1. The Big Picture: The U.S. Economy - Fiscal Policy to the Rescue?
Eugenio J. Alemán, Ph.D.
Director and Senior Economist
April 2018

2. Consumer confidence has surged since the election.
Source: The Conference Board and Wells Fargo Securities

3. Small Business Confidence
Small businesses are also upbeat since the election.
Source: The Conference Board and Wells Fargo Securities

4. Mortgage and Treasury Rates
Mortgage rates have continued to increase, following the Fed.
Source: Freddie Mac, Federal Reserve Board and Wells Fargo Securities

5. Federal Fiscal Results
Not very good at generating surpluses!
Source: U.S. Treasury and Wells Fargo Securities

6. U.S. Budget Gap
The federal government faces some significant fiscal challenges—the current path is not sustainable.
Source: Congressional Budget Office and Wells Fargo Securities

7. 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

8. Real Disposable Income
Americans have decreased the amount they are saving in order to keep consumption from slowing down.
Source: U.S. Department of Commerce and Wells Fargo Securities

9. Americans decreased their savings to sustain consumption.
Personal Saving Rate
Americans decreased their savings to sustain consumption.
Source: U.S. Department of Commerce and Wells Fargo Securities

10. Personal Consumption Expenditures
Personal consumption will remain the driver of economic growth.
Source: U.S. Department of Commerce and Wells Fargo Securities

11. Employment continues to grow.
U.S. Nonfarm Employment
Employment continues to grow.
Source: U.S. Department of Labor and Wells Fargo Securities

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

13. Initial Jobless Claims
No sign of employment weakening from claims.
Source: U.S. Department of Labor and Wells Fargo Securities

14. U.S. Employment By Industry
Employment growth is positive almost across the board.
Source: U.S. Department of Labor and Wells Fargo Securities

15. Unemployment rate has stabilized close to full employment.
Source: U.S. Department of Labor and Wells Fargo Securities

16. The Employment Situation
One of the reasons for the decline in the unemployment rate is tied to the drop-off in the labor force participation rate.
Source: U.S. Department of Labor and Wells Fargo Securities

17. Mean Duration of Unemployment
Finally, the mean duration of unemployment has started to improve but it is still high.
Source: U.S. Department of Labor and Wells Fargo Securities

18. Unemployment by Education Level
Unemployment continues to come down, especially for those with education.
Source: U.S. Department of Labor and Wells Fargo Securities

19. Labor Market: Wages
Average hourly earnings’ 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 19

20. Inflation has started to move higher again.
Consumer Price Index
Inflation has started to move higher again.
Source: U.S. Department of Labor and Wells Fargo Securities

21. Federal Reserve Target Rate
Monetary policy remains extremely expansive, even as the Fed continues to tighten.
Source: Federal Reserve Board and Wells Fargo Securities

22. New home sales continue to slowly improve.
Source: U.S. Department of Commerce and Wells Fargo Securities

23. Housing Starts
Housing Starts continue to recover. There has been a steady increase in single-family starts, while multi-family starts are experiencing a slight decline after registering large gains earlier in in the cycle.
Housing Starts
Single vs. Multi family
Source: U.S. Department of Commerce and Wells Fargo Securities 23 23

24. Existing home sales remain strong.
Source: U.S. Department of Commerce and Wells Fargo Securities

25. Home price growth has stabilized somewhat.
Home Prices
Home price growth has stabilized somewhat.
Source: National Association of Realtors, FHFA, S&P Case-Shiller , Zillow Research and Wells Fargo Securities

26. Negative equity continues to improve.
Source: CoreLogic and Wells Fargo Securities

27. Business activity has picked up in recent months.
Source: Institute for Supply Management and Wells Fargo Securities

28. Credit card lending is improving.
Consumer Credit
Credit card lending is improving.
Source: Federal Reserve Board and Wells Fargo Securities

29. Households deleverage has started to reverse course.
Household Debt
Households deleverage has started to reverse course.
Source: Federal Reserve Board and Wells Fargo Securities

30. Households are feeling pretty good today!
Household Debt
Households are feeling pretty good today!
Source: Federal Reserve Board and Wells Fargo Securities

31. U.S. Fiscal Policy Outlook

32. Federal Fiscal Policy Outlook
Key Tax Law Changes
Individual Tax Code Changes
The act reduces the top income tax rate to 37 percent
Eliminates the state and local tax (SALT) deduction but allows income and property tax deductions of up to $10K
Pass-throughs are allowed to deduct income up to 20 percent
Increases the standard deduction and the child tax credit
Caps mortgage interest deduction at $750,000
Keeps the estate tax but doubles the exemption
Keeps the Alternative Minimum Tax (AMT) but lifts the threshold to $500K
Maintains several deductions including medical expenses, student loans and private activity bonds (PABs)
Repeals the Obamacare individual mandate
Individual cuts will expire on December 31, 2025
Business Tax Code Changes
Permanently reduces the corporate tax rate to 21% from the current 35% federal rate starting in 2018
Repeals the corporate AMT
The business interest expense deductions are capped at 30 percent of EBITDA for 4 years and 30 percent of EBIT thereafter
The act allows for full and immediate expensing of business capital investments for a 5-year period
Ends the current worldwide corporate tax system. Existing profits held abroad can be repatriated at 15.5 percent for cash and cash equivalents, 8 percent for reinvested foreign earnings

33. Size of the Tax Cuts
The new tax plan cuts taxes on businesses and corporations by about $600 billion, plus frees up profits previously being held abroad for tax reasons
Source: Joint Committee on Taxation and Wells Fargo Securities

34. Tax Legislation: A Look Through History
Source: Joint Committee on Taxation, Congressional Budget Office and Wells Fargo Securities

35. Federal Fiscal Policy Outlook
The fiscal policy checklist
Key Issues to Watch in the Second Session of the 115th Congress
Infrastructure Spending
There is currently no political appetite nor a funding mechanism to pass another infrastructure plan
Immigration Reform
Congress is likely to kick the can on immigration reform and pass a short DACA patch
Entitlement Reform
While the idea of entitlement reform using a budget resolution is popular in the House, Senate leadership is skeptical anything can pass with the narrow 51-vote margin
Another Affordable Care Act Repeal Attempt
Given the full legislative agenda and no clear consensus on steps forward, we do not see any further changes to the ACA this year

36. Federal Fiscal Policy Outlook
The fiscal policy checklist
Key Issues to Watch in the Second Session of the 115th Congress
Financial Regulatory Changes
The Economic Growth, Regulatory Relief, and Consumer Protection Act (Senate) and Financial CHOICE Act (House)
Would roll back some Dodd-Frank provisions for banks with less than $250 billion in assets
Senate bill would allow U.S. municipal bonds to be counted towards fulfilling LCR requirements which could reduce demand for 10-year U.S. Treasuries—Would likely change the profitability profile of lending channels, likely extending the credit cycle
Trade Policy Changes
NAFTA is currently being renegotiated but we expect very few major changes to the agreement
Tariffs or backing out of existing trade deals without replacements likely represents the greatest downside fiscal policy risk

37. Federal Fiscal Policy Outlook
The composition of federal spending has shifted dramatically.
The CBO projects that the debt-to-GDP ratio will surpass 91.2 percent by 2027.
Composition of Federal Spending
Federal Debt Continues to Rise
Source: Congressional Budget Office and Wells Fargo Securities 37

38. U.S. Forecast
Source: Wells Fargo Securities 38

39. Regional Trends

40. Year-over-Year Percent Change in GDP by State, Q3-2017
The West Coast is growing solidly, led by the gains in the tech sector and a rebound in homebuilding.
The Southeast continues to benefit from an influx of new businesses and residents.
Economic conditions are rebounding in the energy producing states.
Source: U.S. Department of Commerce and Wells Fargo Securities

41. Year-over-Year Employment Growth by State, December 2017
Job growth has been strongest in the Pacific Northwest and Southeast.
Source: U.S. Department of Labor and Wells Fargo Securities

42. California

43. California Economic Growth
Economic growth in California continues at a faster pace than the national economy.
Source: U.S. Department of Commerce and Wells Fargo Securities

44. California: Employment Situation
California continues to see overall employment gains. Hiring has risen across all major industry categories. Construction and Education & healthcare
should remain key drivers for the state.
Nonfarm Employment
Employment by Industry
Source: U.S. Department of Labor and Wells Fargo Securities 44 44

45. California: Housing Market
Single-family and multifamily construction continues to accelerate in California,
as multifamily activity appears to be nearing its prerecession peak.
Home prices continue to outpace the national average.
Housing Starts
Home Prices
Source: U.S. Department of Commerce, CoreLogic and Wells Fargo Securities 45 45

46. California: Population Growth
Growth in California’s population continues.
Source: U.S. Department of Commerce and Wells Fargo Securities

47. San Diego, California

48. San Diego Economic Growth
Economic growth continues in San Diego, albeit at a slower pace than the national average.
Source: U.S. Department of Commerce and Wells Fargo Securities

49. San Diego: Employment Situation
San Diego continues to experience gains in employment. Hiring has risen across most major industry categories, with significant gains in the construction sector.
Nonfarm Employment
Employment by Industry
Source: U.S. Department of Labor and Wells Fargo Securities 49 49

50. San Diego: Housing Market
Single-family construction continues to accelerate in San Diego, as multifamily construction has regained strength after slowing for most of Home prices continue to pace with the national average.
Housing Starts
Home Prices
Source: U.S. Department of Commerce, CoreLogic and Wells Fargo Securities 50 50

51. San Diego: Population Growth
San Diego’s population growth has slowed down a bit.
Source: U.S. Department of Commerce and Wells Fargo Securities

52. Wells Fargo Securities Economics Group
Global Head of Research, Economics & Strategy
Michael A. Brown, Economist
Charlie Dougherty, Economist
Jamie Feik, Economist
Erik Nelson, Currency Strategist
Michael Pugliese, Economist
Diane Schumaker-Krieg …………………
Global Head of Research, Economics & Strategy
Economists
John E. Silvia
Chief Economist
Senior Economists
Economic Analysts
Mark Vitner, Senior Economist
Jay H. Bryson, Global Economist
Sam Bullard, Senior Economist
Nick Bennenbroek, Currency Strategist
Eugenio J. Alemán, Senior Economist
Azhar Iqbal, Econometrician
Tim Quinlan, Senior Economist
Eric J. Viloria, Currency Strategist
Sarah House, Senior Economist
Harry Pershing, Economic Analyst
Hank Carmichael, Economic Analyst
Ariana Vaisey, Economic Analyst
Abigail Kinnaman, Economic Analyst
Shannon Seery, Economic Analyst
Administrative Assistants
Donna LaFleur, Executive Assistant
Dawne Howes, Administrative Assistant
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