1. Global Economic Outlook
Tim Quinlan, Senior Economist
February, 2017

2. 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

3. 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

4. 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

5. 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

6. 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

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

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

9. 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

10. 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

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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

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

23. 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

24. U.S. Forecast 24

25. Red Ink Rising
The federal budget deficit was $587 billion in FY 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

26. 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

27. 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

28. Regional Trends

29. 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

30. 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

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

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. International Developments

40. 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

41. 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

42. 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

43. 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

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

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

46. 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

47. 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

48. 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

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

50. 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

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

52. 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

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

54. 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

55. Wells Fargo Securities Economics Group
Diane Schumaker-Krieg …………………
Global Head of Research & Economics
Global Head of Research and Economics
Eric J. Viloria, Currency Strategist
Sarah House, Economist
Michael A. Brown, Economist
Jamie Feik, Economist
Economists
John E. Silvia
Chief Economist
Mark Vitner, Senior Economist
Jay H. Bryson, Global Economist
Sam Bullard, Senior Economist
Nick Bennenbroek, Currency Strategist
Anika R. Khan, Senior Economist
Eugenio J. Alemán, Senior Economist
Azhar Iqbal, Econometrician
Tim Quinlan, Senior Economist
Senior Economists
Economic Analysts
Erik Nelson, Currency Analyst
Misa Batcheller, Economic Analyst
Michael Pugliese, Economic Analyst
Julianne Causey, Economic Analyst
E. Harry Pershing, Economic Analyst
Administrative Assistants
Donna LaFleur, Executive Assistant
Dawne Howes, Administrative Assistant
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