Mark Vitner, Managing Director & Senior Economist March 8, 2017 U.S. Economic Outlook Mark Vitner, Managing Director & Senior Economist March 8, 2017

How Will The Trump Presidency Impact the Economy Economic Outlook After growing 1.6 percent in 2016, we expect real GDP to rise 2.3 percent this year. The risk is now more heavily weighted to the upside, however, with tax cuts, defense outlays and regulatory reforms becoming a tailwind. Globalization Trump’s election signals a pause in the push toward globalization. Trade, tourism, immigration and foreign direct investment are all being impacted significantly. Monetary Policy The era of ultra low interest rates is ending. Monetary policy is now focusing on normalizing interest rates and working to offset more typical late cyclical imbalances. Small Business Small business confidence spiked following the election, as hopes for tax cuts and regulatory reform increased. Expectations have risen more than current conditions. Housing Mortgage rates spiked following the presidential election but remain low relative to historical standards. Reforms to the mortgage market are likely.

Real Private Final Sales Economic Growth Real GDP growth has been solid but unspectacular. Real GDP growth has averaged a 2.1 percent pace since the recession has ended but growth has been very uneven. Growth has been concentrated in only a few sectors and metro areas have grown much faster than rural areas. Real GDP Forecast Real Private Final Sales Source: U.S. Department of Commerce and Wells Fargo Securities 3 3 Economic Outlook

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 below 5 percent and local area labor markets are tightening. Nonfarm Employment Unemployment Rate Source: U.S. Department of Labor and Wells Fargo Securities 4 4

Actual vs. Potential GDP After seven and a half years of modest economic growth, much of the excess slack in the economy has been eliminated Potential growth has slowed considerably from prior cycles, however, and a considerable gap remains between actual GDP and the previous trend in potential GDP. Source: U.S. Department of Commerce, CBO and Wells Fargo Securities

Labor Market: Wages Average hourly earnings’ growth has picked up modestly but remains limited by changes in the composition of the workforce. Younger less skilled workers are entering the workforce and older more skilled workers leaving it. The Atlanta Fed Wage Tracker provides a better measure of wage growth and shows wage gains accelerating. Source: Federal Reserve Bank of Atlanta, U.S. Department of Labor and Wells Fargo Securities 6

Inflation Expectations Long-term inflation expectations fell alongside oil. Market-based measures have shown signs of a rebound. Will survey measures follow? Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities

Oil Prices & Inventory While oil prices have risen from their 2016 lows, inventory remains elevated Oil Prices Oil Inventory Source: Baker Hughes Inc., IHS Global Insight and Wells Fargo Securities 8 8

NFIB Small Business Confidence Small Business Confidence surged following the presidential election. Small business owners are hopeful that President Trump will lower marginal tax rates and help roll back regulations. Source: NFIB and Wells Fargo Securities 9

Corporate Profits Corporate profits as a share of value added remain historically high but slowed over the past two years and the stronger dollar and weaker global growth cut into sales and margins. Source: U.S. Department of Commerce and Wells Fargo Securities

Government Spending Trump’s presidential campaign focused on increased spending on infrastructure and defense, which suggests government spending is set to rise over the next few years. Source: U.S. Department of Commerce and Wells Fargo Securities

Composition of Federal Spending Federal Debt Continues to Rise Federal Fiscal Policy The composition of federal spending has shifted dramatically. The CBO projects that the debt-to-GDP ratio will surpass 88 percent by 2027. Composition of Federal Spending Federal Debt Continues to Rise Source: Congressional Budget Office and Wells Fargo Securities 12

Housing Starts Multifamily housing should continue to account for a historically large share of new residential construction, but the mix is shifting back toward single-family construction Source: U.S. Department of Commerce and Wells Fargo Securities 13

Long-term yields spiked in the wake of the U.S. presidential election Interest Rates Long-term yields spiked in the wake of the U.S. presidential election Source: Federal Reserve Board, FHLMC and Wells Fargo Securities

The era of ultra-low interest rates is ending. Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities

Global Forecast Global economic growth is expected to gain momentum in 2017 but remain sluggish by recent historical standards Source: International Monetary Fund and Wells Fargo Securities 16

Regional Trends

Year-over-Year Percent Change in Real GDP Growth by State (Q3 2016) GDP growth has been strongest along the coasts Source: U.S. Department of Commerce and Wells Fargo Securities

Contribution to Economic Growth Economic growth has been concentrated in parts of the country with outsized exposure to the energy and tech sectors Source: U.S. Department of Commerce and Wells Fargo Securities

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

Employment by Industry North Carolina North Carolina continues to add jobs at a solid pace. The majority of key industry segments posted an increase in employment over the past year. Charlotte and Raleigh have seen notable job growth, and gains were also strong in the Triad and Asheville. Employment Employment by Industry Source: U.S. Department of Labor and Wells Fargo Securities 21 21

North Carolina Employment by Metro Area Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, 22

North Carolina Housing Market Residential construction activity has ramped up over the past year, but remains well below its pre-recession level. Apartment development has been booming, particularly in Charlotte and Raleigh. Single-family homebuilding is improving and should rise solidly in 2017. Housing Permits Population Growth Source: U.S. Department of Commerce and Wells Fargo Securities 23 23

North Carolina Home Prices Home prices in North Carolina have risen at a slightly slower rate than the national average. Source: CoreLogic and Wells Fargo Securities 24

The Triad Area The Triad’s historic ties to manufacturing have made for a more sluggish recovery. Nonfarm Employment Unemployment Rates Source: U.S. Department of Labor and Wells Fargo Securities 25 25

Greensboro-High Point MSA Greensboro has seen healthy employment gains over the past year. The region has reported particularly strong hiring in trade, transportation & utilities and education & health services. Nonfarm Employment Employment by Industry Source: U.S. Department of Labor and Wells Fargo Securities 26 26

Greensboro-High Point MSA Housing permits have gradually trended higher since the recession. Population growth is showing signs of moderating. Housing Permits Population Growth Source: U.S. Department of Commerce and Wells Fargo Securities 27 27

Employment by Industry Winston-Salem MSA Job growth has reportedly decelerated in Winston-Salem. The QCEW data suggest the slowdown is likely overstated. Education & health services, led by Wake Forest University, posted one of the largest employment increases and continues to add to local economic growth. Nonfarm Employment Employment by Industry Source: U.S. Department of Labor and Wells Fargo Securities 28 28

Winston-Salem MSA Residential construction activity has been slow to get back on track in Winston-Salem. Population growth has also been modest, as the metro has not experienced the same influx of new residents that has been seen in many other North Carolina areas. Housing Permits Population Growth Source: U.S. Department of Commerce and Wells Fargo Securities 29 29

U.S. Economic Forecast Source: IHS Global Insight and Wells Fargo Securities

Appendix

Economic Outlook Group Publications A Sampling of Our Recent Special, Regional & Industry Commentary To view any of our past research please visit: http://www.wellsfargo.com/ economics To join any of our research distribution lists please visit: http://www.wellsfargo.com/ economicsemail

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