Wells Fargo Economics The Long Road Ahead Ed Kashmarek Economist Wells Fargo Institutional Retirement and Trust Client Forum Omaha, NE June 7, 2011 © 2011

Wells Fargo EconomicsThe Long Road AheadEd KashmarekEconomist

Wells Fargo Institutional Retirement and Trust Client ForumOmaha, NEJune 7, 2011

© 2011 Wells Fargo Bank, N.A. All rights reserved.

Agenda

Labor Market

Inflation/Mortgage Rates

Housing Market

Credit Quality

Lending

Manufacturing

Consumers

Economic Outlook

Budget Deficit/Debt

Questions

33

Labor Market Improving but Still Weak

Change in Total Nonfarm Payroll

(800)(700)(600)(500)(400)(300)(200)(100)

-100200300400500

4-09 10-09 4-10 10-10 4-11

000s

Source: Bureau of Labor Statistics

Estimated Level of Monthly Job Gains Needed to AbsorbLabor Force Growth

United States Employment GrowthX axis: Y/Y J ob Growth (Ths.), Y axis: Avg. Hourly Earnings ($/Hr)

Prof/Bus Svcs.Ed/Hlth Svcs.

Construction

Trade/Trans/Ut

Leis/Hosp

Financial

Info. Svcs.

Mfg.Other Svcs.

$0

$5

$10

$15

$20

$25

$30

-200 -100 0 100 200 300 400 500 600

April 2010 - April 2011

Overall Unemployment Rate

9.0

15.9

3.0

6.0

9.0

12.0

15.0

18.0

4-01 4-02 4-03 4-04 4-05 4-06 4-07 4-08 4-09 4-10 4-11

Percentage


Headline

Augmented*

*Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers

Source: Bureau of Labor Statistics, Wells Fargo Securities, LLC

82.6

100.298.8

80

90

100

110

120

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

HousingNon-housingTotal

Employment Growth - Housing vs. Non-Housing

2.1

1.0%

1.5

2.0

2.5

3.0

3.5

4.0

4.5

4/30/2008 4/30/2009 4/30/2010 4/30/2011-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

Source: Bureau of Labor Statistics; Wells Fargo Economics

Payroll and Hourly Earnings GrowthY/Y%

Payrolls (R)

Avg. Hourly Earnings (L)

Y/Y%

-1.1

1.0%

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

4/30/2008 4/30/2009 4/30/2010 4/30/2011-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

Source: Bureau of Labor Statistics; Wells Fargo Economics

Payroll and Hourly Earnings GrowthY/Y%

Payrolls (R)

Real Avg. Hourly Earnings (L)

Y/Y%

3688

7793

0

2000

4000

6000

8000

10000

12000

14000

Apr-76 Apr-81 Apr-86 Apr-91 Apr-96 Apr-01 Apr-06 Apr-11

Source: Department of Labor

Continuing Jobless ClaimsThs., NSA

Recessions

Total UnemploymentBenefits*

Continuing Claims

* Includes continuing claims, emergency unemployment compensation, extended benefits

Non-farm Productivity Changes

0.31.0

2.5 2.6 2.2 1.9

0.5-0.4

0.8

2.7

4.8

6.5

4.0

2.92.0

1.3

6.7

-1

0

1

2

3

4

5

6

7

07-Q1 08-Q1 09-Q1 10-Q1 11-Q1

Y-Y%


85

90

95

100

105

110

07-Q1 07-Q3 08-Q1 08-Q3 09-Q1 09-Q3 10-Q1 10-Q3 11-Q1

Components of ProductivityIndex

Output

HoursWorked


Unit Labor Cost Changes

3.64.2

3.1 2.7

-0.6 -0.1

-2.2

-3.5-2.9

-1.9-1.0

-0.2

1.2

-4-3-2-10123456

08-Q1 08-Q3 09-Q1 09-Q3 10-Q1 10-Q3 11-Q1

Y-Y%


1414

Inflation Risingbut Core Still Low

InflationYear-over-Year Percent Change

-10%

-5%

0%

5%

10%

01 03 05 07 09 11-10%

-5%

0%

5%

10%

CPI : Apr @ 3.2%PPI : Apr @ 6.8%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Apr-93 Apr-95 Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11

Source: Commerce Department

Core PCE InflationY/Y%

Below the Fed'scomfort zone

Fed Funds Futures5-31-11

-

0.5

1.0

1.5

2.0

2.5

3.0

5/31/2011 9/30/2011 1/31/2012 5/31/2012 9/28/2012 1/31/2013Source: CBOT, WF Economics

Yield range last 52 weeks

I mplied yield

Mortgage RatesPercent

3%

4%

5%

6%

7%

8%

2002 2004 2006 2008 20103%

4%

5%

6%

7%

8%30-Year FRM: May-26 @ 4.60%15-Year FRM: May-26 @ 3.78%1-Year ARM: May-26 @ 3.11%

1919

Housing MarketMixed Signals

200

300

400

500

600

700

800

4-08 10-08 4-09 10-09 4-10 10-10 4-113.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Source: Commerce Department; National Association of Realtors; Wells Fargo Economics

Home SalesThs, SAAR Mil, SAAR

New (L)

Existing (R)

Existing Home Inventory

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

MonthsSupply

Source: National Association of Realtors

Total

Existing Home Median Price

-5.0%

-20%

-10%

0%

10%

20%

Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11

Y/Y%

Source: National Association of Realtors

2323

Housing Starts and Permits

0

500

1000

1500

2000

2500

4-01 4-02 4-03 4-04 4-05 4-06 4-07 4-08 4-09 4-10 4-11

Source: Commerce Dept.

SAAR000's

Housing Starts

Building Permits

Mortgage Applications and Home SalesPurchase Applications (Index) vs. Home Sales (Million SAAR)

150

200

250

300

Jan-09 Jul-09 Jan-10 Jul-10 Jan-113

4

5

6

7

Mortgage Purchase Apps: Apr @ 182.70 (Left Axis)Existing Home Sales: Apr @ 5.05 (Right Axis)

Why Are Home Sales So Constrained? High Unemployment Tight Mortgage Standards Buyers Fear

Further price declines More foreclosures entering market

Sellers Can’t Sell Current Home No demand at desired price Low appraisals Already underwater (28%)

2626

Credit QualityImproving But Challenging

2727

Total Loan Delinquency RatesPercent

0%

1%

2%

3%

4%

5%

6%

7%

8%

85 90 95 00 05 100%

1%

2%

3%

4%

5%

6%

7%

8%

Total Loans: Q1 @ 6.3%

2828

Credit Card Loan Delinquency RatesPercent

3%

4%

5%

6%

7%

92 95 98 01 04 07 103%

4%

5%

6%

7%Credit Card: Q1 @ 3.9%

2929

Residential Loan Delinquency RatesYear-over-Year Basis Point Change

-100

0

100

200

300

400

500

92 95 98 01 04 07 10-100

0

100

200

300

400

500Residential Real Estate: Q1 @ -84.0 bp

3030

Loan Delinquency Rates

-300 -200 -100 0 100

Non-credit Card

Agriculture

Residential Real Estate

Total Real Estate

Total Loans

Total Consumer

Commercial Real Estate

Commercial & Industrial

Credit Card

Y/Y ChangeQ/Q Change

Basis Point Change, Q1 2011

Delinquency Plus Foreclosure RatePercent of All Mortgage Loans Delinquent or in Foreclosure, NSA

4%

6%

8%

10%

12%

14%

16%

80 85 90 95 00 05 104%

6%

8%

10%

12%

14%

16%Delinquency Plus Foreclosure Rate (US): Q1 @ 12.31%

Foreclosure RatePercent of All Mortgage Loans Entering Foreclosure, NSA

0.0%

0.5%

1.0%

1.5%

2.0%

80 85 90 95 00 05 100.0%

0.5%

1.0%

1.5%

2.0%Foreclosure Rate: Q1 @ 1.08%

22.04

26.31

0

5

10

15

20

25

30

35

2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1

U.S. Sub-prime Mortgage Delinquencies

Source: Mortgage Bankers Association; Wells Fargo Economics

Percent delinquent ARM

Fixed

4.59

22.04

0

5

10

15

20

25

30

2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1

U.S. Fixed-rate Mortgage Delinquencies


Percent delinquent Sub-prime

Prime

2.59

10.53

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1

U.S. Fixed-rate Mortgage Foreclosures


Percent in foreclosure at end of quarter, NSASub-prime

Prime

2.59

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1

U.S. Fixed-rate Mortgage Foreclosures


Percent in foreclosure at end of quarter, NSA Prime

BankruptciesThousands, 3-Month Ending, Seasonally-adjusted Annual Rate

0

500

1,000

1,500

2,000

2,500

3,000

00 02 04 06 08 100

15

30

45

60

75

90

Total: Q1 @ 1,501 (Left Axis)Personal: Q1 @ 1,451 (Left Axis)Business: Q1 @ 50 (Right Axis)

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

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

60 65 70 75 80 85 90 95 00 05 1040%

50%

60%

70%

80%

90%

100%

110%

120%

130%

Household Debt: Q4 @ 108.6%

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

0%

20%

40%

60%

80%

100%

120%

60 65 70 75 80 85 90 95 00 05 100%

20%

40%

60%

80%

100%

120%Consumer Credit: Q4 @ 21.2%Home Mortgages: Q4 @ 87.5%

4040

LendingRemains Constrained

Loan Growth and Willingness to LendWillingness to Lend=Net Percent of Banks Loan Growth=Y/Y%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

70 75 80 85 90 95 00 05 10-30%

-24%

-18%

-12%

-6%

0%

6%

12%

18%

24%

30%Willingness to Lend: Q1 @ 28.8% (Left Axis)Consumer Loan Growth: Q1 @ -6.7% (Right Axis)

More Willing

Less Willing

4242

Consumer Loans OutstandingYr/Yr Percent Change, Break Adjusted, Seasonally Adjusted

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2002 2004 2006 2008 2010-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Credit Card: May-18 @ -14.7%Non-Credit Card: May-18 @ -2.5%

4343

Net Charge-offsBillions

$0

$5

$10

$15

$20

85 90 95 00 05 10$0

$2

$4

$6

$8Credit Card Loans: Q1 @ $11.4 (Left Axis)Non-Credit Card Loans: Q1 @ $2.5 (Right Axis)

4444

C&I Loans OutstandingY-o-Y Percent Change, Break Adjusted, Seasonally Adjusted

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

75 80 85 90 95 00 05 10-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

C&I: May-18 @ 3.4%

4545

ManufacturingStrong, but Losing

Momentum?

4646

ISM Manufacturing

30

35

40

45

50

55

60

65

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Index

Source: Institute for Supply Management

4747

$65

$70

$75

$80

$85

$90

$95

$100

$105

$110

$115

5/20/10 8/20/10 11/20/10 2/20/11 5/20/1168

70

72

74

76

78

80

82

Source: Federal Reserve; Bloomberg; Wells Fargo Economics

Oil and the Dollar$/BBL Index

WTI (L)

Trade-weightedDollar (R)

4848

US Manufacturing Employment GrowthYr/Yr Percent Change vs. 3 Month Percent Change, Annual Rate

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

93 95 97 99 01 03 05 07 09 11-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

3-Month Annual Rate: Apr @ 3.5%Year/Year Change: Apr @ 1.7%

4949

ConsumersBetter But Still Not

Confident

60.8

25.3

47.343.2

0

20

40

60

80

100

120

140

160

May-71 May-76 May-81 May-86 May-91 May-96 May-01 May-06 May-11

Consumer ConfidenceIndex

Source: Conference Board

Income ExpectationsPercent Expecting Increase in Incomes in Next 6 Months

5%

10%

15%

20%

25%

30%

35%

40%

80 85 90 95 00 05 105%

10%

15%

20%

25%

30%

35%

40%

Income Expectations: J an @ 11.4%

Consumer Purchasing PlansPercent Planning to Buy in Next 6 Months, 12-M Moving Average

2.0%

2.4%

2.8%

3.2%

3.6%

4.0%

05 06 07 08 09 10 114.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Home: J an @ 2.1% (Left Axis)Auto: J an @ 5.0% (Right Axis)

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

4/30/2007 4/30/2008 4/30/2009 4/30/2010 4/30/11

Source: Bureau of Economic Analysis

Personal Consumption ExpendituresY/Y%

-4

-3

-2

-1

0

1

2

3

4

5

6

7

4/30/2007 4/30/2008 4/30/2009 4/30/2010 4/30/11

Source: Commerce Dept.

Personal IncomeY/Y%

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

Source: BEA, Wells Fargo Securities, LLC

Personal SavingsBillions, SAAR

Home Prices vs. Consumer SpendingYear-over-Year Percent Change

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

74 79 84 89 94 99 04 09-5%

0%

5%

10%

15%

Existing Median SF Home Prices: Q1 @ -4.2% (L)Consumer Spending: Q1 @ 4.4% (R)

Correlations:1970-2011: 69%2002-2011: 76%

5757

Economic Growth and Outlook

Moderate Growth Continues

-0.7

0.6

-4.0

-6.8

-4.9

-0.7

1.6

5.03.7

1.72.6 3.1

1.8 2.02.8 2.9

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2008.1 2009.1 2010.1 2011.1

HISTORY

FORECAST

Q/Q%ChangeReal GDP Annualized

Leading Economic Indicators

(1.2)(1.0)(0.8)(0.6)(0.4)(0.2)-0.20.40.60.81.01.21.41.6

4-08 10-08 4-09 10-09 4-10 10-10 4-11

MOM Pct Chg

-0.3

Source: The Conference Board

6060

Budget Deficit and DebtBig, Big Problems

6161

$(1,600)

$(1,400)

$(1,200)

$(1,000)

$(800)

$(600)

$(400)

$(200)

$-

$200

$400

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Source: CBO

Federal Budget Surplus/DeficitBillions

H F

Forecast based on President's Budget

6262

-30.3

-8.9

-35

-30

-25

-20

-15

-10

-5

0

5

10

1940 1950 1960 1970 1980 1990 2000 2010 2020

Federal Budget Surplus/Deficit (% of GDP)

H F

Source: CBO; Economic Report of the President

World War II Forecast based on President's Budget

6363

62.1

108.6

0

20

40

60

80

100

120

1940 1950 1960 1970 1980 1990 2000 2010 2020

Federal Debt (% of GDP)

H F


Debt to the PublicWorld War II

Forecast based on President's Budget

6464

62.1%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980 1990 2000 2010


Source: CBO

Debt to the Public

6565

95.7%

62.1%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980 1990 2000 2010


Source: CBO

Total Debt

Debt to the Public

Total debt ($13.5T) = debt held by the public ($9.0T) + debt held by gov't accounts ($4.5T)

Gov't accounts* Social Security* Medicare* Other Trust Funds

6666

0

20

40

60

80

100

120

1983 1993 2003 2013 2023 2033 2043 2053 2063 2073 2083


H F


Debt to the Public

Baseline

6767

111.0

923.0

0

100

200

300

400

500

600

700

800

900

1,000

1983 1993 2003 2013 2023 2033 2043 2053 2063 2073 2083


H F


Debt to the PublicAlternative

Baseline

Alternative scenarioMore spending• Medicare payment rates rise• Non-entitlement spending/GDP falls less than baselineLess Revenue• Bush tax cuts extended• AMT reach little changed

6868

$14,294

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

1981Q2 1991Q2 2001Q2 2011Q2

Federal Debt

Source: CBO

Total Debt

Billions

Federal Debt Limit Has Been Reached Debt limit of $14.294 trillion reached May 16 Payments to two big gov’t pension plans halted Republicans say no debt limit increase without cuts Other possible options until August 2

trim or delay sales of marketable securities suspend sales of non-marketable securities suspend flows or redeem securities of gov’t accounts swap debt with Federal Financing Bank

If debt limit not raised by August 2 suspend payments (Social Security, Medicare, military) default on bonds, interest rates rise

Key Takeaways

Job growth - will be less than desired weak labor demand (productivity, off-shoring) weak product demand (unemployment) skills imbalance regulations (healthcare, Dodd-Frank, EPA) uncertainty

Housing Market – will remain challenged weak labor market tight lending standards Buyers fear further price declines, more foreclosures Seller can’t sell (low offers, low appraisals, negative equity) high inventories, shadow inventory

Budget Deficits – will likely weigh on growth tax increases spending cuts higher interest rates? less domestic investment lower income growth

7171

Questions?

[email protected]/com/research/

economics

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Wells Fargo Economics The Long Road Ahead Ed Kashmarek Economist Wells Fargo Institutional Retirement and Trust Client Forum Omaha, NE June 7, 2011 © 2011