aleman-santiago_chile_jan 1811

The U.S. Economy: “From A Housing Market Driven Economy to a _______ _______ Driven Economy”Eugenio J. Aleman, Director and Senior EconomistJanuary 18, 2011

2Economics

Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Real GDP: Q3 @ 2.6%Real GDP: Q3 @ 3.2%

Real GDP Growth

U.S. real GDP growth accelerated somewhat

during the third quarter

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

3Economics

Nonfarm Employment ChangeChange in Employment, In Thousands

-800

-600

-400

-200

0

200

400

600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-800

-600

-400

-200

0

200

400

600

Nonfarm Employment Change: Dec @ 103,000

U.S. Nonfarm Employment

No more Census workers being hired

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

4Economics

Unemployment RateSeasonally Adjusted

2%

4%

6%

8%

10%

12%

60 65 70 75 80 85 90 95 00 05 102%

4%

6%

8%

10%

12%

Unemployment Rate: Dec @ 9.4%

Unemployment Rate

Not as high as during the 1980s recession but more

damaging


5Economics

Mean Duration UnemploymentAverage Weeks Unemployed

6

10

14

18

22

26

30

34

38

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 106

10

14

18

22

26

30

34

38

Dec @ 34.2 Weeks

Mean Duration of Unemployment

Duration of unemployment shows a struggling economy


6Economics

Unemployment Rate by Education Level

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

No High SchoolDiploma

High SchoolDiploma

Some College College Degree1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%December 2010

Unemployment by Education Level

College graduates have the edge even in the worst

recession since the depression


7Economics

Corporate Profit and J ob GrowthYear-over-Year Percent Change

-40%

-20%

0%

20%

40%

60%

70 73 76 79 82 85 88 91 94 97 00 03 06 09-6%

-3%

0%

3%

6%

9%

Corporate Profits: Q3 @ 27.8%J ob Growth: Q4 @ 0.68%

Adjusted for Inventory Valuation and Capital Consumption

Corporate Profit & Job Growth

Normally, employment growth follows growth in

profits

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

8Economics

Consumer Price Index

Consumer inflation is very low


U.S. Consumer Price IndexYear-over-Year Percent Change

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

92 94 96 98 00 02 04 06 08 10-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

CPI : Dec @ 1.5%

9Economics

Producer Price Index

As well as producer prices


Finished Goods Producer Price Index Year-over-Year Percent Change

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

96 98 00 02 04 06 08 10-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Finished Goods PPI : Dec @ 4.0%"Core" Finished Goods PPI : Dec @ 1.3%

10Economics

U.S. Federal Reserve Target Rate

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

2000 2002 2004 2006 2008 20100.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%US Federal Reserve: J an @ 0.25%

Federal Reserve Target Rate

Monetary policy remains extremely expansive

Source: Federal Reserve Board and Wells Fargo Securities, LLC

11Economics

Federal Reserve Balance Sheet

A Monetary Tsunami?


Federal Reserve Balance Sheet Trillions

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

2007 2008 2009 2010$0.0

$0.5

$1.0

$1.5

$2.0

$2.5Other: Nov @ $238.9B

Foreign Swaps: Nov @ $0.1B

PDCF & TAF

Commercial Paper & Money Market

Repos & Dis. Window: Nov @ $0.2B

Agencies & MBS: Nov @ $1,186.8B

Treasuries: Nov @ $891.5B

12Economics

Negative Equity

O…M…G…?


Negative Equity Mortgages - By StatePercent of Mortgages Outstanding

15%15%16%16%

18%20%20%20%20%20%

22%23%24%

28%33%

38%46%

50%68%

23%

0% 15% 30% 45% 60% 75%

MissouriWashington, DC

OregonMinnesota

New HampshireColorado

IllinoisOhio

Rhode IslandUtah

MarylandVirginia

IdahoGeorgia

CaliforniaMichigan

FloridaArizonaNevada

US

13Economics

New Home SalesSeasonally Adjusted Annual Rate, In Thousands

100

300

500

700

900

1,100

1,300

1,500

89 91 93 95 97 99 01 03 05 07 09100

300

500

700

900

1,100

1,300

1,500

New Home Sales: Nov @ 290,0003-Month Moving Average: Nov @ 291,000

New Home Sales

The housing market is very depressed


14Economics

Housing Starts Seasonally Adjusted Annual Rate, In Millions

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

87 89 91 93 95 97 99 01 03 05 07 090.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

Housing Starts: Nov @ 555K

Housing Starts

We don’t see a short to medium term solution


15Economics

Existing Single-Family Home Resales Seasonally Adjusted Annual Rate - In Millions

2.0

3.0

4.0

5.0

6.0

7.0

86 88 90 92 94 96 98 00 02 04 06 08 102.0

3.0

4.0

5.0

6.0

7.0

Existing Home Sales: Nov @ 4.2 Million

Existing Home Sales

No more first time home buyers’ credit, no more

sales!


16Economics

Home PricesYear-over-Year Percentage Change

-24%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

97 99 01 03 05 07 09-24%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

Median Sale Price: Nov @ $171,300Median Sale Price, 3-M Mov Avg: Nov @ -0.4%FHFA Purchase Only Index: Oct @ -3.4%S&P Case-Shiller Composite-10: Oct @ 0.2%

Home Prices

Home prices are weakening again

Source: IHS Global Insight and Wells Fargo Securities, LLC

17Economics

ISM Manufacturing Composite IndexDiffusion Index

30

35

40

45

50

55

60

65

87 89 91 93 95 97 99 01 03 05 07 09 1130

35

40

45

50

55

60

65

ISM Manufacturing Index: Dec @ 57.012-Month Moving Average: Dec @ 57.3

ISM Manufacturing Index

But the rest of the economy is growing. Manufacturing has expanded for almost

two years

Source: Institute for Supply Management and Wells Fargo Securities, LLC

18Economics

ISM Non-Manufacturing Composite Index

30

35

40

45

50

55

60

65

98 99 00 01 02 03 04 05 06 07 08 09 10 1130

35

40

45

50

55

60

65

ISM Non-Manufacturing Index: Dec @ 57.1

ISM Non-Manufacturing Index

The service sector is also in expansion mode

Source: Institute for Supply Management and Wells Fargo Securities, LLC

19Economics

A new “Normal” for the U.S. Consumer? Credit Card vs. Old Economy

Sears brings back the Christmas club

Popular during the Depression, program allows shoppers to sock money away for special occasions so they can then spend it later without going into debt. But you can do the same thing on your own.

August 01, 2010|Kathy M. Kristof | Personal Finance

Christmas club can tame holiday bills

By Pat Curry • Bankrate.com

Does the room start spinning when your first credit card bill arrives from your holiday spending spree and you realize the real cost of your largesse?

The Return of Layaway

Layaway may sound like an old-school concept, especially in today’s “buy now, pay later” society. But the idea of setting aside products to pay off gradually is making a comeback, and is being praised as a way to regain control of family finances and make sure holiday giving doesn’t fall victim to the economic downturn.

In tough times, layaway plans make a comeback

Retailers are touting the service -- and consumers are responding

YOUR MONEY

November 05, 2008|Andrea Chang | Chang is a Times staff writer.

20Economics

Revolving & Nonrevolving DebtMonth-over-Month Change, 3-M Mov. Avg., Millions of Dollars

-$12

-$10

-$8

-$6

-$4

-$2

$0

$2

$4

$6

$8

$10

$12

2004 2005 2006 2007 2008 2009 2010-$12

-$10

-$8

-$6

-$4

-$2

$0

$2

$4

$6

$8

$10

$12

Revolving: Sep @ -$6.1 MillionNonrevolving: Sep @ $3.4 Million

Consumer Credit

Credit card lending is non-existent


21Economics

Consumer Confidence IndexConference Board

20

40

60

80

100

120

140

160

87 89 91 93 95 97 99 01 03 05 07 09 1120

40

60

80

100

120

140

160

Confidence Yr/Yr % Chg: Dec @ -2.0%Confidence: Dec @ 52.512-Month Moving Average: Dec @ 53.3

Consumer Confidence

Consumer confidence is still very weak for a strong

recovery

Source: Conference Board and Wells Fargo Securities, LLC

22Economics

Personal Income Month-over-Month Percent Change

-3%

-2%

-1%

0%

1%

2%

3%

4%

2000 2002 2004 2006 2008 2010-3%

-2%

-1%

0%

1%

2%

3%

4%

Personal Income: Nov @ 0.3%

Personal Income

Personal income is positive but mostly due to

government transfers


23Economics

Personal Consumption Expenditures Month-over-Month Percent Change

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2000 2002 2004 2006 2008 2010-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%PCE: Nov @ 0.4%

Personal Consumption Expenditures

Personal consumption has remained positive


24Economics

Personal Saving Rate Disp. Personal Income Less Spending as a % of Disp. Income

0%

3%

6%

9%

12%

15%

60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 080%

3%

6%

9%

12%

15%

Personal Saving Rate: Nov @ 5.3%Personal Saving Rate, 12-Month M.A.: Nov @ 5.8%

Personal Saving Rate

The best news is that the saving rate is skyrocketing


25Economics

Real Personal Saving Rate

4%

5%

6%

7%

8%

9%

10%

11%

12%

95 97 99 01 03 05 07 094%

5%

6%

7%

8%

9%

10%

11%

12%Real Saving Rate: Sep @ 8.6 %3-Month Moving Average: Sep @ 8.8 %

Real Personal Saving Rate

But it is even better in real terms


26Economics

Conventional Mortgage Rate vs. 10-Year Treasury YieldPercent

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2004 2005 2006 2007 2008 2009 20101.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Conventional 30-Year Fixed Mortg. Rate: Dec @ 4.81%10-Year Yield: Dec @ 3.37%

Mortgage and Treasury Rates

But interest rates have turned the corner and this is not good for the housing

market

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

27Economics

Conventional Mortgage to 10-Year Treasury SpreadBasis Points

100

125

150

175

200

225

250

275

300

2004 2005 2006 2007 2008 2009 2010100

125

150

175

200

225

250

275

300Mortgage Spread: Dec @ 144 bps

Mortgage Spreads

The biggest reason is that risks to lending in mortgage

market have, once again, increased

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

28Economics

Wells Fargo International Economic Forecast(Year-over-Year Percent Change)

GDP CPI2010 2011 2012 2010 2011 2012

Global (PPP weights) 4.9% 4.0% 4.4% 4.2% 4.3% 4.2%Global (Market Exchange Rates) 3.7% 2.8% 3.2% n/a n/a n/a

Advanced Economies1 2.7% 2.2% 2.8% 1.4% 1.6% 1.9%United States 2.8% 2.6% 3.3% 1.6% 1.7% 2.4%Eurozone 1.7% 1.5% 2.2% 1.6% 1.8% 1.9%United Kingdom 1.8% 1.9% 2.1% 3.2% 2.6% 1.7%J apan 3.6% 1.2% 1.7% - 0.7% - 0.5% - 0.2%Korea 6.4% 4.0% 4.2% 2.9% 3.2% 3.0%Canada 2.9% 2.1% 2.4% 1.7% 2.1% 1.9%

Developing Economies1 7.5% 6.0% 6.4% 7.6% 7.5% 7.0%China 10.3% 9.0% 9.3% 3.2% 3.7% 2.7%India 9.4% 7.6% 7.9% 12.4% 7.9% 7.1%Mexico 5.3% 3.6% 3.5% 4.1% 4.8% 5.2%Brazil 7.6% 5.0% 5.6% 5.0% 6.0% 6.0%Russia 4.3% 4.1% 4.5% 6.9% 9.3% 9.3%

Forecast as of: December 8, 20101Aggregated Using PPP Weights

Global Forecast

Growth in 2011 will probably be very similar to

2010

Source: Wells Fargo Securities, LLC

29Economics

The U.S. housing market has bottomed, but…

Surprise crises have the potential to topple the world economy again

The U.S. economy is still growing but employment creation is not enough

Deflation remains a short-term concern while inflation remains a medium to long-term concern

Commodity prices are up from the lows that were reached in early 2009. Another spike in commodity prices à la 2008 does not seem likely as long as global growth remains constrained.

Credit is starting to flow but problems remain

The Federal Reserve will likely maintain an accommodative stance until recovery is firmly established. Indeed, our forecast calls for the Fed to remain on hold until the second half of next year.

Most major foreign central banks likely will keep policy rates on hold well into 2011.

Financial Markets

Growth Interest Rates

Insert slide callout

Summary of Near-Term Outlook

Summary

Monetary and Fiscal Policy

Monetary policy is still not working Fiscal policy is the only alternative In any case, it will be VERY EXPENSIVE

30Economics

Wells Fargo Securities, LLC Economics Group

John Silvia, Chief Economist [email protected] Mark Vitner, Senior Economist [email protected] Jay Bryson, Global Economist [email protected] Scott Anderson, Senior Economist [email protected] Eugenio Aleman, Senior Economist [email protected] Sam Bullard, Senior Economist [email protected]

Anika Khan, Economist [email protected] Azhar Iqbal, Econometrician [email protected] Ed Kashmarek, Economist [email protected] Tim Quinlan, Economist [email protected] Michael Brown, Economist [email protected]

Tyler Kruse, Economic Analyst [email protected] Joe Seydl, Economic Analyst [email protected] Sarah Watt, Economic Analyst [email protected]

Peg Gavin [email protected]

Economists

Senior Economists

Executive Assistant

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 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.

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Economic Analysts

mailto:[email protected]





aleman-santiago_chile_jan 1811

Documents

wells fargo securities

department of labor

department of commerce

federal reserve board

housing market driven

supply management

employment growth

time home buyers credit