Wells Fargo - SDBJ 2016 Economic Trends

2016 Economic Outlook

Anika R. Khan, Senior EconomistJanuary 07, 2016

2

Five Key Themes

U.S. Economic Growth

Slow Global Growth

Slowing global growth will likely have limited direct effects on overall U.S. real GDP growth; however, indirect effects including monetary divergence where capital inflows into the U.S. continue to push up the dollar could be a source of pain this year

Risks to Outlook

The pace of growth is expected to be largely unchanged this year, however, there has been a shift in the underlying sectors adding to the headline. The recent sell off in the high yield market, namely ETFs, and declining energy prices could also add additional uncertainty

Data-DependentFederal Reserve

The Fed has started to normalize its short-term target rate, but will remain data-dependent paying close attention to labor market conditions, inflation, inflation expectations, financial market stability and international developments

China

Economic growth and labor market conditions in the U.S. are improving at a steady pace. Consumer spending and residential investment are expected to continue to strengthen in 2016. Moreover, momentum remains solid for final domestic demand

China’s economic growth continues to slow, bringing much of the commodity export-dependent world down with it. Residential and nonresidential construction are also showing marked declines

Economic Outlook 33

Economic Growth

We are now six years into the recovery and economic growth is increasing at a steady pace. Despite a slow start to the year, activity is expected to improve in line

with the previous year

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

Real Private Final SalesReal GDP Forecast

-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

U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change

GDP - CAGR: Q3 @ 2.0%GDP - Yr/Yr Percent Change: Q3 @ 2.1%

Forecast

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Real Private Final Sales to Domestic PurchasersBars = CAGR Line = Yr/Yr Percent Change

Real Priv Fin Sales to Dom. Purch. - CAGR: Q3 @ 3.2%Real Priv Fin Sales to Dom. Purch. - Yr/Yr Pct Chg: Q3 @ 3.2%

Forecast

Economic Outlook 4

Consumer Spending

Solid improvement in consumer spending is helping to drive overall economic growth. Consumer balance sheets are healthy and increased purchasing power

due to the drop in gasoline prices is helping to fuel growth

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Real Personal Consumption ExpendituresBars = CAGR Line = Yr/Yr Percent Change

PCE - CAGR: Q3 @ 3.0%PCE - Yr/Yr Percent Change: Q3 @ 3.1%

Forecast


Real Disposable IncomeReal Consumer Spending

-19.9%

-2.3%

0.7%

1.4%

2.1%

2.2%

3.5%

4.0%

5.4%

7.3%

-24% -20% -16% -12% -8% -4% 0% 4% 8% 12%

Gas Stations

Electronics

"Core" Retail Sales

Total Retail Sales

Food, Beverages

Building Materials

Health, Pers. Care

Motor Veh. & Parts

Furniture

Nonstore Retailers

Retail SalesYear-over-Year Percent Change, SA

November 2015

5

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

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: Q3 @ 95.8%

Source: Federal Reserve Board and Wells Fargo Securities, LLC

Debt ServiceDebt to Income

14.5%

15.0%

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

18.5%

14.5%

15.0%

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

18.5%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Financial Obligations Ratio-TotalAs a Percent of Disposable Personal Income

Total: Q3 @ 15.3%

Economic Outlook 66

GDP Components

Businesses still have a considerable amount of cash on the sidelines. We expect some of this money to be redirected into capital spending, but there are downside

risks due to the recent drop in oil prices


Cash on SidelinesBusiness Fixed Investment

-30%

-20%

-10%

0%

10%

20%

30%

-30%

-20%

-10%

0%

10%

20%

30%

2000 2002 2004 2006 2008 2010 2012 2014

Capital Spending by TypeYear-over-Year Percent Change

Intellectual Property: Q3 @ 5.4%Equipment: Q3 @ 1.8%Structures: Q3 @ -1.2%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

U.S. Nonfin. Corporate Cash HoldingsTotal Assets Market Value, U.S. Nonfinancial Corporations

Cash Ratio: Q3 @ 4.1%4-Q Moving Average: Q3 @ 4.2%

77

Residential

Residential investment spending has made only a marginal contribution to real GDP growth. However, improving household formations suggest a pick up is

imminent


Household FormationsResidential Investment Spending

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

85 88 91 94 97 00 03 06 09 12 15

Residential Investment SpendingBar = Compound Annual Rate Line = Percentage Points at Annual Rate

Residential Investment Spending: Q3 @ 8.2% (Right Axis)Contribution to U.S. Real GDP: Q3 @ 0.3% (Left Axis)

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

60 64 68 72 76 80 84 88 92 96 00 04 08 12

Household FormationsAverage of CPS/ASEC and CPS/HVS, In Millions

Survey Averages: 2014 @ 900K1948 to 2014 Average

8

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

66 70 74 78 82 86 90 94 98 02 06 10 14

U.S. Homeowners vs. RentersAnnual Change in Occupied Units, In Thousands

Renters: 2014 @ 1026.3 ThousandHomeowners: 2014 @ -234.5 Thousand

Series Break 1981

Homeowners vs. Renters

As the echo-boomers come into adulthood and have a higher propensity to rent, apartment demand should remain robust in the years

ahead


9

25

30

35

40

45

50

55

60

65

25

30

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 16

ISM Manufacturing & Non-Manufacturing Composite Index

ISM Manufacturing Index SA: Dec @ 48.2ISM Non-Manufacturing Index SA: Nov @ 55.9

Business Activity

Recent weakness has been concentrated in the goods

producing sector, while activity in the service sector

remains fairly strong

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

10

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1948-1973 1974-1995 1996-2004 2005-2014

Labor Productivity and IncomeAverage Annual Percent Change

Labor ProductivityReal Disposable Income Per Capita

Productivity & Income

If labor productivity growth remains weak, the paltry

pace of real income growth seems set to continue

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

Valuations and the Credit Cycle

12

0

100

200

300

400

500

600

700

0

100

200

300

400

500

600

700

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

Aaa and Baa Corporate Bond SpreadsOver 10-Year Treasury, Basis Points, Shaded = FOMC Tightening

Baa Spread: Nov @ 308 bpsAaa Spread: Nov @ 180 bps

Credit Spreads

Past tightening cycles show that credit spreads have a

tendency to narrow


13

Late Stages of the Credit Cycle

Phases of the Credit Cycle Recovery Phase

Consolidation Phase Deterioration Phase

Material Deterioration During the advanced stage

of a credit cycle companies become more aggressive with their balance sheets.

Aggregate leverage is expected to rise throughout the year as borrowing outpaces earnings.

Debt-driven M&A, leveraged recaps and LBOs are all on the rise.

However, some sectors and companies are attempting to repair balance sheets.

Source: Wells Fargo Securities, LLC

A Typical Corporate Credit Cycle

RecoveryDeleverageProfits rise

Yields stabilizeSpreads gap tighter

ConsolidationLeverage troughs

Profits peakYields rise

Spreads tighten

DeteriorationReleverage

Profits decelerate/declineYields rise then decline

Spreads grind tighter then widen

Today’screditmarket

Economic Outlook 14

1,200

1,400

1,600

1,800

2,000

2,200

2,400

$0

$50

$100

$150

$200

$250

$300

J an-12 J ul-12 J an-13 J ul-13 J an-14 J ul-14 J an-15 J ul-15

U.S. M&A Volume and S&P 500 IndexBillions of Dollars; Index

US M&A Volume (3-MMA): Nov @ $273.6B (Left Axis)S&P 500 Index: Nov @ 2080.4 (Right Axis)

M&A Volume

U.S. M&A and the S&P 500 remain correlated over time

Source: Thomson Reuters, Capital IQ and Wells Fargo Securities, LLC

Economic Outlook 15

50

100

150

200

250

50

100

150

200

250

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

Moody's/RCA Commercial Property Price IndexIndex; December 2000= 100

Commercial Property Price Index: Oct @ 209.0

CRE Valuations

Much of the surge in pricing continues to be driven by

increases in major markets for the apartment and office

central business district

Source: Real Capital Analytics, Inc. and Wells Fargo Securities, LLC

Economic Outlook 16

Apartment Effective Revenue Growth

Source: Reis, Inc. and Wells Fargo Securities, LLC

Los Angeles

Houston

Chicago

Dallas

Atlanta

PhoenixNorthern New Jersey

Orange County Denver

Suburban VirginiaSan Antonio

San DiegoPhiladelphia

Boston

Oakland

Seattle

Suburban Maryland

Central New JerseyBaltimore

San Francisco

Las Vegas

Riverside

TampaDetroit

Orlando

New York Metro

Indianapolis

Fort Worth

Kansas City

St. Louis

Raleigh

Miami

Columbus

Austin

Portland

Cleveland

Charlotte

Cincinnati

Minneapolis

San Jose

Washington, D.C.

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

-2% 0% 2% 4% 6% 8% 10% 12%

3-Mo

nth

Movi

ng A

vera

ge P

erce

nt C

hang

e

Year-over-Year Percent Change

Apartment Effective Revenue Growth: Q3 2015Year-over-Year Percent Change, 3-MMA; Sorted by Stock

Stock SizeLess than 150,000 Units150,000-200,000 UnitsMore Than 200,000 Units

Recovering Expanding

Contracting Decelerating

17

Five Key Themes

Lift-Off

Yield Curve & Term Premium

Decomposing the yield curve into the risk-neutral yield and the term premium, we find longer-dated U.S. Treasuries have been lower, principally due to a lower term premium

Fed Balance Sheet Operations

Fed balance sheet operations have had substantial effects on longer-term Treasury Yields, by reducing the term premiums on longer-dated Treasury securities

Data Dependent The Fed will remain data-dependent paying close attention

to labor market conditions, inflation, inflation expectations, financial market stability and international developments

Safe-Haven Flows & Policy

Divergence

The divergence between monetary policies of large economies will continue to put upward pressure on the dollar with continued flows into U.S. assets and longer-term U.S. Treasuries

The Fed has started to normalize its short-term target rate this past December, we expect to see some financial market volatility and a flatter yield curve

1818

Employment Situation

Slack in the labor market is steadily diminishing and wage growth is beginning to show some signs of picking up

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

Unemployment RateUnemployment Rate

2%

4%

6%

8%

10%

12%

14%

16%

18%

2%

4%

6%

8%

10%

12%

14%

16%

18%

94 96 98 00 02 04 06 08 10 12 14

Unemployment RatesSeasonally Adjusted

FOMC Central Tendency for Longer RunUnemployment Rate: Nov @ 5.0%U-6 Unemployment Rate: Nov @ 9.9%

1%

2%

3%

4%

5%

6%

0%

5%

10%

15%

20%

25%

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

ECI Wage Growthvs. Small Business Plans to Raise Compensation and Avg. Hourly Earnings

NFIB Plans to Raise Compensation: Q3 @ 14.7% (Left Axis)Average Hourly Earnings (YoY): Q4 @ 2.3% (Right Axis)ECI Wages & Salaries (YoY): Q3 @ 2.1% (Right Axis)

19

0.5%

2.0%1.9%

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%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

PCE Deflator ForecastFed Central Tendency Forecast vs. Wells Fargo Forecast

Central Tendency Forecast RangeHistorical PCE DeflatorWells Fargo Economics Forecast FOMC

Dec. Forecast

Q4-over-Q4 Percent Change

Inflation

Members of the FOMC expect inflation to rise over the course of the year and

approach its long-run target this year as the economy

gradually strengthens and inflation expectations

remain stable

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

20

Inflation: Services vs. Goods

Services continue to underpin overall inflation, led by rising shelter costs as the housing market has recovered. Between 2008 and 2013, total prices were up 8.2

percent vs. 16.8 percent for medical care

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

92 94 96 98 00 02 04 06 08 10 12 14 16

U.S. "Core" CPI - Services vs. Goods Year-over-Year Percent Change

Core Services CPI: Nov @ 2.9%Core Goods CPI : Nov @ -0.6%

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

Shelter CostsServices vs. Goods

-1%

0%

1%

2%

3%

4%

5%

6%

7%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Shelter, OER & Rent CostsYear-over-Year Percent Change

Shelter: Nov @ 3.2%Rent: Nov @ 3.6%OER: Nov @ 3.1%

21

0

50

100

150

200

250

300

350

400

450

500

0

50

100

150

200

250

300

350

400

450

500

0 5 10 15 20 25 30

Cum

ulat

ive

Tigh

teni

ng (b

ps)

Length of Tightening Cycle (Months)

Historic Fed Tightening CyclesCumulative Tightening (bps) in Months

Past Tightening Cycles

There have been five tightening cycles in the

past 25 years

In the 2004 cycle, the Fed stayed on hold for 12 months and hiked rates 425 bps from

1.00%


Tightening Last Cut Length of Cumulative Cumulative Tightening Terminal Cycle to First Hike Tightening Cycle Tightening First Year Fed Funds Rate

1983 - 1984 5.0 Months 16 Months 325 bps 200 bps 11.75%1986 - 1989 4.0 Months 28 Months 387 bps 100 bps 9.75%1994 - 1995 17 Months 13 Months 300 bps 250 bps 6.00%1999 - 2000 7 Months 12 Months 175 bps 175 bps 6.50%2004 - 2006 12 Months 25 Months 425 bps 200 bps 5.25%

Average 9 Months 18.8 Months 322.4 bps 185 bps 7.85%

Tightening Cycles Since 1983Historic Fed Tightening Cycles

22

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Federal Reserve Balance Sheet vs. S&P 500 Index Trillions, Index

Agencies & MBS: Dec @ $1,786.3B (Left Axis)Treasuries: Dec @ $2,461.6B (Left Axis)Other Securities: Dec @ $206.8B (Left Axis)S&P 500 Index: J an @ 2,043.9 (Right Axis)

Fed Balance Sheet

As expected, the Fed’s bond buying program ended in October. Now the focus is

on when the Fed will begin whittling down its balance

sheet


Global Outlook

24

-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%

7.5%

-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%

7.5%

1980 1985 1990 1995 2000 2005 2010 2015

Real Global GDP GrowthYear-over-Year Percent Change, PPP Weights

Period Average

WFForecast

Global Real GDP Growth

Global real GDP growth has grown slightly below its

long-run average in recent years. Although we look for

global GDP to increase somewhat next year, we do not expect to see the robust pace of growth seen in the

previous expansion

Source: IHS Global Insight and Wells Fargo Securities, LLC

2525

Foreign Exchange Holdings

Foreign exchange reserves in emerging markets are steadily declining. Much of the drawdown is occurring to stabilize foreign currencies; however, the level is

still high relative to previous business cycles

Source: International Monetary Fund and Wells Fargo Securities, LLC

China Reserve DrawdownWorld Reserves

$0

$2

$4

$6

$8

$10

$12

$14

$0

$2

$4

$6

$8

$10

$12

$14

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

World Foreign Exchange ReservesTrillions of USD

Emerging Markets: Q1 @ $7.5 TrillionAdvanced Markets: Q1 @ $3.9 Trillion

$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

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Chinese Foreign Exchange ReservesTrillions of USD

Foreign Exchange Reserves: Nov @ $3.4 Trillion

2626

Foreign Exchange Holdings

Emerging market accumulation has reversed with China and Russia seeing the largest drawdown

Source: International Monetary Fund, Bloomberg LP and Wells Fargo Securities, LLC

Global Reserve DrawdownCurrent Accounts

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

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

Developing Economies Current AccountPercent of GDP

All Developing Economies: 2014 @ 0.5%Excluding MENA and China: 2014 @ -1.5%

Country Peak Current DrawdownChina $3,993.2B $3,514.1B -$479.1BRussia $473.1B $308.5B -$164.6BSaudia Arabia $731.2B $642.1B -$89.1BMalaysia $136.8B $90.1B -$46.6BTurkey $112.6B $100.1B -$12.5B

Billions of USDGlobal Foreign Exchange Reserves

27

0%

2%

4%

6%

8%

10%

12%

14%

0%

2%

4%

6%

8%

10%

12%

14%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Chinese Real GDP ForecastYear-over-Year Percent Change

Year-over-Year Percent Change: Q3 @ 6.9%

Forecast

Chinese GDP Forecast

Growth in China is not expected to return to the

double-digit rate seen earlier in the decade


28

-9%

-6%

-3%

0%

3%

6%

9%

12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Chinese PPIYear-over-Year Percent Change

Chinese PPI : Nov @ -5.9%

Chinese Producer Price Index

Chinese producer prices have been in negative

territory since early 2012

Source: Bloomberg LP and Wells Fargo Securities, LLC

29

-5%

0%

5%

10%

15%

20%

25%

30%

35%

47

48

49

50

51

52

53

J an-13 J ul-13 J an-14 J ul-14 J an-15 J ul-15 J an-16

Caixin China Manufacturing PMI vs. S&P 500 IndexSeasonally Adjusted; Year-over-Year Percent Change

Manufacturing PMI: Dec @ 48.2 (Left Axis)S&P 500 Index Year-over-Year: Dec @ -0.7% (Right Axis)

Manufacturing Activity vs. S&P 500

Manufacturing activity in China is starting to improve

somewhat, but is still weighing on the markets


30

-40%

-20%

0%

20%

40%

60%

80%

-40%

-20%

0%

20%

40%

60%

80%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Chinese TradeYear-over-Year Percent Change, 3-Month Moving Average

Exports: Nov @ -5.8%Imports: Nov @ -16.0%

Chinese Trade

Although Chinese trade has clearly weakened over the past few years, part of the

recent decline can be attributed to price effects.

Moreover, the direct effects to the U.S. appear to be

minimal. China accounts for just 7 percent of U.S. exports and less than 1 percent of real GDP


31

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

50

70

90

110

130

150

170

190

210

230

250

270

94 96 98 00 02 04 06 08 10 12 14 16

Bloomberg Industrial Metals Index vs. Chinese GDPIndex, Year-over-Year Percent Change in Real GDP

Industrial Metals Index: Q4 @ 90.44 (Left Axis)Chinese Real GDP: Q3 @ 6.9% (Right Axis)

*Quarterly Average to Date

Chinese GDP vs Industrial Metals

A weakening Chinese economy has weighed

heavily on prices, specifically industrial

metals


32

-12%

-8%

-4%

0%

4%

8%

-12%

-8%

-4%

0%

4%

8%

2002 2004 2006 2008 2010 2012 2014 2016

Eurozone Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change

Compound Annual Growth: Q3 @ 1.2%Year-over-Year Percent Change: Q3 @ 1.6%

Forecast

Eurozone GDP Forecast

The Eurozone has emerged from its double-dip

recession, but the recovery will lag the U.S.


33

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

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

10-Year Government Bond YieldsPercent

I taly: Dec 31 @ 1.6%United States: Dec 31 @ 2.3%United Kingdom: Dec 31 @ 2.0%Germany: Dec 31 @ 0.6%

Yields

The U.S. will continue to be a safe haven for foreign

capital


34

90

95

100

105

110

115

120

125

90

95

100

105

110

115

120

125

2010 2011 2012 2013 2014 2015

U.S. Trade Weighted Dollar IndexJ anuary 1997=100

Broad Currency Index: Dec-25 @ 122.7

Trade Weighted Dollar

We expect the dollar to continue to strengthen

against a broad basket of currencies as U.S. economic

growth improves and the Fed increases short-term

rates


35

U.S. Forecast

Wells Fargo U.S. Economic Forecast

2013 2014 2015 2016 20171Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Real Gross Domestic Product 1 0.6 3.9 2.1 1.1 2.6 2.6 2.7 2.6 1.5 2.4 2.4 2.4 2.5Personal Consumption 1.8 3.6 3.0 2.8 2.7 2.7 2.7 2.6 1.7 2.7 3.1 2.8 2.5

Inflation Indicators 2

PCE Deflator 0.2 0.3 0.3 0.5 1.4 1.3 1.6 2.0 1.4 1.4 0.3 1.6 2.0Consumer Price Index - 0.1 0.0 0.1 0.5 1.8 1.6 1.8 2.2 1.5 1.6 0.2 1.9 2.2

Industrial Production 1 - 0.3 - 2.3 2.6 - 0.1 2.4 2.1 1.1 2.2 1.9 3.7 1.5 1.4 2.1Corporate Profits Before Taxes 2 4.6 0.6 - 4.7 5.0 4.3 4.8 4.6 4.6 2.0 1.7 1.3 4.6 4.4Trade Weighted Dollar Index 3 92.1 89.9 92.3 93.0 94.0 95.5 97.0 98.3 75.9 78.5 91.8 96.2 99.8Unemployment Rate 5.6 5.4 5.2 5.0 4.9 4.8 4.7 4.6 7.4 6.2 5.3 4.7 4.5Housing Starts 4 0.98 1.16 1.15 1.17 1.24 1.24 1.25 1.26 0.92 1.00 1.12 1.25 1.35

Quarter- End Interest Rates 5

Federal Funds Target Rate 0.25 0.25 0.25 0.50 0.50 0.75 1.00 1.25 0.25 0.25 0.31 0.88 1.88Conventional Mortgage Rate 3.77 3.98 3.89 3.96 4.10 4.15 4.17 4.20 3.98 4.17 3.90 4.16 4.3510 Year Note 1.94 2.35 2.06 2.28 2.45 2.50 2.55 2.60 2.35 2.54 2.16 2.53 2.80

Forecast as of: December 9, 20151 Compound Annual Growth Rate Quarter-over-Quarter2 Year-over-Year Percentage Change3 Federal Reserve Major Currency I ndex, 1973=100 - Quarter End4 Millions of Units5 Annual Numbers Represent Averages

ForecastActual2015 2016

ForecastActual

Appendix

Economic Outlook 37

Recent Special Commentary

Wells Fargo Economics Group Publications

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Date Title AuthorsU.S. Macro

December- 22 Our Favorite Charts of 2015 Silvia December- 16 FOMC Moves Forward In a Fog: Gradual, Data Dependent SilviaDecember- 10 Househould Debt: Opportunities/Risks in the Auto Sector Silvia & MoehringDecember- 09 The Great Divide: 2016 Annual Economic Outlook SilviaNovember- 23 Are Risks Brewing in Consumer Lending? Khan & Brown

U.S. RegionalDecember- 18 California Employment Conditions: November 2015 Vitner & BatchellerDecember- 16 North Carolina Economic Outlook: December 2015 Vitner & BatchellerDecember- 10 State GDP: Low Commodity Prices Hit Energy and Farm Economies Vitner & BatchellerNovember- 24 California Economic Outlook: November 2015 Vitner & BatchellerNovember- 20 Florida's Economy Continues to Add J obs at a Rapid Pace Vitner & Batcheller

Global EconomyJ anuary- 04 Singapore's Economy Ends a Week 2015 on a High Note Bryson & Nelson

December- 10 Turkey: Stronger Savings & Investment Needed Bryson & NelsonDecember- 10 Global Chartbook: December 2015 Quinlan, House & NelsonDecember- 03 Brazilian Economy Continues to Plunge AlemánDecember- 03 ECB Disappoints at Today's Policy Meeting Bryson

Interest Rates/Credit MarketDecember- 16 2016 Net Treasury Issuance Outlook Silvia, Vitner & BrownDecember- 09 Bank Lending Conditions: Support for Consumer Spending Silvia, Vitner & BrownNovember- 12 All Systems Go for a FOMC Move in December? Silvia, Vitner & BrownNovember- 04 Inflation Expectations Ease Further Silvia, Vitner & BrownOctober- 28 Debt Ceiling Debates and Their Effects on Yields and Volatility Silvia, Vitner & Brown

Real EstateDecember- 22 Nonresidential Construction Recap: December KhanDecember- 04 Housing Chartbook: November 2015 Vitner & KhanNovember- 30 Nonresidential Construction Recap: November KhanNovember- 24 Commercial Real Estate Chartbook: Q3 KhanNovember- 16 Are Risks Brewing in CRE Lending? Khan & Brown

A Sampling of Our Recent Special, Regional & Industry Commentary

Wells Fargo Securities, LLC Economics Group

38

John E. Silvia … ...................... . … [email protected]

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

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