Economic and Financial-Market Outlook Through 2017
Analysis of the economic transition post-meltdown, global growth concerns, interest-rate cycles, inflation risks, and comparisons to past boom-bust cycles in a Wells Capital Management presentation.
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Wells Capital Management | September 2016 A Presentation to the CSAC Southern California Counties Regional Meeting The Economic and Financial-Market Outlook Through 2017: A Slow Transition From The Post- Meltdown Economy Gary Schlossberg, Senior Economist Irvine, California September 22, 2016 Wells Fargo Asset Management is a trade name used by the asset management businesses of Wells Fargo & Company.
MORE THAN JUST ANOTHER GROWTH "PAUSE?" % Of ISM* Respondents Reporting An Increase In Activity 61 60 Economic Expansion Non-Manufacturing 59 58 57 56 55 54 53 52 51 August 2016 50 49 48 Economic Contraction Manufacturing 47 46 Dec-14 Source: Institute Of Supply Management Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 WELLS FARGO ASSET MANAGEMENT 2
IS THE GLOBAL ECONOMY LOSING A U.S. GROWTH "ENGINE?" % Of Respondents Reporting Increased Manufacturing & Non-Manufacturing Activity 59 Expansion 58 57 U.S. 56 55 54 Rest Of The World 53 52 Of Which: China 51 August 2016 50 49 Contraction 48 Dec-14 Sources: ISM; JP Morgan Chase, Inc; Wells Capital Management estimates. Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 WELLS FARGO ASSET MANAGEMENT 3
4 AN UNUSUAL INTEREST-RATE CYCLE IN 2015? A Cautious Sea Change In Monetary Policy --A More Internationalist Federal Reserve An Eroding, But Still- Friendly Backdrop For Long-Term Rates --Moderate Growth, Subdued Inflation (With A Caveat) --Foreign Flight- And Yield-Driven Demand For U.S. Debt A Bumpy Ride Higher? --Bracing For A Potentially Unsettling Election-Year Cycle --An Unwinding Of Financial-Market Distortions WELLS FARGO ASSET MANAGEMENT 4
A "SPLIT-PERSONALITY" CPI LEAVES INFLATION VULNERABLE TO AN ABRUPT RISE Year-Ago Percent Change 0.5 3.3 "Services" CPI , Excluding Energy (Right Scale) 3.2 3.1 0.2 3.0 "Goods" CPI, Excluding Food & Energy (Left Scale) 2.9 -0.1 August 2016 2.8 2.7 -0.4 2.6 2.5 -0.7 2.4 2.3 -1.0 2.2 Dec-14 Source: U.S. Dep't Of Labor Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 WELLS FARGO ASSET MANAGEMENT 5
A REPLAY OF LAST DECADES BOOM-BUST CYCLE? The Good News --No Nationwide Housing Bubble --Less Leveraged, Better Capitalized Banks --More Manageable Household Debt Burdens --Fewer Sub-Prime Mortgages And The Bad -- Shadow Banking Fills The Traditional-Banking Vacuum -- Illiquidity Risk Amid Ample Liquidity --Weakening Underwriting Standards --Increased Portfolio Leveraging --Inflated Asset Values WELLS FARGO ASSET MANAGEMENT 6
NEW AND NOT-SO-NEW U.S. RECESSION RISKS IN 2016-17 Waning Traditional Catalysts Rising Inflation, Higher Interest Rates, A Typical Inventory Cycle Rising Corporate Debt A Cost-Driven Pull Back In Hiring And In Wage Increases Weak Pricing Power Rising Wages/ Weak Productivity Growth Another Asset-Driven Economic Cycle The Economy s More Interest-Sensitive Debt Profile WELLS FARGO ASSET MANAGEMENT 7
PROFIT MARGINS SQUEEZED BY A WIDENING GAP BETWEEN UNIT-LABOR-COST AND SELLING-PRICE INCREASES Year-Ago % Change; Non-Farm Sector 2.8% Margin Pressure Margin Expansion 2.4% Unit Labor Costs* 2.0% 2016 Q2 1.6% 1.2% Business Selling Prices 0.8% 0.4% 0.0% Dec-11 Sep-12 Jun-13 Mar-14 Dec-14 Sep-15 Jun-16 * Wages, salaries and benefits, adjusted for changes in labor productivity. Source: U.S. Department Of Labor WELLS FARGO ASSET MANAGEMENT 8
A MORE INTEREST-SENSITIVE GOVERNMENT DEBT BURDEN Percent 75% 17% 16% 65% 15% '16Q2 55% Net Federal Interest Payments As A % Of Revenues (Right Scale) 14% 13% 45% Marketable Treasury Debt As A % Of GDP (Left Scale) 12% 35% 11% 25% 10% Dec-07 Source: U.S. Treasury Department Mar-09 Jun-10 Sep-11 Dec-12 Mar-14 Jun-15 Sep-16 WELLS FARGO ASSET MANAGEMENT 9
10 A NEW NORMAL FOR THE U.S. ECONOMY? Lingering Fall-Out From The 2008-09 Financial Meltdown Policy-Related Distortions In The Financial Market The Great Productivity Puzzle An Aging, Slower-Growing Workforce A Jobs Mismatch Between Skilled And Less Skilled Workers WELLS FARGO ASSET MANAGEMENT 10
A LABOR MISMATCH LEAVING THE JOB MARKET "TIGHTER" THAN IT APPEARS Year-Ago Percent Change; Three-Month Moving Average Data 32% 28% Change In Open, But Unfilled Positions 24% Job Openings 20% 16% 12% Hiring 8% 5.5% July 2016 4% 0% 0.8% -4% Dec-12 Source: U.S. Bureau of Labor Statistics Sep-13 Jun-14 Mar-15 Dec-15 Sep-16 WELLS FARGO ASSET MANAGEMENT 11
12 A FEW SUPPORTS IN THE STRUGGLE FOR MORE SATISFACTORY GROWTH Demographically Driven Market Opportunities Infrastructure Upgrades At Home, Expansion Abroad Commercializing, Integrating Technological Innovations --A New Manufacturing Renaissance? Well-Positioned In A Highly Competitive Global Economy --U.S. Entrepreneurial, Innovative Strengths --Demonstrated Cost-Cutting, Efficiency-Raising Ability Emerging-Market Opportunities --Middle-Class Growth, Urbanization, Human Capital Development Tilting Toward More Growth-Oriented Tax And Regulatory Policies WELLS FARGO ASSET MANAGEMENT 12
WFAM Disclosure Wells Fargo Asset Management is the trade name of the investment management services provided by certain subsidiaries of Wells Fargo & Company (including Wells Fargo Funds Distributor, LLC, Wells Capital Management, The Rock Creek Group, Golden Capital Management, Peregrine Capital Management, Nelson Capital Management, ECM Asset Management, and Galliard Capital Management) and marketed by Wells Fargo Securities International Limited or ECM Asset Management Limited. Wells Fargo Securities International Limited and ECM Asset Management Limited are authorised and regulated by the Financial Conduct Authority within the U.K. Certain investments are distributed in the United States by Wells Fargo Funds Distributor, LLC, Member FINRA/SIPC. Wells Capital Management (WellsCap) is a registered investment adviser and a wholly owned subsidiary of Wells Fargo Bank, N.A. WellsCap provides investment management services for a variety of institutions. The views expressed are those of the presenter and are subject to change. This material has been distributed for informational purposes only, and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product. The material is based upon information we consider reliable, but its accuracy and completeness cannot be guaranteed. Past performance is not a guarantee of future returns. As with any investment vehicle, there is a potential for profit as well as the possibility of loss. For additional information on Wells Capital Management and its advisory services, please view our web site at www.wellscap.com, or refer to our Form ADV Part II, which is available upon request by calling 415.396.8000. NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE WELLS FARGO ASSET MANAGEMENT 13
