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Economic Outlook

September 29, 2011

Economic Outlook 2

Real GDP Bars = CAGR Line = Yr/Yr Percent Change

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2000 2002 2004 2006 2008 2010 2012-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%GDPR - CAGR: Q2 @ 1.0%GDPR - Yr/Yr Percent Change: Q2 @ 1.5%

Forecast

Economic Growth

We are two 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 U.S. housing sector

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

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Economic Outlook 3

Real GDP Growth Year-over-Year Percent Change, Quarterly, SA

-6%

-3%

0%

3%

6%

9%

12%

15%

50 55 60 65 70 75 80 85 90 95 00 05 10-6%

-3%

0%

3%

6%

9%

12%

15%Year-over-Year Percent Change: Q2 @ 1.55%

2% 2%

Economic Growth

The year-over-year percent change in real GDP dipped

below the two percent mark in the second quarter, which is a worrisome sign that has often

preceded recessions in the past

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

Economic Outlook 4

Output Gap

The Great Recession has produced an enormous output gap that will take years to close

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

Output Gap in the U.S. Trillions of Dollars, Potential vs. Actual GDP, Inflation Adjusted

$10.5

$11.0

$11.5

$12.0

$12.5

$13.0

$13.5

$14.0

$14.5

2000 2002 2004 2006 2008 2010$10.5

$11.0

$11.5

$12.0

$12.5

$13.0

$13.5

$14.0

$14.5

Potential GDP: Q2 @ $14.2 TrillionActual GDP: Q2 @ $13.3 Trillion

Output Gap = $990 Billion

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Economic Outlook 55

Industrial Production & Exports

A pickup in international trade is boosting industrial production and exports; however, it’s not likely to create a whole lot of jobs as growth is concentrated in capital intensive industries

Industrial ProductionIndex, 2007=100

75

80

85

90

95

100

105

1997 1999 2001 2003 2005 2007 2009 201175

80

85

90

95

100

105

Industrial Production: Aug @ 94.0

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

ExportsIndustrial Production

Capital Goods Ex. Motor Vehicles & AircraftBillions of Dollars

$20

$25

$30

$35

$40

1997 1999 2001 2003 2005 2007 2009 2011$20

$25

$30

$35

$40Exports: Jul @ $39.1 Billion

Economic Outlook 66

Regional Manufacturing Surveys

Regional manufacturing surveys have turned down in recent months

New York Mfg. General Business ConditionsDiffusion Index

-40

-30

-20

-10

0

10

20

30

40

50

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-40

-30

-20

-10

0

10

20

30

40

50

Business Condition Index: Sep @ -8.812 Month Moving Average: Sep @ 5.2

Source: Federal Reserve Banks of New York and Philadelphia, and Wells Fargo Securities, LLC

Philadelphia ManufacturingNew York Manufacturing

Philadelphia Fed General Activity Index Diffusion Index

-60

-40

-20

0

20

40

60

89 91 93 95 97 99 01 03 05 07 09 11-60

-40

-20

0

20

40

60Philadelphia Fed General Activity Index: Sep @ -17.512-Month Moving Average: Sep @ 9.0

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Economic Outlook 7

Employment CyclesPercent Change from Cycle Peak

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0 4 8 12 16 20 24 28 32 36 40 44 48-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%1948-1949 Cycle1981-1982 Cycle1989-1991 Cycle2001 Cycle2007-To-DateForecast

Labor Market

Job losses exceeded every post-World War II downturn and the

modest recovery to date has been extremely disappointing

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

Economic Outlook 8

Unemployment by County – September 2007

Unemployment RateSeptember 2007

Greater than 12.5%

10.0% to 12.5%

8.0% to 10.0%

6.0% to 8.0%

Less than 6.0%

Unemployment Rate

Source: US Department of Labor and Wells Fargo Securities, LLC

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Economic Outlook 9

Unemployment by County – July 2011

8.0% to 10.0%

Unemployment RateJuly 2011

Greater than 12.5%

10.0% to 12.5%

6.0% to 8.0%

Less than 6.0%

Unemployment Rate

Large Portions of the United States Continue to Face Serious Unemployment Issues

Source: US Department of Labor and Wells Fargo Securities, LLC

Economic Outlook 10

Civilians Unemployed For 27 Weeks or MoreIn Millions, Seasonally Adjusted

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

60 65 70 75 80 85 90 95 00 05 100.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Number of Long-Term Unemployed: Aug @ 6.0 Million

Labor Market

Not only is unemployment remaining exceptionally high, but a large number of people

have remained unemployed for a long period of time

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

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Economic Outlook 11

Employment Cost Index Year-over-Year Percent Change

0%

1%

2%

3%

4%

5%

2006 2007 2008 2009 2010 20110%

1%

2%

3%

4%

5%Wages and Salaries: Q2 @ 1.6%Benefits: Q2 @ 3.6%Total Compensation: Q2 @ 2.2%

Employment Costs

Compensation costs remain contained, but the cost of

providing healthcare retirement benefits is accelerating

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

Economic Outlook 12

"Core" CPI vs. "Core" PCEYear-over-Year Percent Change

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

92 94 96 98 00 02 04 06 08 100.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Core PCE: Jul @ 1.6%Core CPI: Aug @ 2.0%

Inflation

Core inflation is running slightly below the lower bound of the

Fed’s comfort zone

Source: Federal Reserve Board, Moody’s and Wells Fargo Securities, LLC

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Economic Outlook 13

Conventional Mortgage Rate vs. SpreadBasis Points, Percent

75

100

125

150

175

200

225

250

275

300

2004 2005 2006 2007 2008 2009 2010 20113.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Mortgage Spread: Sep @ 222 bps (Left Axis)

Conventional 30-Year Fixed Mortg. Rate: Sep @ 4.1% (Right Axis)

Spread = Mortgage Rate - 10-Year Treasury Yield

Mortgage Rates

Mortgage rates are currently near an all-time low, even

though spreads have returned to their historic norm

Source: Freddie Mac, Federal Reserve Board and Wells Fargo Securities, LLC

Economic Outlook 14

Baa Corporate Spread vs. S&P 500 Index Basis Points

0

100

200

300

400

500

600

700

800

2004 2005 2006 2007 2008 2009 2010 2011600

800

1,000

1,200

1,400

1,600

1,800

2,000Baa Corporate Spread: Sep @ 331 (Left Axis)S&P 500: Sep @ 1,173 (Right Axis)

Baa spread = Average Baa Yield - 10-Year Treasury Yield

Corporate Bond Spread

Stock prices began rising in anticipation of QE2, but have fallen significantly since the

program ended in June

Source: Federal Reserve Board, Moody’s, S&P Corp. and Wells Fargo Securities, LLC

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Economic Outlook 1515

Jobless Claims and Mortgage Applications

The high-frequency data, such as jobless claims and mortgage applications, is a good place to measure the effectiveness of monetary policy initiatives

Initial Claims for UnemploymentSeasonally Adjusted, In Thousands

250

300

350

400

450

500

550

600

650

700

86 88 90 92 94 96 98 00 02 04 06 08 10250

300

350

400

450

500

550

600

650

700Year-over-Year Percent Change: Sep-17 @ -8.6%Initial Claims: Sep-17 @ 423.0 Thousand4-Week Moving Average: Sep-17 @ 421.0 Thousand52-Week Moving Average: Sep-17 @ 421.3 Thousand

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

Mortgage Refinancing ActivityInitial Jobless Claims

Mortgage Applications for Refinancing4-Week Moving Average, Seasonally Adjusted

0

2,000

4,000

6,000

8,000

10,000

12,000

94 96 98 00 02 04 06 08 100

2,000

4,000

6,000

8,000

10,000

12,000Weekly Figure: Sep-16 @ 3,813Up from 3,732 on Sep-94-Week Average: Sep-16 @ 3,7304-Week Average Down 22.9% from Same Period Last Year

Economic Outlook 16

Housing StartsMillions of Units

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 140.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

Forecast

Homebuilding

We believe housing starts have bottomed and will increase modestly through 2012 and

return to a “normal” level by 2015

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

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Economic Outlook 17

Existing & New Single Family Home SalesIn Millions, Seasonally Adjusted Annual Rate

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 110.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

New Home Sales: Aug @ 295 Thousand (Left Axis)Existing Home Sales: Aug @ 4.5 Million (Right Axis)

Home Sales

The gap between existing and new home sales is widening

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

Economic Outlook 18

Single-Family Home InventoryMillions of Units

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1992 1994 1996 1998 2000 2002 2004 2006 2008 20100.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5New Homes: Aug @ 0.16M Existing Homes: Aug @ 3.09M

Housing Inventory

The U.S. housing market is still being weighed down by the enormous supply of vacant homes for rent and for sale

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

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Economic Outlook 19

Home PricesYear-over-Year Percentage Change

-24%

-18%

-12%

-6%

0%

6%

12%

18%

24%

97 99 01 03 05 07 09 11-24%

-18%

-12%

-6%

0%

6%

12%

18%

24%

Median Sale Price: Aug @ $168,400Median Sales Price 3-M Mov. Avg.: Aug @ -5.2%FHFA (OFHEO) Purchase Only Index: Jun @ -4.3%S&P Case-Shiller Composite 10: Jul @ -3.7%

Home Prices

Various mortgage foreclosure moratoriums and stimulus programs likely supported

prices earlier and are now giving way

Source: Federal Housing Finance Agency, National Association of Realtors, S&P Corp. and Wells Fargo Securities, LLC

Economic Outlook 20

Impact of Distressed Sales on Home PricesYear-over-Year Percent Change, CoreLogic

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

05 06 07 08 09 10 11-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%Excluding Distressed Sales: Jul @ -0.6%Including Distressed Sales: Jul @ -5.2%

Distressed Home Prices

Home prices of non-distressed properties have likely bottomed

in many areas around the country, but falling prices for foreclosures and bank sales

continue to drag overall home indices lower

Source: CoreLogic and Wells Fargo Securities, LLC

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Economic Outlook 21

Residential Investment Billions of Dollars

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010$0

$100

$200

$300

$400

$500

$600

$700

$800

$900Other: Q2 @ -$0.4Brokers' Commissions: Q2 @ $54.7Improvements: Q2 @ $153.1New Building: Q2 @ $118.7

Residential Investment & Home Improvements

Residential investment has picked up recently, driven in

part by sustained home improvement and remodeling

activity

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

Economic Outlook 22

Leading Indicator of Remodeling ActivityIn Billions, 4-Q Moving Total, Harvard Joint Center for Housing Studies

$100

$105

$110

$115

$120

$125

2009 2010 2011 2012$100

$105

$110

$115

$120

$125

JCHSForecast

Forecast for Remodeling

According to the Leading Indicator of Remodeling Activity

(LIRA), which is published by the Joint Center for Housing

Studies of Harvard University, remodeling activity is expected to remain strong through the

rest of the year and then moderate in early 2012

Source: Joint Center for Housing Studies and Wells Fargo Securities, LLC

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Economic Outlook 23

Asian Real Estate Bubble?

Trade Wars & Currency

Devaluations

DeleveragingCredit Availability

& Finreg

European Debt Crisis

Fiscal & Monetary Policy

GeopoliticalTensions

Energy/Commodity Price Swings

Issues to Watch

Economic Outlook 24

Our Forecast

Wells Fargo U.S. Economic Forecast

2011 2009 2010 2011 2012 20131Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Real Gross Domestic Product 1 0.4 1.0 1.8 1.2 1.0 1.2 1.9 1.7 -3.6 3.0 1.6 1.3 1.7Personal Consumption 2.1 0.4 1.8 1.2 1.3 1.3 1.4 1.4 -2.0 2.0 2.1 1.3 1.3

Inflation Indicators 2

"Core" PCE Deflator 1.1 1.3 1.6 2.0 2.1 2.0 1.9 1.8 1.5 1.4 1.5 1.9 1.7Consumer Price Index 2.2 3.3 3.7 3.7 2.8 2.3 2.0 1.8 -0.3 1.6 3.2 2.2 2.0

Industrial Production 1 4.8 0.5 4.9 1.5 2.3 3.2 3.7 3.7 -11.1 5.3 3.8 2.8 3.8

Corporate Profits Before Taxes 2 8.8 8.3 6.5 6.4 6.2 6.0 6.4 6.6 7.9 32.2 7.5 6.3 7.1

Trade Weighted Dollar Index 3 70.6 69.4 68.5 69.5 70.5 71.5 72.5 73.0 77.7 75.6 69.5 71.9 74.9Unemployment Rate 8.9 9.1 9.1 9.4 9.5 9.5 9.5 9.4 9.3 9.6 9.1 9.5 9.2

Housing Starts 4 0.58 0.57 0.58 0.55 0.57 0.62 0.67 0.70 0.55 0.58 0.57 0.64 0.86

Quarter-End Interest Rates 5

Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25Conventional Mortgage Rate 4.84 4.51 3.90 3.70 3.70 3.80 4.00 4.10 5.04 4.69 4.24 3.90 4.2810 Year Note 3.47 3.18 1.75 1.60 1.80 2.00 2.20 2.30 3.26 3.22 2.50 2.08 2.55

Forecast as of: September 23, 20111 Compound Annual Growth Rate Quarter-over-Quarter2 Year-over-Year Percentage Change3 Federal Reserve Major Currency Index, 1973=100 - Quarter End4 Millions of Units5 Annual Numbers Represent Averages

Forecast2012

Forecast ActualActual

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Appendix

Economic Outlook 26

Recent Special Commentary

Wells Fargo Economics Group Publications

To view any of our past research please visit:

http://www.wellsfargo.com/economics

To join any of our research distribution lists please visit:http://www.wellsfargo.com/

economicsemail

Date Title AuthorsSeptember-26 Employment: Beyond the Sound Bites—Reading the Signals IV Silvia & WattSeptember-21 "Operation Twist" Gets Underway BrysonSeptember-20 Credit Quality Monior: September 2011 Anderson & KashmarekSeptember-16 Global Chartbook: September 2011September-15 Florida Economic Outlook: September 2011 Vitner, Brown & SeydlSeptember-09 The Direction of Treasury Rates: A Japanese Story? Anderson, Bryson & SeydlSeptember-08 Long-Term Unemployment: Costs & Consequences Silvia & WattSeptember-07 Housing Data Wrap-Up: September 2011 Vitner, Khan & SeydlSeptember-07 Brazil: GDP and Central Bank Autonomy Aleman September-06 Strength of Currency Weighs on Swiss GDP Growth Bryson September-02 Is Another Recession Brewing in Germany? Bryson & KruseSeptember-01 Housing and Arizona, Rebuilding a Marketplace Aleman & Kruse

August-30 The Evolution of Economic Relationships: The PMI and Growth Silvia, Iqbal & WattAugust-26 Tacking in Treacherous Water: No Full Sail for QE3 SilviaAugust-26 Barzilian Economy: Growing Pains AlemanAugust-24 Will the Renminbi Eventually Rival the Dollar? BrysonAugust-23 State Coincident Indicators Highlight A Disturbing Trend Vitner & BrownAugust-23 Are We Headed for Another Global Recession? Bryson, Quinlan & KruseAugust-22 Philadelphia Fed Index: Can It Predict a Recession? Silvia, Khan, Iqbal & WattAugust-22 Gold Bubble Fears Overblown Anderson & KashmarekAugust-22 Mexican Economy Grows Despite Slowdown in Q2 AlemanAugust-22 The Kids Are Alright Silvia, Quinlan & SeydlAugust-19 Even Slower Growth with Significant Downside Risk SilviaAugust-15 Why Is France in the Crosshairs? Bryson & KruseAugust-11 Commercial Real Estate Chartbook: Quarter 2 Vitner, Khan & SeydlAugust-11 Employment: Beyond the Sound Bites—Reading the Signals III Silvia & WattAugust-07 S&P Downgrade of Treasury /Fed Credit: Fiscal Imbalances Silvia & VitnerAugust-05 What are the Risks of Recession? VitnerAugust-02 Economic Implications of the Debt Ceiling Compromise Silvia, Vitner, Bullard & BrownAugust-02 Real GDP Per Capita Stalled Out In the First Half of 2011 Vitner & SeydlAugust-01 Employment: Beyond the Sound Bites—Reading the Signals II Silvia & Watt

July-29 Housing Chartbook: July 2011 Vitner, Khan & SeydlJuly-27 With Greece "Stabilized," Will the Fire Spread? Bryson & KruseJuly-25 Is the Greek Debt Problem "Solved?" Bryson & KruseJuly-21 Employment: Beyond the Sound Bites—Reading the Signals I Silvia & WattJuly-21 Moody's Blues: Implications for a U.S. Downgrade Bryson, Quinlan & SeydlJuly-15 Employment Issues Linger in New Jersey Vitner, Khan & WattJuly-15 Global Chartbook: July 2011

June-30 Maryland: Economic Diversity Breeds Uneven Growth Silvia, Brown & KruseJune-30 The Brazilian Exchange Rate Conundrum AlemanJune-29 Housing Data Wrap-Up: June 2011 Vitner, Khan & SeydlJune-24 Texas Budget: 2012-2013 Biennium Aleman & KruseJune-24 Regional Chart Book: Quarter 2 Vitner, Brown & SeydlJune-22 Credit Quality Monitor Anderson & KashmarekJune-22 FOMC: Steady as She Goes BullardJune-21 An Economic Framework for Financial Services Silvia, Brown & WattJune-01 U.K. Trip Notes: Will the Expansion Continue? Bryson

A Sampling of Our Recent Special, Regional & Industry Commentary

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Economic Outlook 27

Wells Fargo Securities, LLC Economics Group

John Silvia, Chief Economist john.silvia@wellsfargo.com

Mark Vitner, Senior Economist mark.vitner@wellsfargo.com

Jay Bryson, Global Economist jay.bryson@wellsfargo.com

Scott Anderson, Senior Economist scott.a.anderson@wellsfargo.com

Eugenio Aleman, Senior Economist eugenio.j.aleman@wellsfargo.com

Sam Bullard, Senior Economist sam.bullard@wellsfargo.com

Anika Khan, Economist anika.khan@wellsfargo.com

Azhar Iqbal, Econometrician azhar.iqbal@wellsfargo.com

Ed Kashmarek, Economist ed.kashmarek@wellsfargo.com

Tim Quinlan, Economist tim.quinlan@wellsfargo.com

Michael Brown, Economist michael.a.brown@wellsfargo.com

Tyler Kruse, Economic Analyst tyler.kruse@wellsfargo.com

Joe Seydl, Economic Analyst joseph.seydl@wellsfargo.com

Sarah Watt, Economic Analyst sarah.watt@wellsfargo.com

Peg Gavin (Charlotte), Executive Assistant peg.gavin@wellsfargo.com

Carol Nightengale (Minneapolis), Executive Assistant carol.nightengale@wellsfargo.com

Economists

Senior Economists

Executive Assistants

Global Head of Research and Economics: Diane Schumaker-Krieg

Chief Economist: John Silvia

301 S. College StreetMAC D1053-077

Charlotte, NC28288

a

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 FinancialIndustry 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, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co.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, LLCassume 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 generalinformation 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 legalentity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2010 Wells Fargo Securities, LLC.

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Economic Analysts