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North Carolina Economic Outlook
Mark Vitner, Managing Director & Senior Economist
January 03, 2018
Economic Outlook 2
The Economy Has Solid Momentum At The Start of the New Year
Economic Outlook
Fiscal Policy
Tax cuts have finally become a reality and will likely be more impactful than consensus estimates. We looking for consumer spending and business investment to kick up a notch. An infrastructure program is likely in 2018.
Monetary Policy
The post-financial crisis era is over and monetary policy is now focusing on normalizing interest rates and financial regulation. Inflation and interest rates may rise slightly more than currently expected in 2018.
Soft Data Strength
The persistent strength in various economic surveys reflects improving job prospects, a lightening regulatory burden and a reviving manufacturing sector. A broader economic recovery will lift more industries and regions.
North Carolina
North Carolina’s economic recovery gained considerable strength during the past couple of years, although gains have largely been limited to the Triangle and Charlotte. Growth is now broadening to include most metro areas.
Real GDP growth accelerated during the second and third quarters of 2017 and the improved pace of growth appears to be carrying over in 2018. Growth is not only stronger but much more broadly based.
Economic Outlook 3
Economic Growth
Real GDP growth accelerated during the spring and summer.
The improvement reflects stronger global growth and a
lessening of burdensome regulations, which have helped
revive capital spending.
Real GDP growth has slowed during the first quarter of the
past few years. This year may be an exception, as strong holiday
season sales likely cleared inventories and bolstered company balance sheets.
Source: U.S. Department of Commerce and Wells Fargo Securities
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change
GDP - CAGR: Q3 @ 3.2%
GDP - Yr/Yr Percent Change: Q3 @ 2.3%
Forecast
Economic Outlook 4
Inflation
After making steady progress toward the Fed’s 2 percent
inflation objective, most broad inflation measures have
remained below 2 percent since the last recession ended.
The recent moderation in core inflation is unnerving some
members of the FOMC, suggesting the Fed may be even
more cautious about raising short-term rates.
There are likely a mix of structural and cyclical forces restraining inflation that may
prove to be long lasting.
Source: U.S. Department of Commerce and Wells Fargo Securities
-2%
-1%
0%
1%
2%
3%
4%
5%
-2%
-1%
0%
1%
2%
3%
4%
5%
92 94 96 98 00 02 04 06 08 10 12 14 16 18
PCE Deflator vs. Core PCE DeflatorYear-over-Year Percent Change
PCE Deflator: Oct @ 1.6%
"Core" PCE Deflator: Oct @ 1.4%
FOMC's 2.0% Inflation Target
Economic Outlook 5
Metro Area GDP
Raleigh, and other tech-driven metros, remain the fastest
growing economies.
Years of sustained growth are creating challenges, however.
Source: U.S. Department of Commerce and Wells Fargo Securities
0% 1% 2% 3% 4% 5% 6% 7%
San Jose, CA
San Francisco, CA
Raleigh, NC
Austin, TX
Seattle, WA
Tampa, FL
Sacramento, CA
Las Vegas, NV
Atlanta, GA
Charlotte, NC
Nashville, TN
Jacksonville, FL
San Antonio, TX
Salt Lake City, UT
Dallas-Fort Worth, TX
Metro Area GDP Growth: Top 15Year-over-Year Percent Change in Real GDP, 2016
Economic Outlook 6
The Geographic Mix of Growth Has Shifted
Wake and Durham counties accounted for the bulk of job
gains earlier in the expansion, as residents and businesses moved
back toward the city center.
Job growth has since broadened and more growth is occurring in
outlying areas. Job growth in Wake County is moderating.
Source: U.S. Department of Labor and Wells Fargo Securities
-5
0
5
10
15
20
25
30
35
-5
0
5
10
15
20
25
30
35
2011 2012 2013 2014 2015 2016 2017 2018 2019
Thousands
Thousands
Raleigh-Durham-Chapel Hill CSA Job Gain by CountyYear-over-Year Level Change in Annual Averages, Thousands
WakeDurhamOrangeOther Counties in CSA
Forecast
Economic Outlook 7
Income Polarization
While job growth has been solid, income gains have remained
elusive for many workers.
Job growth in Raleigh has been stronger at the high-end and
low-end of the wage spectrum.
The income divide is a national issue and has made economic
mobility more challenging.
Source: U.S. Department of Labor and Wells Fargo Securities
$0
$10
$20
$30
$40
$50
$60
$70
-2
0
2
4
6
8
10
12
Raleigh Occupational EmploymentChange in Jobs 2013-2016 in Ths., 2016 Average Hourly Wages
Change in Jobs 2013-2016 (Left Axis)Average Hourly Wages (Right Axis)
Economic Outlook 8
Labor Market Tightness
The Triangle’s lower unemployment rate has pulled wage increases higher, which is
something that much of the country has not yet seen.
While the labor market has certainly tightened, the Triangle
has grown solidly for long periods of time with an even lower unemployment rate.
Source: U.S. Department of Labor and Wells Fargo Securities
-6%
-3%
0%
3%
6%
9%
12%
0%
2%
4%
6%
8%
10%
12%
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Raleigh CSA Unemployment vs. Avg. Hourly Earnings
Raleigh-Durham-Chapel Hill CSA Unemployment: Oct @ 3.7%Average Hourly Earnings: Nov @ 4.7%
Non Seasonally Adjusted, 12-MMA Year-over-Year Percent Change
Economic Outlook 9
0
10
20
30
40
50
60
0
10
20
30
40
50
60
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16
Triangle Population ChangeLevel Change Over Year, Thousands
Suburban: 2016 @ 2.3K
Primary City: 2016 @ 14.6K
Migration
The movement back into the center city bolstered growth in Raleigh and Durham earlier in
the cycle, setting off battles over redevelopment and
gentrification.
Rising housing costs and sluggish median income growth
have spurred an affordability migration to outlying areas,
raising a new set of challenges in regards to land use and zoning.
Source: CoreLogic and Wells Fargo Securities
Economic Outlook 10
0
5
10
15
20
0
5
10
15
20
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Thousands
Thousands
Raleigh MSA Housing Permits
Single-Family: Nov @ 8,436Single-Family, 12-MMA: Nov @ 10,841Multifamily, 12-MMA: Nov @ 3,162
Single-Family Average (1998-2003): 10,453
Thousands of Permits, Seasonally Adjusted Annual Rate
Housing Permits
2017 was a strong year for homebuilding in Raleigh.
Single-family housing permits surpassed their long-run
average and are now roughly in line with population gains.
Source: U.S. Department of Commerce and Wells Fargo Securities
Economic Outlook 11
0
5,000
10,000
15,000
20,000
25,000
0
5,000
10,000
15,000
20,000
25,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Raleigh-Durham CSA Housing PermitsAnnual Level
WakeDurhamOrangeOther Counties in CSA
Housing Permits
Wake and Durham Counties accounted for the bulk of
housing starts earlier in the recovery, led by a boom in
apartment building and redevelopment of single-family
homes in closer-in neighborhoods.
More recently, growth has been shifting to the suburbs and
outlying areas.
Source: U.S. Department of Commerce and Wells Fargo Securities
Economic Outlook 12
40
60
80
100
120
140
160
180
200
220
40
60
80
100
120
140
160
180
200
220
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
CoreLogic Home Price IndexIndex, 2000=100, Not Seasonally Adjusted
United States: Oct @ 195.4
North Carolina: Oct @ 153.0
Raleigh, NC: Oct @ 151.3
Durham, NC: Oct @ 160.9
Home Prices
Home price appreciation has not seen the roller coaster ride that some other parts of the country have. Prices did not fall as hard during the housing slump and
have rebounded less dramatically than they did
nationwide.
Home prices in Raleigh and Durham have risen past their
previous highs, and affordability has become a bigger issue.
Source: CoreLogic and Wells Fargo Securities
Economic Outlook 13
$150
$200
$250
$300
$350
$150
$200
$250
$300
$350
2012 2013 2014 2015 2016
Median List PriceMonthly Zillow Data, in Thousands
Raleigh: Nov @ $319.9KDurham: Nov @ $244.4KUnited States: Nov @ $259.9K
Home Prices
Home prices in the Triangle are now higher relative to the
national average, making the region less of a bargain
compared to similar sized markets in the Sunbelt.
While homes are less expensive in some neighboring areas, the Triangle still has lower home prices relative to other major tech hubs such as San Jose, Austin, Denver and Boston.
Source: CoreLogic and Wells Fargo Securities
Economic Outlook 14
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Raleigh-Durham Apartment Effective RentQuarter-over-Quarter Percent Change
Effective Rent Growth: Q3 @ 0.8% (Right Axis)
Year-over-Year: Q3 @ 4.4% (Left Axis)
Apartment Rents
The Triangle has seen a deluge of apartments come to market in
recent years. Many of these units have been high-end urban
developments, resulting in much higher average rents.
Source: Zillow, Inc. and Wells Fargo Securities
Economic Outlook 15
2.50
2.75
3.00
3.25
3.50
2.50
2.75
3.00
3.25
3.50
2000 2002 2004 2006 2008 2010 2012 2014 2016
Raleigh Price-to-Income RatioQuarterly
Price-to-Income: Q3 @ 3.3
Long-run Average: 3.08
Affordability
While home prices have risen modestly in Raleigh relative to other rapidly growing markets, affordability has still become a critical issue. This is true across the nation, as wage growth has
lagged and income mobility appears to have slowed.
Source: Zillow, Inc. and Wells Fargo Securities
Economic Outlook 16
0.5
0.55
0.6
0.65
0.5
0.55
0.6
0.65
Raleigh Price-to-Rent RatioCoreLogic HPI, CPI Owners Equivalent Rent South
Price-to-Rent: Oct @ 0.56
Long-run Average (1987-Present): 0.55
Homeownership Still Makes Economic Sense
If you can afford to buy a home, homeownership makes
economic sense.
With rents rising so rapidly, the ratio of home prices to rents
remains only slightly above its long-run average.
Source: Zillow, Inc. and Wells Fargo Securities
Economic Outlook 17
The Triangle Is Poised For Another Strong Year
Economic Outlook
Employment & Income Growth
Job growth is expected to be slightly stronger in 2018, with the metro area adding close to 25,000 net new jobs. Employment growth remains skewed toward the upper and lower end but income gains should be larger in 2018.
Interest Rates & Housing
The Federal Reserve will likely hike interest rates at least three times this year but mortgage rates will rise only modestly. We look for single-family construction to rise solidly in 2018 but apartment construction will cool.
Affordability Migration
Years of strong growth have pushed housing costs higher, particularly in areas close to city centers. Higher housing costs have set off an affordability migration to the suburbs, fueling numerous zoning battles.
Infrastructure
President Trump has hinted that his attention is to shift toward boosting infrastructure investment. There is no pot of money to fund infrastructure, however, and much of the responsibility will fall back to local governments.
The Triangle has been growing roughly twice as fast as the nation and will continue to do so this year. Tax reform is expected to meaningfully boost capital spending, which will provide an added boost to the tech sector.
Economic Outlook 18
U.S. Economic Forecast
Wells Fargo U.S. Economic Forecastq 4 2 01 7
2017
2015 2016 2017 2018 2019
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Real Gross Domestic Product 1 1.2 3.1 3.2 2.5 2.6 2.5 2.6 2.5 2.7 2.6 2.6 2.7 2.9 1.5 2.3 2.7 2.6
Personal Consumption 1.9 3.3 2.2 3.0 2.3 2.5 2.5 2.5 2.7 2.6 2.5 2.5 3.6 2.7 2.7 2.6 2.6
Business Fixed Investment 7.2 6.7 4.7 5.4 4.8 4.1 4.0 3.7 3.7 3.6 3.6 3.7 2.3 -0.6 4.6 4.7 3.7
Equipment 4.4 8.8 10.8 7.6 5.4 4.3 4.2 3.7 3.7 3.3 3.5 3.7 3.5 -3.4 4.6 6.2 3.7
Intellectual Property Products 5.7 3.7 5.2 4.1 5.2 4.8 4.7 4.5 4.6 4.6 4.6 4.6 3.8 6.3 4.1 4.7 4.6
Structures 14.8 7.0 -7.0 1.0 3.0 2.4 2.4 2.2 2.5 2.4 2.4 2.4 -1.8 -4.1 5.3 1.3 2.4
Residential Construction 11.1 -7.3 -4.7 9.0 6.0 8.0 7.5 7.0 5.5 5.0 5.0 4.5 10.2 5.5 1.6 4.9 6.0
Government Purchases -0.6 -0.2 0.7 2.5 0.2 0.8 0.8 0.8 0.7 0.7 0.7 0.7 1.4 0.8 0.1 0.9 0.7
Net Exports 2 0.2 0.2 0.4 -0.5 -0.2 -0.1 -0.1 0.0 0.0 0.0 0.1 0.2 -0.7 -0.2 -0.2 -0.1 0.0
Inventories 2 -1.5 0.1 0.8 0.0 0.2 0.0 0.0 -0.1 0.0 0.0 -0.1 0.0 0.2 -0.4 -0.1 0.2 0.0
Nonfarm Payroll Change 3 166 187 128 212 170 165 160 155 150 150 145 145 226 187 173 163 148
Unemployment Rate 4.7 4.4 4.3 4.1 4.1 4.0 3.9 3.8 3.8 3.7 3.8 3.7 5.3 4.9 4.4 4.0 3.8
Consumer Price Index 4 2.6 1.9 2.0 2.1 2.0 2.6 2.7 2.1 2.0 2.1 2.2 2.3 0.1 1.3 2.1 2.3 2.1
Quarter-End Interest Rates 5
Federal Funds Target Rate 1.00 1.25 1.25 1.50 1.75 2.00 2.25 2.25 2.50 2.50 2.75 2.75 0.27 0.52 1.25 2.06 2.63
Conventional Mortgage Rate 4.20 3.90 3.81 3.89 4.06 4.20 4.30 4.35 4.45 4.50 4.62 4.67 3.85 3.65 3.95 4.23 4.56
2 Year Note 1.27 1.38 1.47 1.80 2.00 2.25 2.45 2.60 2.70 2.80 2.93 3.00 0.69 0.83 1.48 2.33 2.86
10 Year Note 2.40 2.31 2.33 2.49 2.66 2.80 2.90 2.95 3.05 3.10 3.22 3.27 2.14 1.84 2.38 2.83 3.16
Forecast as of: December 21, 20171 Compound Annual Growth Rate Quarter-over-Quarter 2 Percentage Point Contribution to GDP 3 Average Monthly Change4 Year-over-Year Percentage Change 5 Annual Numbers Represent Averages
ForecastActual
2017 2018 2019
ForecastActual
Source: IHS Global Insight and Wells Fargo Securities
Appendix
Economic Outlook 20
Economic Outlook Group Publications
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A Sampling of Our Recent Special, Regional & Industry Commentary
Date Title Authors
U.S. MacroDecember-05 Are Millennials Moving Out and Settling Down? House & Vaisey
December-04 Understanding the Senate Tax Plan's Dynamic Score Brown, Pugliese & Kinnaman
December-04 Tax Package Next Steps: Reconciling Differences Brown, Pugliese & Kinnaman
November-27 Capitol Hill Update: Funding Deadline Looms Brown, Pugliese & Kinnaman
November-27 Five Potential Inflation Surprises for 2018 House & Vaisey
U.S. RegionalNovember-30 Western Economic Outlook: Fall 2017 Vitner & Feik
November-17 California Employment Conditions: October 2017 Vitner, Feik & Carmichael
November-17 Texas Payrolls Gain 71,500 Jobs in October Vitner, Feik & Carmichael
November-17 North Carolina Unemployment Still Stuck at 4.1 Percent Vitner, Feik & Carmichael
November-17 Florida Payrolls Rebound after Hurricane Irma Vitner, Feik & Carmichael
Global EconomyDecember-06 Australian Q3 GDP Results Just Shy of Expectations Quinlan & Seery
December-04 Brazilian Economy Back from the Brink Alemán, Nelson & Seery
December-01 Canadian Growth Slows, but Not as Much as Expected Quinlan
November-30 Swiss Economy Remains on Solid Footing in Q3 Bryson, Pugliese & Kinnaman
November-29 Swedish GDP Growth Moderates a Bit in Q3 Bryson & Pugliese
Interest Rates/Credit Market
December-06 Profits and Financing in the Nonfinancial Sector Silvia & Pershing
November-29 Mixed Credit Trends Among Businesses and Consumers Silvia & Seery
November-15 Continuity Doesn't Work When the Road is Changing Silvia
November-08 Monetary Policy Convergence: What About the ECB? Silvia & Kinnaman
November-07 Persistently Overshooting the Fed Funds Rate Silvia, Iqbal & Pershing
Real Estate & HousingDecember-06 The State of CRE: Q3 Chartbook Vitner, Carmichael & Vaisey
November-06 Return of the Affordability Migration Vitner & Carmichael
November-02 A Primer on the Architectural Billings Index Vitner & Vaisey
October-10 Housing Chartbook: October 2017 Vitner & Carmichael
September-12 A Primer on the NAHB Index Vitner & Carmichael
Recent Special Commentary
Economic Outlook
Wells Fargo Securities Economics Group
21
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