2016 Southwest Business Forum Global Economic Outlook Tim Quinlan, Economist January 6, 2016

Economics 2 Pace of Policy Firming After months of feet-dragging, Fed finally delivered the first rate hike in nine years on December 16 Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities, LLC

Economics 3 Unemployment The labor market is steadily firming, the unemployment rate is spot-on the FOMC’s central tendency target Source: U.S. Department of Labor, Federal Reserve Board and Wells Fargo Securities, LLC

Economics 4 Labor Turnover The recent pickup in job openings and quits are consistent with recently strong employment gains, although there is potential for moderation going forward Source: U.S. Department of Labor and Wells Fargo Securities, LLC Separations Hiring

Economics 55 Inflation Low oil prices continue to weigh on headline inflation, but core inflation has remained fairly stable Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

66 Tech in 2000 Vs. Oil Today Is the decline in energy prices a harbinger of recession like in 2000 when the collapse in the NASDAQ foreshadowed the subsequent economic downturn in 2001? Source: Bloomberg LP, IHS Global Insight and Wells Fargo Securities, LLC Crude Oil over the Past 10 Years Tech Stocks in the Late 1990s & Early 2000s

Supply/ Demand Imbalance 7  Persistent supply gluts combined with softer demand have resulted in a global imbalance that has lasted longer than most analysts expected.  There is more to price forecasting than supply and demand, but the chart below is not encouraging for the trajectory for oil prices. CLO Spreads Source: IHS Global Insight and Wells Fargo Securities, LLC

88 Employment / Share of S&P Market Cap Market Cap Employment Source: U.S. Dept. of Commerce, Bureau of Labor Statistics, (Energy Industries include: petroleum and coal products, support activities for mining, pipeline transportation), Standard and Poor’s and Wells Fargo Securities, LLC  The tech sector in 2000 comprised a 4X larger share of employment and was more than a third of the market cap of the S&P 500.  Energy in the summer of 2014 was only about 10% of the market cap.

99 Business Fixed Investment Source: U.S. Department of Commerce, and Wells Fargo Securities, LLC Value Added Fixed Investment  Capex in the tech sector comprises a 22% share of all business investment spending.  Investment in the energy (while a key driver of growth from ) still comprised less than 6% of all business outlays.

10 Energy Share of Debt Market Source: Bloomberg LP and Wells Fargo Securities, LLC High Yield Investment Grade  Energy’s drag could be more visible in the bond market. Our credit strategy team thinks that low commodity prices, energy and materials will likely continue to serve as the greatest headwinds for the HY market.  With energy comprising a 14.3% share of the HY market, that makes sense to us.

Takeaways Conclusions and Our Current Thoughts on the Economy  Oil and commodity price weakness means everything to businesses heavily reliant on the sector. But for the broader economy, the price weakness alone will not push us into recession. The price dynamic is still a major negative, but compared to last year, oil should be less of a factor in holding back business spending and holding down inflation. Consumer spending should get some help from increased discretionary income as a result of smaller fuel outlays.  Big issues for the economy in 2016 will be the ongoing drag from trade, occasional disruptions from inventories and steady growth in both consumer spending and housing activity.  Below-target inflation will be most important factor in pace of Fed rate increases. Any stabilization in oil prices will mean less of a price drag compared to last year. 11

Economics 12 Global Supply/Demand Balance Crude Oil Market Update – Not Returning to S/D Balance Anytime Soon Source: US Energy Information Administration Short Term Energy Outlook, May, Aug 2015 September May

Economics 13 World Liquid Fuels Consumption Crude Oil Market Update: Reason to Care About the Economy Source: US Energy Information Administration Short Term Energy Outlook, November 2015

Economics 14 Real GDP Forecast Outlook is for below-trend growth to continue Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Economics 15 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, LLC

Economics 16 Household Balance Sheets A recovery in household asset values has boosted net worth, but households continue to save at a higher rate than during the past expansion Source: Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities, LLC Household Net WorthHousehold Assets

Economics 17 Household Balance Sheets Consumer deleveraging may be nearing an end, but monthly debt and other financial obligation payments remain near historic lows Source: Federal Reserve Board and Wells Fargo Securities, LLC Financial Obligations RatioHousehold Debt

Economics 18 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, LLC

Economics 19 ISM Weakness in the ISM index suggests that in the midst of broader economic expansion, the factory sector is in contraction Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Economics 20 Core Capital Spending Weakness in core capital goods orders has not been as pronounced, but we saw broad declines in the second half of 2014 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Economics 21 Inflation Although factory orders have shown considerable weakness in recent months, much of this can be attributed to price declines, particularly in the energy sector, as orders are reported in nominal terms Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Economics 22 Business Spending Tough to find reasons to get excited about prospects for capital outlays Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Economics 23 How Will Business Spending Fare as FOMC Raises Rates? Past tightening cycles show that credit spreads have a tendency to narrow and equipment spending often improves even as the Fed raises rates. Source: Bloomberg LP, U.S. Department of Commerce and Wells Fargo Securities, LLC Capex Credit Spreads

Economics 24 Inventories Quite a bit of stockpiling against a backdrop of weak business investment spending is an indication that the recent pace of the inventory build is unsustainable and could be a drag on 2H growth. Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Inventory Change & Investment Inventory Contribution

Economics 25 U.S. Forecast

International Developments

Economics 27 Chinese Stock Market What are the implications of the Chinese stock market volatility for the Chinese economic outlook Source: Bloomberg LP and Wells Fargo Securities, LLC

Economics 28 Chinese Household Assets Equities represent a small proportion of household assets in China Source: CEIC and Wells Fargo Securities, LLC

Economics 29 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, LLC

Economics 30 Eurozone Real GDP 2 Years of Uninterrupted Growth Source: IHS Global Insight and Wells Fargo Securities, LLC

Economics 31 Eurozone PMIs The Eurozone purchasing managers’ indices are pointing to continued recovery Source: Bloomberg LP and Wells Fargo Securities, LLC

Economics 32 Eurozone Bank Lending Bank lending in the euro area is starting to grow again after two years of contraction Source: IHS Global Insight and Wells Fargo Securities, LLC

Economics 33 Outstanding Government Debt The outstanding debt of the Spanish and Italian governments swamps the others Source: IHS Global Insight Wells Fargo Securities, LLC

Economics 34 Japanese Monetary Base The expansion of the monetary base will continue to expand the size of the BoJ’s balance sheet considerably Source: Bank of Japan, IHS Global Insight and Wells Fargo Securities, LLC

Economics 35 Monetary Base Comparison The expansion of the monetary base in Japan is really just playing catch-up ball with the Fed and ECB Source: Bloomberg LP and Wells Fargo Securities, LLC

Economics 36 FX Forecast Eventual Fed tightening should be dollar positive. Euro to face more weakness as slow growth profile remains consistent with continued QE. Commodity currencies could go lower weighed down by easy- money policies Source: Wells Fargo Securities, LLC

Economics 37 Global Forecast Growth in the global economy likely will grind closer to long term trend Source: International Monetary Fund and Wells Fargo Securities, LLC

Economics Wells Fargo Securities, LLC Economics Group 38 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 Nick Bennenbroek, Currency Eugenio J. Alemán, Senior Economist… Anika R. Khan, Senior Economist …. Senior Economists Erik Nelson, Economic Analyst Alex Moehring, Economic Analyst Misa Batcheller, Economic Analyst Michael Pugliese, Economic Analyst Economists Azhar Iqbal, Econometrician………………… Tim Quinlan, Economist …………………… 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 © 2015 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. Cyndi Burris, Senior Administrative Assistant