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Economic Outlook

Charlie Dougherty, Vice President & Economist

March 19, 2019

Economic Outlook 2

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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

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

GDP - CAGR: Q4 @ 2.6%

GDP - Yr/Yr Percent Change: Q4 @ 3.1%

Forecast

Economic Growth Will Remain Solid in 2019

Real GDP growth has upshifted recently and ended the year at nearly a 3.0% pace. We expect a

soft moderation in 2019, however growth will remain

solid and expand at a 2.5% pace.

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

Economic Outlook 3

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ISM Manufacturing Index & Real GDPIndex, 3-Month Moving Average, Year-over-Year Percent Change

ISM Manufacturing Index: Feb @ 55.0 (Left Axis)

Real GDP, Year-over-Year Percent Change: Dec @ 3.1% (Right Axis)

Manufacturing Activity Has Weakened

Sentiment in the manufacturing sector has weakened, however has come off a near-euphoric level and is still consistent with

above-trend growth.

Source: Institute for Supply Management and Wells Fargo Securities

Economic Outlook 4

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U.S. China

Bilateral Export ExposurePercent

Percent of Total Exports (2017)

Percent of Value Add (2016)

Trade

China appears to have more to lose if a full-blown trade war were to develop, but such an event would not be costless for

the United States.

The USMCA will also unleash investment in areas with

transportation linkages with Mexico and Canada.

Source: International Monetary Fund, OECD, United Nations, U.S. Department of Commerce and Wells Fargo Securities

Economic Outlook 5

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PPI: Steel Mill Products3-Month Moving Average, Year-over-Year Percent Change

Steel Mill Products: Feb @ 12.6%

Tariffs

Newly imposed tariffs have pushed up prices for steel which

is used by a wide array of industries as an input.


Economic Outlook 6

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96 98 00 02 04 06 08 10 12 14 16 18

Capacity UtilizationPercent of Capacity

Manufacturing Capacity Utilization: Feb @ 76.0%

Iron and Steel Products: Feb @ 78.1%

Trade: What’s the End Game?

Higher steel prices will benefit domestic producers. One purpose of the tariffs was to boost manufacturing capacity utilization, which has been slowly trending higher.


Economic Outlook 7

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-6% -4% -2% 0% 2% 4% 6% 8%

Apparel

Printing

Wood

Textile

Paper

Food & Bev.

Plastics

Petroleum

Elect. Equip.

Furniture

Mineral

Autos

Miscellaneous

Chemical

Primary Metal

Fabricated Metal

Machinery

Comp. & Elect.

Aerospace

Manufacturing Production by Market SegmentYear-over-Year Percent Change of 3-Month Moving Average

February 2019

Manufacturing

Production growth has been mixed across market segments.

Aerospace, computer & electronics and machinery & metal manufacturing are

leading.


Economic Outlook 8

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2011 2012 2013 2014 2015 2016 2017 2018 2019

Boeing 737 MAX Orders & Deliveries Value of 737 MAX as Percent of Total Value

737 MAX Orders/Total Aircraft Orders: 2019 YTD @ 13%737 MAX Deliveries/Total Aircraft Deliveries: 2019 YTD @ 37%

Could the Grounding of 737-MAX Hurt Manufacturing?

If airlines hold-off on new orders of this aircraft, the total negative impact to durable goods orders could be

substantial. However, supply chain disruptions are unlikely, as Boeing reportedly intends on

continuing production.

Source: Boeing and Wells Fargo Securities

Economic Outlook 9

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Industrial Production vs. WTI Oil PricesYear-over-Year Percent Change, USD

IP: Feb @ 3.5 (Left Axis)

WTI: Mar @ $56.84 (Right Axis)

Oil Prices Have Also Dropped

The recent drop in oil prices may be good for consumers, but is concerning for new energy-related investment, the impact of which is felt up and down the supply chain outside of the

major energy producing regions.

Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities

Economic Outlook 10

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Rig Count vs. Employment in Fabricated Metals Thousands of Employed

Rig Count: Nov @ 884 (Left Axis)Employment: Nov @ 1,493K (Right Axis)

Manufacturing Sector’s Resurgence

The shale boom created enormous demand for

fabricated metals, which are used in drilling platforms, pressure vessels and a wide

variety of equipment used in the drilling and extraction process.

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

Economic Outlook 11

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Global Growth PerformanceReal GDP Growth Year-over-Year Percent Chage

United States

G2-G7 economies

G8-G20 economies

Global Growth Peaking?

Global economic growth has been generally strong, but is slowing outside of the U.S.,

particularly in other developed economies

Source: OECD and Wells Fargo Securities

Economic Outlook 12

The Dollar

As global growth accelerates over the next few years the

dollar should reverse its recent course of strengthening.

Source: International Monetary Fund, Federal Reserve Board and Wells Fargo Securities

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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Trade Weighted DollarMajor Currency Index, 1973 = 100

Trade Weighted Dollar: Q4 @ 91.8

Forecast

Economic Outlook 13

Industrial Market

Growing international trade and the “Amazon Effect” have boosted the need for

warehouses, distribution facilities and logistics services.


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Industrial Supply & DemandPercent, Millions of Square Feet

Industrial Net Absorption: Q4 @ 59.3M (Right Axis)

Industrial Net Completions: Q4 @ 61.2M (Right Axis)

Industrial Vacancy Rate: Q1 @ 4.8% (Left Axis)

Economic Outlook 1414

Trucking

Employment is growing modestly, but the trucking sector continues to report a pronounced labor shortage. As a result, the sector is seeing outsized earnings growth.

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

Average Hourly EarningsEmployment

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Trucking EmploymentYear-over-Year Percent Change

Year-over-Year: Feb @ 2.7%

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Trucking Average Hourly EarningsYear-over-Year Percent Change

Year-over-Year: Jan @ 4.5%

Economic Outlook 15

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U.S. Nonfarm Employment ChangeChange in Employment, In Thousands

Monthly Change: Feb @ 20K

12-Month Average Change: Feb @ 209K

Employment Situation: Employment Growth Resilient

Hiring has not shown any signs of weakening, continuing the streak of 100 straight months of

positive gains.


Economic Outlook 16

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Blue-Collar EmploymentPrivate Sector, Year-over-Year Percent Change

Blue-Collar (Mfg., Mining, Const. & Trans.): Feb @ 2.7%Other Private Employment: Feb @ 1.7%

Employment Situation: Employment Growth Broadening

Employment growth is picking up in the construction and manufacturing sectors after lagging for much of the

expansion


Economic Outlook 17

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Unemployment RatesSeasonally Adjusted

Unemployment Rate: Feb @ 3.8%U-6 Unemployment Rate: Feb @ 7.3%

Dashed Lines Represent Pre-Recession Lows

Employment Situation: Tightening Labor Market

The unemployment rate has fallen considerably over the course of the recovery.


Economic Outlook 18

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Labor Force Participation RatePrime vs. Total, Seasonally Adjusted 3-MMA

Labor Force Participation: Feb @ 63.2% (Left Axis)

Prime Participation (Ages 25-54): Feb @ 82.5% (Right Axis)

Employment Situation: Tightening Labor Market

Strong employment growth has also helped counter the

downward pressure on labor force participation from an

aging population.


Economic Outlook 19

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97 99 01 03 05 07 09 11 13 15 17 19

Average Hourly Earningsvs. Atlanta Fed Wage Growth Tracker; 3-MMA of YoY % Chg.

Atlanta Fed Wage Growth Tracker: Dec @ 3.8%

Average Hourly Earnings (Prod. & Supervisory): Jan @ 3.4%

Average Hourly Earnings (Total Private): Jan @ 3.3%

Workers’ Earnings Drift Upward

Wage growth has picked up modestly but remains a missing piece to the recovery thus far

due to slow productivity growth.

Source: U.S. Department of Labor, Federal Reserve Bank of Atlanta and Wells Fargo Securities

Economic Outlook 20

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00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Real PCE vs. Real Disposable IncomeYear-over-Year Percent Change

Real Personal Consumption Expend.: Dec @ 2.2%Real Disposable Income: Dec @ 3.9%

Income Growth

Spending has mostly kept pace with income gains, which is a positive sign for continued

growth.


Economic Outlook 21

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Consumer Confidence Index and S&P 500Conference Board

Confidence: Feb @ 131.4 (Left Axis)

S&P 500: Feb @ 2,784.5 (Right Axis)

Consumer Confidence

Stock market volatility has led to waning consumer confidence.

Source: Conference Board, S&P Indices and Wells Fargo Securities

Economic Outlook 22

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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Consumer Price IndexYear-over-Year Percent Change

CPI: Q4 @ 2.2%

Core CPI: Q4 @ 2.2%

Forecast

Consumer Price Inflation

Inflationary pressures will likely ease on lower oil prices. Core measures, however, continue to firm around the Fed’s target of

2.0%.


Economic Outlook 23

Interest Rates

The Fed will likely hit the “pause” button on interest rate hikes, but resume again later in the year as volatility dissipates.

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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Federal Funds Target RateUpper Bound, Percent

Federal Funds: Q4 @ 2.50%

Forecast

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

Interest RatesMonetary Policy

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Wells Fargo Rates ForecastThrough 2020

Q4 2020

Q4 2019

Q4 2018

Economic Outlook 24

Household Balance Sheets Remain Solid

Households have improved their credit positions over the past few years—with the exception of student debt. Auto loan delinquencies very gradually rising.

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110%

2003 2005 2007 2009 2011 2013 2015 2017 2019

Household DebtPercentage of Disposable Income

(Mortgage, Autos, Credit Cards, Student Loans)

Household Debt/Disposable Income: Q4 @ 80.5%

Source: Federal Reserve and Wells Fargo Securities

Delinquency RatesIndebtedness Not Out of Line

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03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Household Debt DelinquenciesPercent of Balance 90+ Days Past Due

Credit Card: Q4 @ 7.8%Other: Q4 @ 7.0%Student Loans: Q4 @ 11.4%Mortgage: Q4 @ 1.1%Auto: Q4 @ 4.5%HELOC: Q4 @ 1.2%

SL Data Scope Change

Economic Outlook 25

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04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Auto Market ShareAuto Sales vs. Light Truck Sales

Total Light Truck Market Share: Sep @ 69.7%

Total Auto Market Share: Sep @ 30.3%

Auto Market

Auto sales have been weaker than expected. The industry has seen a significant shift towards light trucks and crossovers.

Source: OECD and Wells Fargo Securities

Economic Outlook 26

69.5

67.267.7

65.3

$3,004 $3,008

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56

64

72

Total Returns

Received

Total Returns

Processed

Average

Refund

Where's My Refund?Millions of Returns, Dollars, Filing Season through 03/08/2019

2018 2019

Government Shutdown

The government shutdown will not have a huge direct economic impact, however may delay tax refunds which could weigh on

consumer spending.

Source: Congressional Budget Office and Wells Fargo Securities

Economic Outlook 27

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FY 2014/2015 FY 2016/2017 FY 2018/2019

Increase in BCA Budget Caps Billions of USD

Defense Spending

Nondefense Spending

Federal Fiscal Policy Outlook

The budget deal reached last February provides additional

fiscal stimulus to the U.S. economy

Source: Congressional Budget Office and Wells Fargo Securities

Economic Outlook 28

Federal Fiscal Policy Outlook

Key Tax Law Changes

Individual Tax Code Changes

• Bill slashes marginal tax rates across the board

• Limits state & local income and property tax deductions to $10,000

• Pass-throughs would be allowed to deduct up to 20 percent of income

• Doubles the standard deduction and the child tax credit

• Caps mortgage interest deduction at $750K

• Doubles the estate tax exemption

• Keeps the Alternative Minimum Tax (AMT) but lifts the threshold to $500K

• Maintains several deductions including medical expenses, student loans and private activity bonds (PABs)

• Repeals Obamacare individual mandate

• Individual cuts expire on December 31, 2025

Business Tax Code Changes

• Permanently reduces the corporate tax rate to 21% from the current 35% federal rate starting in 2018

• Corporate AMT repealed

• Business interest expense deductions are capped at 30 percent of EBITDA for 4 years and 30 percent of EBIT thereafter

• The bill allows for full and immediate expensing of business capital investments. This provision expires in five years.

• Ends the current worldwide corporate tax system by switching to a territorial system. Existing profits held abroad are taxed at 15.5 percent for cash and cash equivalents and 8 percent for reinvested foreign earnings.

Economic Outlook 29

Home Sales

Home sales slowed in 2018. New home sales held up better, but existing homes have been impacted by rising low

inventories, rising prices and higher mortgage rates

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

New Home Sales: Nov @ 0.7 Million (Left Axis)

SF Existing Home Sales: Jan @ 4.4M (Right Axis)

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

Economic Outlook 30

Mortgage Rates

Higher mortgage rates combined with rising prices have put a dent in overall

affordability.

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90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Mortgage Payment vs. Mortgage RatePrincipal & Interest Payment as a Percent of Income

Mortgage Payment as Percent of Income: Dec @ 16.9% (Left Axis)

6 Month Moving Average: Dec @ 17.3% (Left Axis)

30-Yr. Conventional Mortg. Rate: Feb @ 4.40% (Right Axis)

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

Economic Outlook 31

Home Prices

Prices have risen fastest in rapidly growing tech-driven markets, mostly in the West where shortages are most acute.

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Home PricesYear-over-Year Percentage Change

Median Single-Family Sale Price: Jan @ $249,400

Median Sales Price 3-M Mov. Avg.: Jan @ 3.8%

FHFA (OFHEO) Purchase Only Index: Dec @ 5.7%

S&P Case-Shiller Composite 10: Dec @ 3.8%

Source: U.S. Department of Commerce, S&P Dow Jones Indices and Wells Fargo Securities

Regional Home PricesMedian Home Value

11.4%8.0%

5.9%

5.5%

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5.3%

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2.3%

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4.2%

4.7%

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

Las VegasPhoenixAtlanta

MinneapolisDenverDetroitBostonTampa

CharlotteMiami

SeattleCleveland

DallasPortland

Los AngelesSan FranciscoNew York City

ChicagoWashington, D.C.

San Diego

C-10C-20

National HPI

S&P CoreLogic Case-Shiller Home PricesYear-over-Year Percent Change, NSA

December 2018

Economic Outlook 32

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Housing StartsMillions of Units

Multifamily Starts

Multifamily Forecast

Single-Family Starts

Single-Family Forecast

Forecast

Although Steadily Rising, Single-Family Starts Have Lost Momentum

New apartment construction will remain elevated and the new single family starts will gradually trend higher.


Economic Outlook 33

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U.S. Homeownership RatePercent

Homeownership Rate: Q4 @ 64.8%

Homeownership

Household formation has improved over the past few years but generally remains below prior decades. Still, the homeownership rate is reversing

course.


Regional Outlook

Economic Outlook 35

Indianapolis

Columbus

Cleveland

Cincinnati

Oklahoma City

Milwaukee

Minneapolis

DetroitKansas City

St. Louis

Chicago

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3%

0.5% 1.0% 1.5% 2.0% 2.5%

3-M

onth

Annualized P

erc

ent Change

Year-over-Year Percent Change

Midwest Employment Growth by Metro3-Month Moving Averages, January 2019

Percent of Total Employees

Less than 4%

5% to 8%

More than 9%

Recovering Expanding

Contracting Decelerating

Midwest Employment by MSA

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

Economic Outlook 36

Michigan Economy

Statewide employment growth has moderated recently and is currently running slightly below

the rest of the country.


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Nonfarm Employment GrowthYr/Yr Pct. Change 3-Month Moving Averages

Michigan: Jan @ 0.9%

United States: Jan @ 1.8%

Economic Outlook 37

Michigan Economy

Most industries are hiring, especially in the manufacturing and construction sectors.


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Construction

Other Services

Financial Activities

Leisure and Hospitality

Manufacturing

Prof. & Bus. Svcs.

Government

Educ. & Health Services

Trade, Trans. & Utilities

Total Nonfarm

Michigan Employment Growth By IndustryYear-over-Year Percent Change, 3-MMA

Number of

Employees

Less

More

January 2019

Economic Outlook 38

Michigan Economy

Grand Rapids grew faster than every other metro in Michigan

in 2018.


-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

Jackson, MI

Muskegon, MI

Bay City, MI

Detroit, MI

Kalamazoo, MI

Niles, MI

Midland, MI

Flint, MI

Monroe, MI

Michigan

Saginaw, MI

Battle Creek, MI

Ann Arbor, MI

Lansing, MI

Grand Rapids, MI

Michigan Employment by MSAYear-over-Year Percent Change, December 2018

Economic Outlook 39

Michigan Economy-Manufacturing

Manufacturing employment continues to trend higher.

Michigan still ranks as one of the nation’s top manufacturing

employers.


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90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Michigan Nonfarm EmploymentIndex 1990 = 100

Manufacturing Employment: Jan @ 78.4

Non-Manufacturing Employment: Jan @ 123.3

Economic Outlook 40

Michigan Economy

Population growth continues to slow, however fewer residents

are leaving the state.


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Components of Population Change: MichiganIn Thousands

Natural Increase: 2018 @ 15.1KInternational Migration: 2018 @ 21.4KDomestic Migration: 2018 @ -16.8K

Series

Break

Series

Break

Appendix

Economic Outlook 42

U.S. Economic Forecast

Wells Fargo U.S. Economic Forecastq 1 2 01 9

2019

2016 2017 2018 2019

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Real Gross Domestic Product 1 2.2 4.2 3.4 2.6 1.3 2.7 2.3 2.5 2.3 2.1 1.8 1.9 1.6 2.2 2.9 2.4

Personal Consumption 0.5 3.8 3.5 2.8 1.7 2.6 2.4 2.5 2.2 2.0 2.0 2.0 2.7 2.5 2.6 2.6

Business Fixed Investment 11.5 8.7 2.5 6.2 3.9 3.6 4.2 4.0 3.7 3.6 2.9 2.8 0.5 5.3 7.0 4.4

Equipment 8.5 4.6 3.4 6.7 1.4 2.3 3.7 3.1 2.7 2.6 2.1 2.0 -1.5 6.1 7.5 3.4

Intellectual Property Products 14.1 10.5 5.6 13.1 7.4 5.3 4.7 4.6 4.7 4.6 3.7 3.6 7.5 4.6 7.7 7.5

Structures 13.9 14.5 -3.4 -4.2 2.5 3.5 4.5 5.0 4.5 4.0 3.5 3.5 -5.0 4.6 5.0 1.7

Residential Construction -3.4 -1.3 -3.6 -3.5 -3.6 2.6 2.0 1.5 1.5 1.5 1.0 1.0 6.5 3.3 -0.2 -1.3

Government Purchases 1.5 2.5 2.6 0.4 1.4 4.2 1.5 1.2 0.8 0.7 0.3 0.1 1.4 -0.1 1.5 2.0

Net Exports 2 0.0 1.2 -2.0 -0.2 -0.5 -0.1 -0.1 -0.1 0.1 0.0 -0.1 0.0 -0.4 -0.4 -0.3 -0.4

Inventories 2 0.3 -1.2 2.3 0.1 0.1 -0.3 -0.2 0.0 0.0 0.0 0.0 0.0 -0.6 0.0 0.1 0.2

Nominal GDP 1 4.3 7.6 4.9 4.6 2.1 5.3 4.7 4.7 4.6 4.4 3.7 3.8 2.7 4.2 5.2 4.3

Corporate Profits Before Taxes 3 5.9 7.3 10.4 6.7 3.9 6.6 6.7 5.1 3.5 1.0 -2.6 -1.0 -1.1 3.2 7.6 5.6

Forecast as of: March 13, 20191 Compound Annual Growth Rate Quarter-over-Quarter 2 Percentage Point Contribution to GDP 3 Year-over-Year Percentage Change

ForecastActual ForecastActual

20202018 2019

Source: IHS Global Insight and Wells Fargo Securities

Economic Outlook 43

Economic Outlook Group Publications

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A Sampling of Our Recent Special, Regional & Industry Commentary

Date Title Authors

U.S. Macro

February-25 Refund Status: Still Processing Quinlan, Pugliese & Seery

February-14 Dating Advice: A Compendium Quinlan, House & Seery

January-31 Myth Busing Real-Time Recession Predictors Iqbal, Kinnaman & Seery

January-28 The Government Shutdown: An Update Bryson & Pugliese

January-24 Productivity: Back from the Dead or Dead Cat Bounce? House & Seery

U.S. Regional

February-21 Virginia 2019 Economic Outlook Vitner, Dougherty and Honnold

January-18 California Payrolls Remain Solid in 2018 Vitner & Dougherty

January-18 Mixed Results For December Job Growth in the Carolinas Vitner & Dougherty

January-18 Texas Payrolls End 2018 On a Strong Note Vitner & Dougherty

January-18 Florida Ends 2018 On a High Note Vitner & Dougherty

Global Economy

March-07 ECB: When Doves Fly Nelson & Bennenbroek

March-06 Window Closes on Further Bank of Japan Policy Action McKenna & Bennenbroek

March-04 ECB Preview: The Loan Time is Running Out (TLTRO) Nelson & Bennenbroek

February-27 Brazilian Pension Reform in Queue McKenna

February-25 Making Sense of China's Fiscal Dollard and Cents Pugliese & Bennenbroek

Interest Rates/Credit Market

March-04 Two Thine Own Inflation Target Be True? Bryson, House & Nelson

February-20 The Outlook for the Fed's Balance Sheet: An Update Bryson & Pugliese

February-07 "Crosscurrents" and the Outlook for Fed Policy Bryson

February-06 Credit: Lifeblood of Economy Continues to Flow Bryson

January-30 Fed Balance Sheet Shrinking Inches Closer Towards Ending Bryson & Pugliese

Real Estate & Housing

January-16 What's Ahead for Housing in 2019? Vitner, Dougherty & Honnold

December-07 Q3 CRE Chartbook: Outlook Vitner, Dougherty & Honnold

December-05 Housing Chartbook: December 2018 Vitner, Dougherty & Honnold

November-26 Does CRE Pose a Risk to the Financial System? Bryson, Dougherty & Honnold

November-07 Home Sales Remain Soft Vitner, Dougherty & Honnold

To view any past research please visit: www.wellsfargo.com/economics

Recent Special Commentary

Economic Outlook

Wells Fargo Securities Economics Group

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