Global Economic Outlook Tim Quinlan, Senior Economist February, 2017

Four Key Themes Post Election What Changes Probability distribution of potential outcomes greater Infrastructure spend + less regulation = happy markets But does stimulus at/near full employment make sense Monetary Policy After December hike, focus shift to asset bubbles Get ready for inflation, maybe hyper-inflation Debt Sustainability Budget deficit is large and growing National Debt is Large and Growing Global Growth 2016 weakest global growth year since 2009 – low point? Global GDP to pick up OECD upgraded forecast – bolsters commodity prices

GDP and Fed Funds “Long-Run” Expectations from the Fed Over the past several years, the Fed has dialed-back it own estimates of potential GDP growth as have private-sector economists and Congressional Budget Office Openings Separations Source: Federal Reserve and Wells Fargo Securities

GDP forecasts have not moved dramatically after the election Despite Financial Market Reaction, Forecasts Haven’t Changed Substantially After Election GDP forecasts have not moved dramatically after the election Source: Bloomberg LP and Wells Fargo Securities

Government Spending Trump’s campaign focused on increased spending on infrastructure and defense, which suggests government spending is set to rise over the next few years. Actual spend will probably be much less than the grand infrastructure plan discussed in the media. Source: U.S. Department of Commerce and Wells Fargo Securities

Outlook is for below-trend growth to continue Real GDP Forecast Outlook is for below-trend growth to continue Source: U.S. Department of Commerce and Wells Fargo Securities

Potential Growth—Little Help From Productivity Productivity growth has downshifted over the past cycle Source: U.S. Department of Labor and Wells Fargo Securities

Business Spending Tough to find reasons to get excited about prospects for capital outlays Source: U.S. Department of Commerce and Wells Fargo Securities

Business Fixed Investment Energy has been a significant drag on business investment since the oil collapse, but capital spending has slowed more broadly during the first half of the year. Election uncertainty? Business Investment Ex-Mining Energy Share of Investment Source: U.S. Department of Commerce and Wells Fargo Securities 9

The OPEC meeting helped oil get back above $50 Oil Prices The OPEC meeting helped oil get back above $50 Source: Baker Hughes Inc., Bloomberg LP and Wells Fargo Securities

We see oil prices trending gradually higher toward the low $60s Source: IHS Global Insight and Wells Fargo Securities

Oil Supply & Demand Factors Consumption is expected to grow faster than production over the next couple of years Source: Energy Information Administration and Wells Fargo Securities

We continue to look for a gradual recovery in homebuilding. Housing We continue to look for a gradual recovery in homebuilding. Apartment demand remains exceptionally strong but supply is catching up with demand. Single-family housing starts are beginning to ramp back up. Gains will be more modest than in past building cycles. Source: U.S. Department of Commerce and Wells Fargo Securities

Household Balance Sheets Consumer deleveraging may be nearing an end, but monthly debt and other financial obligation payments remain near historic lows Household Debt Financial Obligations Ratio Source: Federal Reserve Board and Wells Fargo Securities 14 14

Real PCE Forecast Consumer spending growth is set to moderate but remain positive throughout the forecast horizon Source: U.S. Department of Commerce and Wells Fargo Securities

Normalization is underway, another rate hike in December Pace of Policy Firming Normalization is underway, another rate hike in December Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities

Unemployment The labor market is steadily firming, the unemployment rate is in line with the FOMC’s central tendency target Source: U.S. Department of Labor, Federal Reserve Board and Wells Fargo Securities 17

Unemployment Rates Even the broadest measures of unemployment are roughly in line with prior cycles although “part-time for economic reasons” remains high Source: U.S. Department of Labor and Wells Fargo Securities

Labor Turnover Job openings appear to be leveling off, while the mix of turnover in the labor market remains healthy Openings Separations Source: U.S. Department of Labor and Wells Fargo Securities

Average Hourly Earnings Wage growth has picked up modestly but remains limited by lower-skilled workers entering the workforce and Baby Boomers beginning to retire Source: Federal Reserve Bank of Atlanta, U.S. Department of Labor and Wells Fargo Securities 20

Inflation Inflation has moved higher but remains below the Fed’s 2 percent target Source: U.S. Department of Commerce and Wells Fargo Securities 21

Inflation The services sector has pricing power, while goods prices are declining Source: U.S. Department of Commerce and Wells Fargo Securities 22

Inflation Rising Inflation remains historically low. However, the Trump administration is likely to favor growth over inflation concerns and therefore we expect inflation to move a bit higher than in our previous baseline outlook. Source: U.S. Department of Commerce and Wells Fargo Securities 23

U.S. Forecast 24

Red Ink Rising The federal budget deficit was $587 billion in FY 2016. This was the first increase in the deficit, relative to the size of the economy, since 2009. What happened? Revenue growth slowed dramatically, led lower by volatile tax sources such as corporate income taxes and non-withheld income tax receipts (such as capital gains). On the spending side, entitlement programs and net interest spending grew steadily Budget Deficit Back on the Rise Revenue Growth Has Slowed Significantly Source: U.S. Department of the Treasury and Wells Fargo Securities 25 25

Long-Run Outlook: From Bad to Worse? The debt-to-GDP ratio is set to rise as an aging population, rising medical care costs and net interest spending grow. Trillion dollar deficits return by 2024 according to the CBO. If President Trump leaves entitlements untouched, cuts taxes and increases discretionary spending, the outlook will worsen fiscally given CBO’s baseline Net Treasury issuance would rise even faster than currently anticipated in coming years The Long-Run Outlook Is Ominous Deficit Drivers Source: Congressional Budget Office, U.S. Department of the Treasury and Wells Fargo Securities 26 26

Fed Implications Fiscal stimulus could take some pressure off the Fed to keep policy as accommodative More rapid inflation could also lead the Fed to tighten more than previously anticipated Higher interest rates would create even more budget challenges and potentially lead to further political pressure on the Fed Inflation Expectations Are on the Rise Low Rates and High Debt: A Dangerous Combo Source: Bloomberg LP, U.S. Department of the Treasury, U.S. Department of Commerce and Wells Fargo Securities 27 27

Regional Trends

Year-over-Year Percent Change in Real GDP Growth by State (Q2 2016) Economic growth varies considerably throughout the United States. States with large technology sectors continue to post the strongest gains. The Southeast is also benefitting from an influx of new businesses and retirees. Source: U.S. Department of Commerce and Wells Fargo Securities

Year-over-Year Employment Growth by State (November 2016) Job growth has been strongest in the Pacific Northwest and Southeast Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities

Economic growth in Pennsylvania has started to outpacing the nation's Source: U.S. Department of Commerce and Wells Fargo Securities

Employment Situation: Pennsylvania Job growth in Pennsylvania has slowed recently. Employment growth has been the strongest in the education & health services, professional & business services and leisure & hospitality sectors Nonfarm Employment Employment by Industry Source: U.S. Department of Labor and Wells Fargo Securities 32 32

Pennsylvania Employment Growth by MSA Most of Pennsylvania’s larger metro areas are seeing a pickup in growth Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities

Housing Market: Pennsylvania The housing market in Pennsylvania has not fully recovered from the Great Recession and remains below long-term averages Housing Permits Home Prices Source: U.S. Department of Commerce, CoreLogic and Wells Fargo Securities 34 34

Pennsylvania Population Growth Population growth has declined for the first time in nearly three decades Source: U.S. Department of Commerce and Wells Fargo Securities

The economy is starting to strengthen in Harrisburg Harrisburg, PA The economy is starting to strengthen in Harrisburg Source: U.S. Department of Commerce and Wells Fargo Securities

Employment Situation: Harrisburg, PA Job growth in Harrisburg has reportedly slowed since the start of last year, with payrolls growing at a 0.5 percent pace. The QCEW data suggests that hiring has been understated and could be revised higher Nonfarm Employment Employment by Industry Source: U.S. Department of Labor and Wells Fargo Securities 37 37

Housing Market: Harrisburg, PA Single-family home building is steadily rising. The pickup in growth is being driven by an increase in young professional moving to the area Housing Permits Population Growth Source: U.S. Department of Commerce and Wells Fargo Securities 38 38

International Developments

Sovereign Yields Government bond yields have declined across the globe but have jumped since the election Source: Federal Reserve Board, IHS Global Insight and Wells Fargo Securities

But short-term rates remain firmly negative Negative Rates But short-term rates remain firmly negative Standard inst Source: Bloomberg LP and Wells Fargo Securities

Foreign Purchases of U.S. Securities Capital flows and asset allocation by global investors play a strong role in rate determinations Less appetite for Treasuries growing appetite for Agencies Standard inst Source: U.S. Department of the Treasury and Wells Fargo Securities

Implications of Brexit have not been as bad as feared U.K. GDP Growth Implications of Brexit have not been as bad as feared Source: IHS Global Insight and Wells Fargo Securities 43

Eurozone Real GDP 3+ Years of Uninterrupted Growth Source: IHS Global Insight and Wells Fargo Securities

Eurozone PMIs The Eurozone purchasing managers’ indices are pointing to continued recovery Source: Bloomberg LP and Wells Fargo Securities

ECB Balance Sheet The ECB’s QE program should remain operational through at least March 2017 Source: IHS Global Insight and Wells Fargo Securities 46

Global trade has slowed over the past year Global Exports Global trade has slowed over the past year Standard inst Source: IHS Global Insight and Wells Fargo Securities

China Real GDP Growth in China has stabilized, but we do not expect it to return to the double-digit growth rates seen in the past Source: Bloomberg LP and Wells Fargo Securities

Mixed track record for Abenomics Japanese GDP Mixed track record for Abenomics Source: Bank of Japan, IHS Global Insight and Wells Fargo Securities

Japanese Monetary Base The expansion of the monetary base will continue to expand the size of the BoJ’s balance sheet considerably; The move into negative rates is dangerous and uncharted ground Source: Bank of Japan, IHS Global Insight and Wells Fargo Securities

Japanese Currency Intervention? Talk of currency intervention is misplaced in our view Source: Bank of Japan, IHS Global Insight and Wells Fargo Securities

OECD’s updated forecast: Global GDP Growth 2016 will likely mark the weakest year for global economy since 2009, but we see gradual improvement in coming years OECD’s updated forecast: 3.3% in 2017 3.6% in 2018 Source: International Monetary Fund and Wells Fargo Securities

Global Forecast Growth in the global economy likely will grind closer to long term trend Source: International Monetary Fund and Wells Fargo Securities 53

Dollar expected to grind higher against most currencies Currency Forecast Dollar expected to grind higher against most currencies Source: International Monetary Fund and Wells Fargo Securities 54

Wells Fargo Securities Economics Group Diane Schumaker-Krieg ………………… ……….diane.schumaker@wellsfargo.com Global Head of Research & Economics Global Head of Research and Economics Eric J. Viloria, Currency Strategist eric.viloria@wellsfargo.com Sarah House, Economist sarah.house@wellsfargo.com Michael A. Brown, Economist michael.a.brown@wellsfargo.com Jamie Feik, Economist jamie.feik@wellsfargo.com Economists John E. Silvia john.silvia@wellsfargo.com Chief Economist Mark Vitner, Senior Economist mark.vitner@wellsfargo.com Jay H. Bryson, Global Economist …jay.bryson@wellsfargo.com Sam Bullard, Senior Economist sam.bullard@wellsfargo.com Nick Bennenbroek, Currency Strategist nicholas.bennenbroek@wellsfargo.com Anika R. Khan, Senior Economist anika.khan@wellsfargo.com Eugenio J. Alemán, Senior Economist eugenio.j.aleman@wellsfargo.com Azhar Iqbal, Econometrician azhar.iqbal@wellsfargo.com Tim Quinlan, Senior Economist tim.quinlan@wellsfargo.com Senior Economists Economic Analysts Erik Nelson, Currency Analyst erik.f.nelson@wellsfargo.com Misa Batcheller, Economic Analyst misa.n.batcheller@wellsfargo.com Michael Pugliese, Economic Analyst michael.d.pugliese@wellsfargo.com Julianne Causey, Economic Analyst julianne.causey@wellsfargo.com E. Harry Pershing, Economic Analyst edward.h.pershing@wellsfargo.com Administrative Assistants Donna LaFleur, Executive Assistant donna.lafleur@wellsfargo.com Dawne Howes, Administrative Assistant dawne.howes@wellsfargo.com 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 © 2017 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 2007. 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. 55 55 55