the u.s. economy: “bracing for higher interest rates” eugenio j. aleman, ph.d. director and...

The U.S. Economy: “Bracing for Higher Interest Rates”Eugenio J. Aleman, Ph.D.Director and Senior Economist

September 11, 2015

Economics 2

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

60 65 70 75 80 85 90 95 00 05 10 15

Federal Government Outlay GrowthYear-over-Year Percent Change, 12-Month Moving Average

Federal Government Outlay Growth: J ul @ 6.0%

Federal Government Expenditures

Government expenditures have started to grow after several years in negative

territory

Source: U.S. Treasury and Wells Fargo Securities, LLC

Economics 3

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$400

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$400

67 71 75 79 83 87 91 95 99 03 07 11 15

Federal Budget Surplus or Deficit12-Month Moving Sum in Billions of Dollars

Surplus or Deficit: J ul @ -$488 Billion

Federal Fiscal Results

Not very good at generating surpluses!

Source: U.S. Treasury and Wells Fargo Securities, LLC

Economics 4

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

96 98 00 02 04 06 08 10 12 14

U.S. Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change

Real GDP: Q2 @ 2.3%Real GDP: Q2 @ 2.3%

Real GDP Growth

The U.S. economy continues to grow

Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Economics 5

U.S. Nonfarm Employment

2014 was the best year for employment growth since

1999

Source: U.S. Department of Labor and Wells Fargo Securities, LLC

-1,000

-800

-600

-400

-200

0

200

400

600

-1,000

-800

-600

-400

-200

0

200

400

600

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Nonfarm Employment ChangeChange in Employment, In Thousands

Monthly Change: J ul @ 215K

Economics 6

U.S. Employment By Industry

Employment growth is positive across the board


0% 1% 2% 3% 4% 5% 6%

Information

Other Services

Construction

Financial Activities

Manufacturing

Leisure & Hospitality

Prof. & Bus. Svcs.

Educ. & Health Svcs.

Government

Trade, Trans. &Utilities

Total Nonfarm

U.S. Employment by IndustryYear-over-Year Percent Change of 3-M Moving Average

July 2015

Number of Employees

Less

More

Economics 7

Government Employment

It is not the Federal Government!


Federal Government,

13%

State Government,

23%

Local Government,

64%

U.S. Government Employment Composition

Economics 8

Unemployment Rate

The rate of unemployment is closing in on what is called full-employment


2%

4%

6%

8%

10%

12%

2%

4%

6%

8%

10%

12%

60 65 70 75 80 85 90 95 00 05 10 15

Unemployment RateSeasonally Adjusted

Unemployment Rate: J ul @ 5.3%

Economics 9

62%

63%

64%

65%

66%

67%

68%

62%

63%

64%

65%

66%

67%

68%

90 92 94 96 98 00 02 04 06 08 10 12 14

Labor Force Participation Rate16 Years and Over, Seasonally Adjusted

Labor Force Participation Rate: J ul @ 62.6%

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


Economics 10

Mean Duration of Unemployment

Finally, the mean duration of unemployment has

started to improve but it is still too high


8

12

16

20

24

28

32

36

40

44

8

12

16

20

24

28

32

36

40

44

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Mean Duration UnemploymentAverage Weeks Unemployed

Average Duration of Unemployment: J ul @ 28.3

Economics 11

Unemployment by Education Level

Unemployment continues to come down, especially for

those with education


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

No High SchoolDiploma

High SchoolDiploma

Some College College Degree

Unemployment Rate by Education LevelJ uly 2015

Economics 12

Consumer Price Index

Inflation is almost nonexistent


-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

92 94 96 98 00 02 04 06 08 10 12 14

U.S. Consumer Price IndexBoth Series are 3-Month Moving Averages

CPI 3-Month Annual Rate: J un @ 3.0%

CPI Year-over-Year Percent Change: J un @ 0.0%

Economics 13

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

2000 2002 2004 2006 2008 2010 2012 2014

U.S. Federal Reserve Target Rate

U.S. Target Rate: J ul @ 0.25%

Federal Reserve Target Rate

Monetary policy remains extremely expansive

Source: Federal Reserve Board and Wells Fargo Securities, LLC

Economics 14

Federal Reserve Balance Sheet

The Fed’s balance sheet is no longer growing


$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

2007 2008 2009 2010 2011 2012 2013 2014 2015

Federal Reserve Balance Sheet Trillions

Other: Aug @ $215.6B

Foreign Swaps: Aug @ $0.3B

PDCF & TAF

Commercial Paper & Money Market

Repos & Dis. Window: Aug @ $0.2B

Agencies & MBS: Aug @ $1,769.9B

Treasuries: Aug @ $2,461.6B

Economics 15

New Home Sales

New home sales are starting to show some

recovery


100

300

500

700

900

1,100

1,300

1,500

100

300

500

700

900

1,100

1,300

1,500

89 91 93 95 97 99 01 03 05 07 09 11 13 15

New Home SalesSeasonally Adjusted Annual Rate, In Thousands

New Home Sales: J un @ 482,000

3-Month Moving Average: J un @ 507,333

Economics 16

0.0

0.4

0.8

1.2

1.6

2.0

2.4

0.0

0.4

0.8

1.2

1.6

2.0

2.4

90 92 94 96 98 00 02 04 06 08 10 12 14

Housing Starts Seasonally Adjusted Annual Rate, In Millions

Housing Starts: J un @ 1.17M

Housing Starts

Housing starts plunged in February, perhaps due to

severe weather


Economics 17

2.0

3.0

4.0

5.0

6.0

7.0

2.0

3.0

4.0

5.0

6.0

7.0

86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Existing Single-Family Home Resales Seasonally Adjusted Annual Rate - In Millions

Existing Home Sales: J un @ 4.8 Million

Existing Home Sales

Existing home sales have weakened a bit but remain

relatively strong


Economics 18

-40%

-30%

-20%

-10%

0%

10%

20%

30%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

97 99 01 03 05 07 09 11 13 15

Home PricesYear-over-Year Percentage Change

Median Sale Price: J un @ $237,700Median Sale Price, 3-M Mov Avg: J un @ 8.2%FHFA Purchase Only Index: May @ 5.6%S&P/Case-Shiller Composite-10: May @ 4.7%Zillow: Sep @ 6.52

Home Prices

Home price growth seems to be picking up steam

again

Source: National Association of Realtors, FHFA, S&P Case-Shiller and Wells Fargo Securities, LLC

Economics 19

Home Mortgages

Mortgage lending is still very weak but have

improved over the past several months


-10%

-5%

0%

5%

10%

15%

20%

25%

-10%

-5%

0%

5%

10%

15%

20%

25%

1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013

Real Estate LendingBy Commerical Banks, Year-over-Year Percent Change

Year-over-Year Change: May @ 3.8%

Economics 20

Negative Equity

Negative equity continues to improve

Source: CoreLogic and Wells Fargo Securities, LLC

22.5%

66.5%

48.6%

45.5%

37.6%

31.6%

28.0%

22.1%

22.0%

20.0%

20.0%

19.4%

17.7%

15.2%

10.5%

10.2%

23.1%

16.8%

21.2%

14.1%

8.5%

12.1%

9.8%

14.7%

15.2%

15.7%

16.8%

12.6%

13.1%

7.4%

0% 10% 20% 30% 40% 50% 60% 70% 80%

United States

Nevada

Arizona

Florida

Michigan

California

Georgia

Virginia

Maryland

Ohio

Rhode Island

I llinois

New Hampshire

New J ersey

North Carolina

Negative Equity by StatePercent of Mortgages Outstanding

Q3 2010

Q1 2015

Economics 21

ISM Manufacturing Index

Manufacturing has weakened with the

appreciation of the U.S. dollar

Source: Institute for Supply Management and Wells Fargo Securities, LLC

30

35

40

45

50

55

60

65

30

35

40

45

50

55

60

65

90 92 94 96 98 00 02 04 06 08 10 12 14

ISM Manufacturing Composite IndexDiffusion Index

ISM Manufacturing Index: J ul @ 52.7

12-Month Moving Average: J ul @ 54.4

Economics 22

ISM Non-Manufacturing Index

The service economy continues to move along

Source: Institute for Supply Management and Wells Fargo Securities, LLC

35

40

45

50

55

60

65

35

40

45

50

55

60

65

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

ISM Non-Manufacturing Composite Index

ISM Non-Manufacturing Index SA: J ul @ 60.3

Economics 23

-$12

$0

$12

$24

$36

$48

$60

-$12

$0

$12

$24

$36

$48

$60

2007 2008 2009 2010 2011 2012 2013 2014 2015

Revolving & Nonrevolving DebtChange in Billions of Dollars, 3-Month Moving Average

Revolving: J un @ $5.2B

Nonrevolving: J un @ $14.3B

Consumer Credit

Credit card lending is improving but it is still very

weak


Economics 24

Household Debt

Households continue to deleverage


40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

60 65 70 75 80 85 90 95 00 05 10 15

Household Debt - Consumer & MortgageAs a Percent of Disposable Personal Income

Household Debt: Q1 @ 95.5%

Economics 25

Household Debt

Households are feeling pretty good today!


9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Household Debt Service RatioDebt Payments as a Percent of Disposable Personal Income

DSR: Q1 @ 9.9%

Economics 26

0

20

40

60

80

100

120

140

160

0

20

40

60

80

100

120

140

160

87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

Consumer Confidence IndexConference Board

Confidence Yr/Yr % Chg: J ul @ 0.6%Confidence: J ul @ 90.912-Month Moving Average: J ul @ 95.4

Consumer Confidence

Consumer confidence is on the right path

Source: The Conference Board and Wells Fargo Securities, LLC

Economics 27

0%

3%

6%

9%

12%

15%

18%

0%

3%

6%

9%

12%

15%

18%

60 66 72 78 84 90 96 02 08 14

Personal Saving Rate Disp. Personal Income Less Spending as a % of Disp. Income

Personal Saving Rate: J un @ 4.8%Personal Saving Rate, 12-MMA: J un @ 4.8%

Personal Saving Rate

The saving rate has inched up a bit in the last several

months


Economics 28

0%

1%

2%

3%

4%

5%

6%

7%

0%

1%

2%

3%

4%

5%

6%

7%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Conventional Mortgage Rate vs. 10-Year Treasury YieldPercent

Conventional 30-Year Fixed Mortg. Rate: Aug @ 3.91%

10-Year Yield: Aug @ 2.22%

Mortgage and Treasury Rates

Mortgage interest are still at almost historic lows

Source: Freddie Mac, Federal Reserve Board and Wells Fargo Securities, LLC

Economics 29

Wells Fargo International Economic Forecast(Year-over-Year Percent Change)

GDP CPI

2014 2015 2016 2014 2015 2016

Global (PPP weights) 3.4% 3.0% 3.5% 3.5% 3.3% 3.6%Global (Market Exchange Rates) 2.6% 2.5% 2.9% n/a n/a n/a

Advanced Economies1 1.8% 1.9% 2.4% 1.4% 0.3% 1.6%

United States 2.4% 2.1% 2.5% 1.6% 0.3% 2.1%Eurozone 0.9% 1.4% 1.9% 0.4% 0.0% 1.1%United Kingdom 3.0% 2.6% 2.2% 1.5% 0.1% 1.4%J apan - 0.1% 1.1% 1.5% 2.7% 1.0% 1.1%Korea 3.3% 2.4% 3.3% 1.3% 0.8% 2.3%Canada 2.4% 1.0% 2.2% 1.9% 1.3% 2.3%

Developing Economies1 4.6% 4.0% 4.6% 5.1% 6.0% 5.5%

China 7.4% 6.8% 6.3% 2.0% 1.5% 2.0%India2 6.9% 7.3% 7.5% n/a 5.3% 5.8%Mexico 2.1% 2.5% 2.9% 4.0% 2.9% 3.1%Brazil 0.1% - 1.7% 1.0% 6.3% 9.1% 8.4%Russia 0.6% - 3.5% 1.0% 7.8% 15.3% 6.3%

Forecast as of: August 12, 20151Aggregated Using PPP Weights 2Forecasts Refer to Fiscal Year

Global Forecast

Growth will continue to improve

Source: Wells Fargo Securities, LLC

Economics

Wells Fargo Securities, LLC Economics Group

30

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Global Head of Research and Economics

Diane Schumaker-Krieg ………………… ………[email protected] Head of Research & Economics

Chief Economist

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Jay H. Bryson, Global Economist …………………....…… …[email protected]

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Eugenio J. Alemán, Senior Economist… …………[email protected]

Anika R. Khan, Senior Economist … . [email protected]

Senior Economists

Erik Nelson, Economic Analyst [email protected]

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Economic Analysts

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the u.s. economy: “bracing for higher interest rates” eugenio j. aleman, ph.d. director and...

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