1. Anika R. Khan, Senior Economist May 3, 2017
2017 Economic Outlook
Anika R. Khan, Senior Economist
May 3, 2017

2. Global Economic Growth
Five Critical Themes
U.S.
Economic Growth
On the back of solid consumer spending, U.S. domestic demand has shown “resilience.” Growth in the labor market remains steady and inflation is approaching the Fed’s target
Fiscal Policy
With the stall in ACA legislation, markets are cautious on whether the administration will be able to pass tax reform this year. Some believe the more plausible route is to include infrastructure spending in the tax reform package. Markets are awaiting the details
Monetary Policy
Tightening in the labor market and gradually rising inflation are supportive of two additional rate hikes this year. The Fed is also messaging it will begin normalizing its balance sheet late this year
Global Economic Growth
The slowdown in global growth is largely due to economic uncertainties in the developing world. However, much of the headwinds are behind us
Upside & Downside Risks
The drag from the oil collapse is now behind us, giving a boost to business fixed investment. Moreover, sentiment remains elevated. That said, uncertainty around monetary and fiscal policy and geopolitical risks could weigh on activity

3. Economic Growth
We are now seven years into the recovery and economic growth is increasing at a steady pace. Despite a slow start to 2017, activity is expected to grow between 2-2.5
Real GDP Forecast
Output Gap
Source: U.S. Department of Commerce, CBO and Wells Fargo Securities 3 3

4. Potential Growth – Little Help From Productivity
Historically, slow productivity growth suggests potential real GDP will also remain low
Source: Federal Reserve Board and Wells Fargo Securities

5. Business Fixed Investment
During the current expansion, nonresidential fixed investment spending is much lower than previous cycles
Source: U.S. Department of Commerce and Wells Fargo Securities

6. Oil Prices & Inventory
Oil prices have bounced off their recent lows and rig count is rising. There is still a great deal of oil in inventory around the world and production remains strong overseas. The breakeven price for oil production in the U.S. has also fallen
Oil Prices
Oil Inventory
Source: Baker Hughes Inc., EIA and Wells Fargo Securities 6 6

7. Real Consumer Spending
Solid improvement in consumer spending is helping to drive overall economic growth. The tight labor market and gradual increase in wage and salary growth will help activity in 2017
Real Consumer Spending
Retail Sales
Source: U.S. Department of Commerce and Wells Fargo Securities

8. 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
Assets-to-Disposable Income Ratio
Personal Saving Rate
Source: Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities, LLC 8 8

9. 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
Debt to Income
Debt Service
Source: Federal Reserve Board and Wells Fargo Securities, LLC

10. Residential Investment Spending
Residential investment jumped from a low base during the quarter and improving household formations suggest the pickup is sustainable
Residential Investment Spending
Household Formations
Source: U.S. Department of Commerce and Wells Fargo Securities 10 10

11. Employment Situation
Slack in the labor market is steadily diminishing and wage growth is rising from a low level. Relatively inexpensive labor may be inciting businesses to deploy capital in hiring
Unemployment Rate
Wage Growth
Source: U.S. Department of Labor , Federal Reserve Bank of Atlanta, National Federation of Independent Business and Wells Fargo Securities 11 11

12. Potential Growth—Little Help from Labor
Labor force participation has improved, particularly for prime-age workers, but remains historically low
Working Age Population
Labor Force Participation
Source: U.S. Department of Labor and Wells Fargo Securities 12

13. Inflation
Alternative measures of underlying inflation show the recent rise in core PCE is long overdue
Source: U.S. Departments of Labor & Commerce, Federal Reserve System and Wells Fargo Securities

14. Inflation
Although the stronger dollar and lower energy prices pulled core goods prices lower, they are now serving as tailwinds
Source: U.S. Department of Labor and Wells Fargo Securities 14

15. Lift-Off: Pace of Policy Firming
The FOMC Committee has boosted its expectations for the Federal Funds rate path, with three expected hikes in 2017
Source: Federal Reserve Board and Wells Fargo Securities

16. Fed Balance Sheet
The Fed is beginning to lay the groundwork for unwinding the $4.5 trillion balance sheet
Source: Federal Reserve Board and Wells Fargo Securities, LLC

17. Commercial Property Price Index
High commercial property prices have caught the Fed’s attention
Source: Real Capital Analytics, Inc. and Wells Fargo Securities

18. Global Real GDP Growth
Global real GDP growth is expected to remain below the robust pace seen in the previous expansion
Source: IHS Global Insight and Wells Fargo Securities

19. Economic Policy Uncertainty
The Index of Economic Policy Uncertainty reached its highest level on record during the debt ceiling debate, but also typically rises during elections
Source: Economic Policy Uncertainty and Wells Fargo Securities

20. 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 85 percent by 2026
Composition of Federal Spending
Federal Debt Continues to Rise
Source: Congressional Budget Office and Wells Fargo Securities 20 20

21. CBO Fiscal Multipliers
The fiscal multiplier during recessions is much larger than during expansions, suggesting the late-cycle lift from tax reform, infrastructure and defense spending could be less than originally anticipated
Source: Congressional Budget Office and Wells Fargo Securities

22. U.S. Forecast 22

23. Housing & Apartments

24. Home Sales Should Continue to Improve, Despite Modestly Higher Mortgage Rates
Home sales have slowly recovered over the past seven years but remain well below their previous highs and are particularly low relative to where we are in the cycle.
Source: National Association of Realtors, U.S. Department of Commerce and Wells Fargo Securities

25. Inventories Remain Exceptionally Lean, Which Is Limiting Home Sales
The supply of for-sale homes remains near all-time lows relative to sales.
A large proportion of home owners are relatively complacent in their current home and unwilling to relocate, which has clogged the normal progression in homeownership.
Source: National Association of Realtors and Wells Fargo Securities 25

26. The Recovery in Home Price Is a Matter of Perspective
The persistence of lean inventories has helped support home prices. Nominal home prices have surpassed their previous peak level but prices remain well below their past highs after adjusting for inflation.
Source: S&P, CoreLogic, Inc. and Wells Fargo Securities

27. U.S. Homeownership Rate at Multi-Decade Low
The long slide in the homeownership rate may have finally ended. The recovery in homeownership is likely to be protracted due to a combination of cyclical and structural factors.
Source: U.S. Department of Commerce and Wells Fargo Securities 27

28. Homeownership Has Fallen Across Age Groups
The decline in homeownership has been most prominent among younger households.
Source: U.S. Department of Commerce and Wells Fargo Securities 28

29. Demographics Trends: Friend or Foe to Housing Market?
A steady stream of Millennials are approaching the age that homeownership tends to rise.
Source: U.S. Department of Commerce and Wells Fargo Securities 29

30. The U.S. population has become much more diverse.
Demographics
The U.S. population has become much more diverse.
Source: U.S. Department of Commerce and Wells Fargo Securities

31. The U.S. will become even more diverse over the next fifty years.
Demographics
The U.S. will become even more diverse over the next fifty years.
Source: U.S. Department of Commerce and Wells Fargo Securities

32. Americans are moving much less often than in the past.
Mobility Has Declined
Americans are moving much less often than in the past.
The motivations for moving are not as strong as they were in previous decades.
Source: U.S. Department of Commerce and Wells Fargo Securities

33. 20 Largest MSA Population Gains
Population growth has been highly concentrated in a relative handful of metropolitan areas.
The universe of metros that young people are moving to is even smaller, which has left many markets with a very poor demographic underpinning.
Source: U.S. Department of Commerce and Wells Fargo Securities

34. Supply Side Challenges: Construction Labor Shortage
The lack of readily available experienced construction workers has become a limiting factor for new home construction in many of the nation’s housing markets.
Source: National Association of Home Builders and Wells Fargo Securities 34

35. Supply Side Challenges: Rising Materials Prices
Prices for key construction commodities have been rising.
Source: U.S. Department of Labor and Wells Fargo Securities 35

36. Mortgage Originations
Credit has been unusually constrained for borrowers with lower credit scores.
Source: FRBNY and Wells Fargo Securities

37. Single-Family Starts Are Gaining Momentum, as Apartments Begin to Moderate
After a very slow start, we see single-family homebuilding steadily gaining momentum over the next few years
Apartment construction is showing signs of topping out but should remain near recent levels
Source: U.S. Department of Commerce and Wells Fargo Securities 37

38. Apartment Cycle – Occupancy Rate
Source: CoStar and Wells Fargo Securities, LLC

39. Apartment Effective Revenue Growth
Source: Reis, Inc. and Wells Fargo Securities, LLC

40. Women in the Economy

41. The Gender Pay Gap Persists
Women earn just 80 cents for every dollar earned by men.
While this figure is accurate, it is somewhat blunt in its measurement as the causes of the gender pay gap are multi-faceted.
Source: U.S. Department of Commerce and Wells Fargo Securities

42. Experience: Women in the Workforce
After joining the workforce in increasing numbers from the late-1940s to the late 1990s, female labor force participation has plateaued.
Source: U.S. Department of Labor and Wells Fargo Securities

43. Experience: Limited Hours Restricts Women’s Acquisition of Skills
While most women choose to work part time, a consistently greater share of women report being under-employed relative to men.
Part-Time Employment
Under-Employed Women
Source: U.S. Department of Labor and Wells Fargo Securities 43 43
Economic Outlook

44. Gender Differences in Occupation
Differences in industry and occupation are the largest cause of variation in pay, and can explain roughly 50 percent of the gender wage gap.
Occupational Employment
Women in S&P 500 Companies
Source: U.S. Department of Labor, Catalyst and Wells Fargo Securities 44 44
Economic Outlook

45. Men Earn More in Nearly Every Occupation
Even in female-dominated fields, men tend to earn more.
Source: U.S. Department of Labor and Wells Fargo Securities

46. Breaking Down the Gender Pay Gap
Experience
14 percent: Time out of the labor force and fewer hours worked due to more housework and family care
Occupation
33 percent: Men 5x more likely to be engineers while women are 9x more likely to be receptionists
Industry
18 percent: Women are overrepresented in education & health services and underrepresented in construction and manufacturing
Education
- 6 percent: Young women enrolling in college at higher rate, share of women with bachelors degree or higher on par with men
Unexplained
38 percent of the gender wage gap remains unexplained
Source: Blau & Khan 2010 and Wells Fargo Securities

47. The Gender Wage Gap: Unexplained
After controlling for a host of characteristics, 38 percent of the gender wage gap remains unexplained.
Explaining the Gender Wage Gap
38% remains unexplained
Implicit/unconscious bias
Negotiation
Sponsors vs. Mentors
Wage-penalty for flexibility
Sources: Blau & Khan 2010 , The Girl with the Draggin’ W-2 and Wells Fargo Securities 47 47

48. The Economic Case for Closing the Wage Gap
Further convergence in the gender pay gap could help lift female labor force participation and support growth in the labor supply—an oft-cited factor for explaining below-trend GDP growth.
GDP Growth
Slow Growth in Labor Force
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities 48 48
Economic Outlook

49. The Economic Case for Closing the Wage Gap
Narrowing the wage gap would also support growth in real household incomes, as family incomes have been greatly enhanced by more women entering the workforce.
Source: U.S. Department of Commerce and Wells Fargo Securities

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