rise over the course of the year and approach its long-run target this year as the economy gradually strengthens and inflation expectations remain stable Source: U.S. Department of Commerce, Federal Reserve Board and Wells Fargo Securities, LLC

Economic Outlook 21 Inflation The stronger dollar and lower energy prices are having a bigger impact on core goods than services prices Source: U.S. Department of Labor and Board and Wells Fargo Securities, LLC Shelter Inflation Core Goods vs. Services Inflation

Economic Outlook 22 Lift-Off: Pace of Policy Firming The FOMC Committee continues to downshift its expectations for the Federal Funds rate path Source: Federal Reserve Board and Wells Fargo Securities, LLC

Economic Outlook 23 Fed Balance Sheet As expected, the Fed’s bond buying program ended in October. Now the focus is on when the Fed will begin whittling down its balance sheet Source: Federal Reserve Board and Wells Fargo Securities, LLC

Economic Outlook 24 Productivity & Income If labor productivity growth remains weak, the paltry pace of real income growth seems set to continue Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC

Economic Outlook 25 Wage Fundamentals Inflation and productivity are two of the major drivers of wages Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC

Economic Outlook 26 U.S. Forecast

Hotel Macro Correlations

Economic Outlook 28 Hotel Correlations Hotel demand has surged in recent years and is expected to continue to strengthen along with accelerating economic growth Source: Smith Travel Research, U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC Hotel Demand vs. Real GDPHotels

29 Hotel Correlations Hotel demand is closely correlated to trends in employment. As the labor market continues to strengthen, hotel demand will continue to climb Source: Smith Travel Research, Inc., U.S. Department of Labor and Wells Fargo Securities, LLC Hotel Demand vs. EmploymentTourism-Related Employment

30 Hotel Correlations Visitation to the U.S. continues to improve, despite dollar appreciation, and is leading to an increase in hotel demand Source: Smith Travel Research, Inc., Bloomberg LP, U.S. Bureau of Transportation and Wells Fargo Securities, LLC Hotel Demand vs. EnplanementVisitation to the U.S.

31 Hotel Correlations The increase in hotel demand has led to a pickup in RevPAR growth Source: Smith Travel Research, Inc., U.S. Department of Commerce and Wells Fargo Securities, LLC Hotel Demand vs. RevPARAmusement & Recreation

32 Hotel Correlations Import prices do not appear to be a strong driver of hotel demand Source: Smith Travel Research, Inc. and Wells Fargo Securities, LLC Hotel Demand vs. Import PricesImport Prices

Economic Outlook 33 Hotel Pipeline Almost two-thirds of the pipeline is in upscale and upper midscale chain-hotels Source: Smith Travel Research and Wells Fargo Securities, LLC

Economic Outlook 34 Hotel Pipeline Most hotel rooms are either in construction or final planning stages Source: Smith Travel Research and Wells Fargo Securities, LLC

Economic Outlook 35 Opportunities - South Florida Employment Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Economic Outlook 36 Opportunities - California Employment Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Appendix

Economic Outlook 38 Recent Special Commentary Wells Fargo Economics Group Publications To view any of our past research please visit: economics To join any of our research distribution lists please visit: economics A Sampling of Our Recent Special, Regional & Industry Commentary

Economic Outlook Wells Fargo Securities, LLC Economics Group 39 John E. Silvia … … Global Head of Research and Economics Diane Schumaker-Krieg ………………… …… Global Head of Research & Economics Chief Economist Mark Vitner, Senior Economist……………....……….. Jay H. Bryson, Global Economist …………………....…… …. Sam Bullard, Senior Economist Nick Bennenbroek, Currency Anika R. Khan, Senior Economist …. Eugenio J. Alemán, Senior Economist… …… Tim Quinlan, Economist …………………… Senior Economists Erik Nelson, Economic Analyst Alex Moehring, Economic Analyst Misa Batcheller, Economic Analyst Michael Pugliese, Economic Analyst Julianne Causey, Economic Analyst Economists Azhar Iqbal, Econometrician………………… Eric J. Viloria, Currency Strategist Sarah House, Economist …………… ………… Michael A. Brown, Economist ……………… … Economic Analysts Administrative Assistants 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. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2016 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE Important Information for Non-U.S. Recipients For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority’s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only. Donna LaFleur, Executive Assistant.