The U.S. Economic Outlook: - PowerPoint Presentation

Slide1

The U.S. Economic Outlook:

May You Live in Interesting Times

Sarah HouseSenior EconomistDecember 03, 2019

Slide2

2Business Cycles

The Longest Expansion

…but the WeakestSource: U.S. Department of

Commerce, National Bureau of Economic Research and Wells Fargo Securities

The current expansion is now the longest on record, but has also been

the weakest of the post-WWII era, making the economy more vulnerable to a shock

Slide3

3

U.S. Growth

Our baseline forecast is for growth to slow in the coming year, but for the expansion to continue

Source: U.S

. Department of Commerce and Wells Fargo Securities

Slide4

4

Government Investment

Government investment

is still supporting growth, although not nearly to the extent of last year

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

Slide5

5

Trade War:

Imports

The trade war has

escalated since the summer, but the direct costs of tariffs remain small relative to the size of the U.S. economy

Source: U.S

. Department of

Commerce,

Office of the United States Trade Representative

and Wells Fargo Securities

Slide6

6

Inflation

Tariffs are now

hitting more consumer

goods categories directly, but the overall impact to

inflation should

be minimal given the majority of

spending

goes toward services

Source: U.S

. Department of

Labor

and Wells Fargo Securities

Slide7

7

Corporate Profits

Slowing sales, rising labor costs and tariffs are set to weigh on profits,

which will

hinder investment and hiring

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

Slide8

8

Investment Plans

Manufacturers have scaled back investment plans, but small business plans suggest capex spending is holding up better in other industries

Source:

Federal Reserve System, NFIB and

Wells Fargo Securities

Slide9

9

Global Growth

Global trade and growth are retrenching

Source: IHS

Markit

and

Wells Fargo Securities

Slide10

10

Manufacturing vs. Non-Manufacturing

Outside of the manufacturing sector, the economy continues to expand, although the pace has moderated

Source:

Institute for Supply Management and Wells Fargo Securities

Slide11

11

Housing

Lower mortgage rates have helped arrest the slide in home sales

Source:

Freddie Mac, U.S

. Department of Commerce and Wells Fargo Securities

Slide12

12Housing Headwinds

Home Prices

Mobility

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

Headwinds to the housing market include income only recently outpacing costs and fewer households moving

Slide13

13

Household Wealth & Saving

Household saving has risen alongside wealth

Source:

Federal Reserve Board, U.S. Department of Commerce and

Wells Fargo Securities

Slide14

14

Household Debt

Monthly debt service remains fairly low

Source:

Federal

Reserve Board and Wells Fargo Securities

Slide15

15

Household Debt

Some categories of consumer credit are in the later stages of the credit cycle with delinquencies trending higher again

Source:

Federal Reserve Board and

Wells Fargo Securities

Slide16

16

Credit

Condtions

Tightening credit standards and weaker demand point to only modest credit growth ahead in most

categories, and should keep a lid on delinquency rates

Source:

Federal Reserve Board and

Wells Fargo Securities

Slide17

Labor Market, Inflation & Monetary Policy

Slide18

18

Labor Market: Wages Costs

Labor costs are picking

up, especially for lower-wage workers

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

Slide19

19

Labor Market: Employment Growth

Hiring

has been slowing in “blue-collar” industries as global growth and activity in the industrial sector has

slowed, but the spillovers into the service sector currently look limited

Source: U.S. Department of

Labor and

Wells Fargo Securities

Slide20

20Labor Market: Demand

Jobless Claims

Job Openings

Source: U.S. Department of Labor, NFIB

and Wells Fargo Securities

A flat trend in jobless claims signals demand for labor is hardly collapsing, but a pullback in job openings and hiring plans bears watching

Slide21

21Labor Market: Supply

Participation—Still a

Ways to Go

Slower Growth Around the CornerSource: U.S. Department of

Labor

and Wells Fargo Securities

Without a significant pickup in participation, growth in the labor supply is set to remain

tepid and keep the jobs market fairly tight

Slide22

22

Inflation

Higher labor costs and some pass through of tariffs should help inflation move back up to the Fed’s 2% target, but inflation is not expected to break meaningfully higher

Source:

U.S. Department of Commerce and

Wells Fargo Securities

Slide23

23

Monetary Policy

The FOMC has neared the end of its mini-easing cycle

Source: Federal Reserve Board and Wells Fargo Securities

Slide24

The End of the Line?

Slide25

25

Interest Rates

Yield curve inversions have preceded the past seven recessions, although the lead time has varied

Source

: Bloomberg LP,

Federal Reserve Board and Wells Fargo Securities

Slide26

26

Financial Conditions

Financial conditions broadly remain accommodative following additional Fed easing

Source

: Bloomberg LP and

Wells Fargo

Securities

Slide27

27

Consumer Confidence

Consumers have the means to spend, but do they have the will?

Source:

The Conference Board, IHS

Markit

and

Wells Fargo Securities

Slide28

28

Elections & Growth

Growth during election years is not statistically different than non-election years

Source: U.S. Department of Commerce and

Wells Fargo Securities

Slide29

29

Debt in the United States

Corporate debt is trending higher while government debt ratios have not improved with the stronger economy

Source

:

Bank for International Settlements and Wells Fargo

Securities

Slide30

30Nonfinancial Corporate Health

Interest Coverage

Debt Relative to Earnings

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

Debt is not overly burdensome at present, but a deterioration in earnings could quickly change that picture

Slide31

31

U.S. Federal Budget Deficit

Expansions have traditionally been associated

narrowing deficits,

but that has changed

Source: U.S. Department of Commerce and

Wells Fargo Securities

Slide32

32U.S. Fiscal Policy

Federal Debt Projections

Federal Spending Projections

Source: Congressional Budget Office (CBO) and Wells Fargo Securities

Rising debt levels provides less room for fiscal policy to respond to the next downturn, while more immediately growing mandatory outlays will squeeze discretionary government spending

Slide33

33

Expectations

U.S.

Outlook

Composition of Growth

Slow global growth and trade uncertainty

is weighing

on capital investment while fiscal stimulus fades

Consumer spending should moderate, but finances generally healthy and housing activity is perking up

Financial Conditions & the Fed

Risks to Watch

Late-cycle signs are emerging, heightening the risk around a policy error (e.g., trade, fiscal, monetary)

While not an imminent risk, business and government debt is high and

is likely to

exacerbate the next

downturn

Labor Market & Inflation

The late stage of the cycle and lower run rate of U.S. growth leaves the economy more vulnerable to a shock

GDP to slow to about 1.5% the next

couple of

quarters,

but a recession

should be avoided

The labor market is tight and wages have

strengthened,

but hiring plans signal cooler job growth

Helped by tariffs and higher labor costs, inflation is moving back to 2%, but is unlikely to break much higher

Fed cuts have helped to ease financial

conditions and

offset

some of the headwinds from trade

policy

More Fed easing to come if a “Phase I” trade deal does not include a delay of Dec. 15 tariffs

Slide34

34

U.S. Economic Forecast

Source: IHS Markit and Wells Fargo Securities

Slide35

35

Global Forecast

Source: International Monetary Fund and Wells Fargo Securities

Slide36

Wells Fargo Securities Economics Group

36

Jay H. Bryson,

Acting Chief Economist

…

jay.bryson@wellsfargo.com

Mark Vitner, Senior Economist

mark.vitner@wellsfargo.com

Sam Bullard, Senior Economist

sam.bullard@wellsfargo.com

Nick Bennenbroek, Macro Strategist

nicholas.bennenbroek@wellsfargo.com

Tim Quinlan, Senior Economist

tim.quinlan@wellsfargo.com

Azhar

Iqbal, Econometrician

azhar.iqbal@wellsfargo.com

Sarah

House, Senior Economist

sarah.house@wellsfargo.com

Charlie Dougherty, Economist

charles.dougherty@wellsfargo.com

Erik Nelson, Macro Strategist

erik.f.nelson@wellsfargo.com

Michael Pugliese, Economist

michael.d.pugliese@wellsfargo.com

Brendan McKenna, Macro Strategist

brendan.mckenna@wellsfargo.com

Economists & Macro Strategists

Economic Analysts

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 Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Canada, Ltd., Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC. and Wells Fargo Bank, N.A. are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. 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 © 2019 Wells Fargo Securities, LLC.

Important Information for Non-U.S. Recipients

For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (“the Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients.

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

Coren Burton, Administrative Assistant

coren.burton@wellsfargo.com

Shannon Seery, Economic Analyst

shannon.seery@wellsfargo.com

Matthew Honnold, Economic Analyst

matthew.honnold@wellsfargo.com

Jen Licis,

Economic Analyst

jennifer.licis@wellsfargo.com

Hop Mathews,

Economic Analyst

hop.mathews@wellsfargo.com

Administrative

Assistant