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Economic Outlook
Mark Vitner, Managing Director & Senior Economist October 16, 2012
Economic Growth
10%
GDP - CAGR: Q2 @ 1.3%
10%
GDP - Yr/Yr Percent Change: Q2 @ 2.1%
8% 6%
8% 6%
We are more than three years into the economic recovery and there is still a considerable amount of uncertainty regarding sovereign debt issues in Europe, the federal budget deficit and the willingness of businesses and households to commit to major capital purchases.
Forecast
2002
2004
2006
2008
2010
2012
2014
Economic Outlook
21%
10-Year Treasury Yield: Oct @ 1.74% 18% Fed Funds Target: Oct @ 0.25%
21%
18%
15%
15%
Treasury yields are currently near record low levels. We believe uncertainty is the primary driver of ultra-low interest rates.
12%
12%
9%
9%
6%
6%
3%
3%
0% 1971
Economic Outlook
The timing for the Feds first tightening move has been pushed even further out. Long-Term growth estimates have also been scaled back.
14
June Release September Release
14
5.0%
June Projection
5.0%
September Projection
12
12
4.5% 4.0%
4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
10
10
2
0.5%
0.0%
2012
2013
2014
2015
Longer Run
Economic Outlook
$3.5
$3.0
$3.0
$2.5
$2.5
The massive expansion of the Feds balance sheet has lifted asset prices and has also given the economy a boost. But all magic comes with a price!
$2.0
$2.0
$1.5
$1.5
$1.0
$1.0
$0.5
$0.5
$0.0 2007
Economic Outlook
Labor Market
Unemployment is gradually trending down, although much of the improvement has come from unusual forces.
8.0%
8.0%
6.0%
6.0%
4.0%
4.0%
2.0% 1994
Economic Outlook
Labor Market
Employment Cycles
Percent Change from Cycle Peak
20.0%
1948-1949 Cycle 1981-1982 Cycle 1989-1991 Cycle 2001 Cycle 2007-To-Date Forecast
20.0%
16.0%
16.0%
12.0%
12.0%
Job losses exceeded every postWorld War II downturn, and the modest recovery to date has been extremely disappointing.
8.0%
8.0%
4.0%
4.0%
0.0%
0.0%
-4.0%
-4.0%
-8.0% 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84
-8.0%
Economic Outlook
Consumer Related
The recent strength in the stock market has helped bolster consumer spending at a time that real incomes are barely growing, and consumer confidence remains historically low.
Household Wealth
Household Assets
Trillions of Dollars
Consumer Confidence
Confidence vs. Retail Sales and Income
Conference Board Consumer Confidence, Yr/Yr % Chg. 3-MMA
$90
Financial Assets: Q2 @ $51.9 Trillion
$90
Household Real Estate Holdings: Q2 @ $16.9 Trillion Other Tangible Assets: Q2 @ $7.3 Trillion
210 Confidence Yr/Yr % Chg: Sep @ 51.6% Confidence: Sep @ 70.3 (Left Axis) Retail Ex-Auto Yr/Yr % Chg 3-MMA: Aug @ 3.1% (Right Axis) Real Disposible Income Per Capita: Aug @ 1.0% (Right Axis)
16.0%
$80 $70
180
12.0%
150
$60 $50 $40 $30
60 120
8.0%
4.0%
90
0.0%
-4.0%
$20 $10
30 -8.0%
$0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
$0
0 93 95 97 99 01 03 05 07 09 11
-12.0%
Source: U.S. Department of Commerce, Conference Board and Wells Fargo Securities, LLC
Economic Outlook
Consumer Confidence
Economic growth is unlikely to accelerate in a meaningful way until consumers feel better about current economic conditions than they do about future economic prospects.
Consumer Confidence
Conference Board Consumer Confidence
250
Confidence Gap
Confidence Gap
Present Situation Minus Expectations
250
100
75 50
100
75 50 25
225
200 175
225
200 175
150
125 100 75 50 25 0 87 89 91 93 95 97 99 01 03 05 07 09 11
150
125 100 75
25
0
-25 -50
0
-25 -50 -75
Confidence Gap: Sep @ -33.5
50 25 0
-75
-100 87 89 91 93 95 97 99 01 03 05 07 09 11
-100
Economic Outlook
Homebuilding
Housing Starts
Millions of Units 2.4 2.1 2.4 2.1
1.8
1.5 Forecast
1.8
1.5 1.2 0.9 0.6 0.3 0.0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
We believe housing starts have bottomed and will increase modestly over the next few years.
Economic Outlook
10
Housing Starts
Apartment construction accounts for much of the recent improvement in homebuilding. We believe multifamily housing will account for a larger proportion of future starts.
2,000
1,800 1,600
600
540 480
500
5+ Units: Aug @ 212.3 (Left Axis) 2-4 Units: Aug @ 9.0 (Right Axis) 400
200
160
1,400
1,200 1,000
420
360 300 300 120
800
600 400 200 0 87 89 91 93 95 97 99 01 03 05 07 09 11
Single-family Housing Starts: Aug @ 524K (Left Axis) Multifamily Housing Starts: Aug @ 221K (Right Axis)
240
180 120 60 0
200
80
100
40
0 87 89 91 93 95 97 99 01 03 05 07 09 11
Economic Outlook
11
Home Prices
Home Prices
24% Year-over-Year Percentage Change 24%
16%
16%
Home prices have firmed recently as foreclosures have become a smaller portion of overall sales. Prices will likely fluctuate along a low trajectory until more foreclosures clear through the pipeline.
8%
8%
0%
0%
-8%
-8%
-16%
Median Sale Price: Aug @ $188,700
-16%
-24%
Median Sales Price 3-M Mov. Avg.: Aug @ 9.2% FHFA (OFHEO) Purchase Only Index: Jul @ 3.7% S&P Case-Shiller Composite 10: Jul @ 0.6%
-24%
-32% 96 98 00 02 04 06 08 10 12
-32%
Source: Federal Housing Finance Agency, National Association of Realtors, S&P Corp. and Wells Fargo Securities, LLC
Economic Outlook
12
70
60
70
60 50 40 30 20 10 0 87 89 91 93 95 97 99 01 03 05 07 09 11
Homebuilder sentiment has risen significantly over the past year, but it is still at a relatively low level.
50 40 30 20 10 0
Source: National Association of Home Builders and Wells Fargo Securities, LLC
Economic Outlook
13
Construction
Homebuilding is now adding to overall economic activity. Nonresidential construction remains stuck in low gear, however, with recent gains in energy & power cooling off.
Residential
Real Residential Investment
Bars = CAGR 30% 20% 10% 0% -10% -20% Line = Yr/Yr Percent Change 30% 40% 30%
Nonresidential
Real Nonresidential Construction
Bars = CAGR Line = Yr/Yr Percent Change 40% 30% Forecast
Forecast
20%
10% 0% -10%
20%
10% 0% -10% -20% -30%
-20%
-30%
-40% -50% 2000
-30%
-40% -50% 2002 2004 2006 2008 2010 2012 2014
-40% -50%
2002
2004
2006
2008
2010
2012
2014
Economic Outlook
14
Vacancy Rates
Commercial Real Estate Vacancy Rates
Percent 24%
Office Vacancy Rate: Q2 @ 17.2% Industrial Vacancy Rate: Q2 @ 8.8% Retail Vacancy Rate: Q2 @ 10.8% Apartment Vacancy Rate: Q2 @ 4.7%
20%
20%
10%
10%
16%
16%
8%
8%
12%
12%
6%
6%
8%
8%
4%
Industrial: Q2 @ 7.7% Retail: Q2 @ 7.2% Office: Q2 @ 7.1% Apartment: Q2 @ 6.2% 10-Year Yield: Q2 @ 1.8%
4%
4%
4%
2%
2%
0% 1994
0% 1995
Source: Reis, Inc., PPR, Real Capital Analytics, Federal Reserve Board and Wells Fargo Securities, LLC
Economic Outlook
15
Capital Markets
Financing is flowing to commercial real estate again, the current is simply not very strong just yet.
Vacancy Rates
Commercial Mortgages Outstanding
Billions of Dollars, Non-Seasonally Adjusted $3,000 $3,000
$45
CMBS Issuance: Sep @ $4.1 Billion
$45
$40 $35 $30 $25 $20 $15 $10 $5
$40
$2,500 $2,500
$35
$2,000 $2,000
$30 $25
$1,500
$1,500
$20
$1,000
Other: Q2 @ $203B
$1,000
$15 $10
$500
Life Insurance Companies: Q2 @ $270B Securitized: Q2 @ $472B U.S. Chartered Depository Institutions: Q2 @ $1,192B
$500
$5
$0
$0 2004
Economic Outlook
16
Loan Standards
100%
80%
80%
60%
60%
Banks are becoming a little more aggressive in lending for commercial real estate.
40%
40%
20%
20%
0%
0%
-20%
-20%
-40% 1990
Economic Outlook
17
Apartment
Apartment Supply & Demand
Percent, Thousands of Units 9% 100 14%
Industrial
Industrial Supply & Demand
Percent, Millions of Square Feet 60
8%
75
12%
40
7%
50
10%
20
6%
25
8%
5%
6%
-20
4%
-25
4% Industrial Net Completions: Q2 @ -6.3M SF (Right Axis) Industrial Net Absorption: Q2 @ 25.8M SF (Right Axis) Industrial Vacancy Rate: Q2 @ 8.8% (Left Axis) 2005 2006 2007 2008 2009 2010 2011 2012
-40
3%
Apartment Net Completions: Q2 @ 10,382 Units (Right Axis) Apartment Net Absorption: Q2 @ 28,353 Units (Right Axis) Apartment Vacancy Rate: Q2 @ 4.7% (Left Axis) 05 06 07 08 09 10 11 12
-50
2%
-60
2%
-75
0%
-80
Economic Outlook
18
Office vacancy rates have leveled off but absorption remains relatively weak.
Office
Office Supply & Demand
Percent, Millions of Square Feet 21% 30 14%
Retail
Retail Supply & Demand
Percent, Millions of Square Feet 20 Retail Net Completions: Q2 @ 0.6M SF (Right Axis) Retail Net Absorption: Q2 @ 2.1M SF (Right Axis) Retail Vacancy Rate: Q2 @ 10.8% (Left Axis)
18%
20
12%
16
15%
10
10%
12
12%
8%
9%
-10
6%
6% Office Net Completions: Q2 @ 1.6M SF (Right Axis) Office Net Absorption: Q2 @ 4.1M SF (Right Axis) Office Vacancy Rate: Q2 @ 17.2% (Left Axis) 2005 2006 2007 2008 2009 2010 2011 2012
-20
4%
3%
-30
2%
-4
0%
-40
-8
Economic Outlook
19
Issues to Watch
Deleveraging
Geopolitical Tensions
Economic Outlook
20
Our Forecast
Forecast 2013 3Q 1.6 1.8 1.4 1.6 0.1 5.7 72.7 8.1 0.77 0.25 3.50 1.65 4Q 1.2 1.1 1.6 2.1 1.1 5.3 72.5 7.6 0.84 0.25 3.30 1.60 1Q 1.0 0.6 1.3 2.1 0.7 4.8 73.0 7.6 0.85 0.25 3.30 1.65 2Q 1.5 1.5 1.5 2.6 3.5 5.2 74.0 7.9 0.88 0.25 3.30 1.70 3Q 1.8 1.4 1.5 2.7 4.1 5.7 75.0 8.1 0.91 0.25 3.35 1.75 4Q 1.9 1.3 1.5 2.4 4.1 6.3 76.0 8.0 0.92 0.25 3.40 1.80
Actual 2010 2011 2.4 1.8 1.9 1.6 5.4 26.8 75.4 9.6 0.59 1.8 2.5 2.4 3.1 4.1 7.3 70.9 9.0 0.61
2012 2.1 1.8 1.7 2.1 3.7 6.9 73.1 8.0 0.76
Forecast 2013 1.4 1.2 1.4 2.4 2.0 5.5 74.5 7.9 0.89
2Q 1.3 1.5 1.6 1.9 2.6 6.7 74.5 8.2 0.74 0.25 3.68 1.67
Corporate Profits Before Taxes Trade Weighted Dollar Index Unemployment Rate Housing Starts
4 3
Quarter-End Interest Rates 5 Federal Funds Target Rate Conventional Mortgage Rate 10 Year Note
Forecast as of: October 12, 2012 1 C ompound Annual Growth Rate Quarter-over-Quarter 2 Year-over-Year Percentage C hange 3 Federal Reserve Major C urrency Index, 1973=100 - Quarter End 4 Millions of Units
5
Economic Outlook
21
Appendix
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Economic Outlook
23
Economists Azhar Iqbal, Econometricianazhar.iqbal@wellsfargo.com Tim Quinlan, Economist ..tim.quinlan@wellsfargo.com Michael A. Brown, Economist michael.a.brown@wellsfargo.com
Senior Economists Mark Vitner, Senior Economist..... . Jay Bryson, Global Economist
.
Sarah Watt, Economic Analyst .sarah.watt@wellsfargo.com mark.vitner@wellsfargo.com Kaylyn Swankoski, Economic Analyst Zachary Griffiths, Economic Analyst Sara Silverman, Economic Analyst kaylyn.swankoski@wellsfargo.com zachary.griffiths@wellsfargo.com sara.silverman@wellsfargo.com
.....jay.bryson@wellsfargo.com .eugenio.j.aleman@wellsfargo.com
Eugenio Aleman, Senior Economist Sam Bullard, Senior Economist Anika Khan, Senior Economist
.sam.bullard@wellsfargo.com . . anika.khan@wellsfargo.com
Administrative Assistants Peg Gavin, Executive Assistant. Cyndi Flowe, Administrative Assistant peg.gavin@wellsfargo.com cyndi.h.flowe@wellsfargo.com
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Economic Outlook
24