April 30, 2010

Economics Group

John Silvia, Chief Economist

john.silvia@wellsfargo.com ! 704-374-7034

GDP: 2010 Starts Off with Positive Momentum

Real GDP was reported up 3.2 percent with gains in consumer spending, equipment investment and boosts
from federal spending and inventories. Construction spending remains weak while inflation is tame.

Recession Passes into History: Pace of Recovery in Question Real Domestic Final Sales
Bars = Compound Annual Rate Line = Yr/Yr % Change
While the recession appears to have passed, the character of the gains in 8% 8%

growth leaves the pace of the recovery in question. Real domestic final
6% 6%
sales were up just 1.6 percent in the first quarter (1.7 percent in the fourth
quarter) with gains in consumer spending and business investment (top 4% 4%

figure).
2% 2%
Consumer spending improved in the first quarter as special federal
supports, wealth gains in the equity markets and a gradual improvement in 0% 0%

the labor market all suggest sustained consumer spending going forward.
In addition, housing prices appear to have stabilized in some areas while in -2% -2%

other areas prices are improving; this provides support to consumer -4% -4%
Final Sales: Q1 @ 1.6%
confidence and wealth perceptions. Meanwhile, business investment in Final Sales: Q1 @ 1.4%
equipment and software continues at a strong pace and is consistent with -6% -6%
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
what we have seen in orders/shipments for capital goods, especially
primary metals, over the last six months. Inventory Change in GDP
Quarterly Change, Annual Rate, Billions of Dollars
Inventories and Federal Spending: Temporary Support $150 $150

Growth received a temporary boost for the third straight quarter from $100 $100
inventories as the huge inventory decline of mid-2009 has faded away.
This adjustment is typical of every business cycle and suggests that the $50 $50

inventory contribution to growth will be flat for the rest of this year.
$0 $0
Federal spending, however, could be another issue. In the short run,
countercyclical fiscal stimulus is welcome—but in this election year the risk -$50 -$50

is for sustained federal spending to ensure growth into the election with the
-$100 -$100
possibility that investors, both public and private, will become increasingly
leery of outsized federal deficits, affecting their willingness to continue to -$150 -$150
buy that debt at currently prevailing interest rates. On the opposite side is Change in Inventories: Q1 @ $31.1B

state and local spending which declined in the last two quarters. -$200
1997 1999 2001 2003 2005 2007 2009
-$200

Inflation and Risks to the Outlook

Current inflation measures are running at below the 2 percent perceived GDP Price Index
Seasonally Adjusted Annual Rate
Fed target. Yet one of the biggest risks for 2010 is that oil prices will spike, 4.5% 4.5%

sending gasoline back up toward $4 a gallon. This is not our forecast, but 4.0% 4.0%

we do see oil prices rising over the forecast period and gasoline prices 3.5% 3.5%

appear destined to rise to more than $3 a gallon this summer. 3.0% 3.0%

Another risk for the recovery is the uncertainty of the pace of real economic 2.5% 2.5%

growth without the artificial supports provided by special federal programs 2.0% 2.0%

and unusually low, sustained, interest rates by the Federal Reserve. 1.5% 1.5%

Housing is already struggling at the current level of rates and without 1.0% 1.0%
first-time home buyer credits and low rates the ability of any housing
0.5% 0.5%
recovery to really add to growth is in question. Finally, consumer spending
0.0% 0.0%
gains remain limited by job gains and those jobs remain in question given GDP Price Index: Q1 @ 0.9%
-0.5% -0.5%
the many policy uncertainties associated with taxes and regulation. 2002 2003 2004 2005 2006 2007 2008 2009 2010

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

Wells Fargo Securities, LLC Economics Group

Diane Schumaker-Krieg Global Head of Research (704) 715-8437 diane.schumaker@wellsfargo.com

& Economics (212) 214-5070

John E. Silvia, Ph.D. Chief Economist (704) 374-7034 john.silvia@wellsfargo.com

Mark Vitner Senior Economist (704) 383-5635 mark.vitner@wellsfargo.com
Jay Bryson, Ph.D. Global Economist (704) 383-3518 jay.bryson@wellsfargo.com
Scott Anderson, Ph.D. Senior Economist (612) 667-9281 scott.a.anderson@wellsfargo.com
Eugenio Aleman, Ph.D. Senior Economist (612) 667-0168 eugenio.j.aleman@wellsfargo.com
Sam Bullard Economist (704) 383-7372 sam.bullard@wellsfargo.com
Anika Khan Economist (704) 715-0575 anika.khan@wellsfargo.com
Azhar Iqbal Econometrician (704) 383-6805 azhar.iqbal@wellsfargo.com
Adam G. York Economist (704) 715-9660 adam.york@wellsfargo.com
Ed Kashmarek Economist (612) 667-0479 ed.kashmarek@wellsfargo.com
Tim Quinlan Economist (704) 374-4407 tim.quinlan@wellsfargo.com
Kim Whelan Economic Analyst (704) 715-8457 kim.whelan@wellsfargo.com
Yasmine Kamaruddin Economic Analyst (704) 374-2992 yasmine.kamaruddin@wellsfargo.com

Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer
registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the
Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through
subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A, Wells Fargo Advisors, LLC,
and Wells Fargo Securities International Limited. The information and opinions herein are for general information use
only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities,
LLC assume any liability for any loss that may result from the reliance by any person upon any such information or
opinions. Such information and opinions are subject to change without notice, are for general information only and are
not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized
investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a
wholly owned subsidiary of Wells Fargo & Company © 2010 Wells Fargo Securities, LLC.

SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE