Economic Outlook
Economic Outlook
September 15, 2009
Table of Contents
I.
National Economic Overview
II.
Residential Real Estate Summary
III.
The Carolinas
Appendix
| Economics
2
National Economic Overview
| Economics
3
U.S. Economic Overview The U.S. Will Likely Continue to Struggle in the Months to Come, but Signs of Stabilization Are Here Highlights
We believe the recession may have ended in June. The downturn turned into the longest of the post war period at 19 months, but some signs of stabilization are appearing. We are beginning to see some small positives in many key indicators mixed in with smaller declines. The labor market remains the primary concern as job losses have reached 6.9 million on their way to more than 8.0 million before the end of the cycle. This will easily exceed every downturn since the aftermath of World War II. The unemployment rate should exceed 10 percent later this year.
Wells Fargo U.S. Economic Forecast
Level One Level Two
Level Three Level Four
Source: Federal Reserve Board, U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
4
U.S. Economic Overview The Domestic Economy Has Been Extremely Weak but Is on Track for a Modest Recovery Highlights
Real "core" GDP, or private
domestic final sales, lines up well with the persistent weakness in the domestic economy more clearly than GDP. The measure has been negative in the past six quarters, and we expect it to turn positive for the second half of this year. International trade collapsed last year. Imports have fallen dramatically this year while exports have fallen less. Businesses have struggled to bring inventories in line with demand. Massive liquidations occurred in the first and second quarters. We expect the drawdown process to proceed, albeit more slowly, for several more quarters. Nominal GDP, a measure of revenue growth for the economy, has already seen the steepest decline since 1958, and will likely turn positive in the second half of this year.
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
| Economics
5
Consumer Overview Consumer Spending Plunged in the Late 2008 and Early 2009, but the Declines Moderated This Spring Discretionary Consumer Spending
Negative
Positive
Collapsing Labor Market The torrent of layoffs and job
Fiscal Stimulus A reduction in payroll
losses is unlikely to abate until the end of this year. Housing and Home Equity Housing prices and home equity are falling, weighing on consumer spending and sentiment.
withholdings provided a lift to take-home pay in the middle of this year. Consumer Confidence While the confidence for the present situation is still low, consumers’ expectations for the future have rebounded off of their lows.
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
| Economics
6
Credit Spreads & The Yield Curve Fed and Treasury Actions Have Helped Narrow Credit Spreads Highlights
Credit markets began a steady thaw late last year, and progress has continued in recent weeks. The TED spread has moved to its lowest level since the credit crunch began and is now at a more normal level. Corporate borrowing has improved as credit spreads have narrowed. Credit is still relatively expensive and hard to qualify for small businesses and consumers. Mortgage rates were pushed sharply lower by the Fed’s intervention in the MBS market, reaching historically low levels in April. Mortgage rates have since inched up and are now at more than five percent.
Source: British Bankers’ Association, Federal Reserve Board, Freddie Mac and Wells Fargo Securities, LLC
| Economics
7
Global Growth & The Dollar The Global Recession Drags On Highlights
After declining in 2009, global economic growth is poised to rebound in 2010. European economies have contracted more than the U.S. economy, but there are tentative signs that European recessions are coming to an end. The dollar should continue to grind higher against most major currencies over the next few quarters as U.S. growth prospects continue to improve.
Wells Fargo Bank Currency Strategy Group Forecast
Source: Bloomberg LP, Federal Reserve Board, International Monetary Fund and Wells Fargo Securities, LLC
| Economics
8
Unemployment by County Large Portions of the U.S. Face Serious Unemployment Issues Unemployment Rate
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
9
Residential Real Estate Summary
| Economics
10
Homebuilding Construction May Have Bottomed, but This Will Likely Not Be the End of the Problems for Housing Highlights
We estimate an overbuild of roughly 2.0 million units occurred at the peak,
and, unfortunately, little progress was made in reducing inventories in 2008 despite the collapse in new home construction. Inventory levels have improved this year but still remain elevated. This will continue to pressure new construction activity and prices. Housing starts remain at low levels. Starts probably bottomed during the first half of this year, but we are at least two years away from seeing starts move back above 1 million units. Excess supply from builders and the rising tide of foreclosed properties have driven prices sharply lower. We expect the pace of price declines to continue moderating in the coming months. Progress will likely remain uneven, and we do not expect to see house prices trough until 2010. Wells Fargo Housing Outlook
Source: Federal Housing Finance Agency, National Association of Realtors, S&P Corp, U.S. Department of Commerce and Wells Fargo Securities, LLC
| Economics
11
Residential Real Estate While Construction May Have Seen a Trough, We Expect Prices to Continue Declining for Some Time Highlights
New home sales have improved
markedly in recent months. Sales fell sharply last autumn despite lower mortgage rates and increased incentives from builders. Existing sales have held up better and have also increased recently. A large portion, however, is foreclosure and distressed sales. The first-time homebuyers’ tax credit is likely providing a lift to home sales. The tax credit, however, is due to expire at the end of the year. The near-term relevance of the housing affordability measure has diminished because prices have been pushed down by foreclosure activity and fewer people can qualify for conventional mortgages. Credit standards loosened somewhat in the third quarter but still remain tight. Continued caution is understandable given the rise in delinquency rates and foreclosures. Source: Federal Reserve Board, National Association of Realtors, S&P Corp, U.S. Department of Commerce and Wells Fargo Securities, LLC
| Economics
12
Home Price Declines from Peak Home Price Declines Will Likely Continue into 2010 FHFA (OFHEO) Home Price Index
Source: FHFA and Wells Fargo Securities, LLC
| Economics
13
The Carolinas
| Economics
14
North Carolina Unemployment and Housing Freeze the Economy Highlights
North Carolina’s unemployment rate is now the eighth highest in the nation. Labor force growth has certainly contributed to the rise in the unemployment rate, but layoffs have also mounted at an alarming rate. Layoffs are most notable in the construction and manufacturing sectors, which still account for about 20 percent of total employment in the state. Payroll employment declined more than five percent from its peak in several major metro areas including Charlotte and Greensboro. Recently, however, the declines have been slowing. With such severe job losses, personal income will likely fall in the state this year, hitting the state’s retailers and other consumer sectors. New single-family building activity has declined considerably from cycle highs as local and national builders scaled back. Construction likely bottomed earlier this year, and single-family construction activity has inched up recently. Most of the state did not experience the same rapid home price appreciation during the housing boom as in other parts of the country. Home prices declined more than six percent in the second quarter, and we do not expect price appreciation to return for at least another year.
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
15
South Carolina South Carolina’s Persistently High Unemployment Rate Remains Troublesome Highlights
South Carolina’s unemployment rate is the sixth highest in the nation. It now stands at the highest level since the series began but now shows some tentative signs of leveling off. Manufacturing layoffs are a major drag on the state, particularly in rural areas. Employment growth collapsed earlier but has slowly edged up, although the trend remains down. Layoffs have risen quickly throughout the state. Population growth remained strong, though slightly off the record-setting highs of 2007. The state’s relatively affordable housing continues to attract new residents, but recently the strongest gains have been in the Upstate and the greater Charlotte area. Housing construction activity has slowed nearly 70 percent from its peak in mid2005, with much of the deceleration occurring along the coast. Investor activity drove up property values along the coast, and natural disasters increased insurance premiums. These factors combined to hurt affordability in Myrtle Beach, Charleston and Hilton Head.
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
16
Charlotte Unemployment Is a Major Concern Highlights
After an incredibly dreadful year, job
losses have shown signs of slowing and the unemployment rate seems to be topping out. Charlotte’s housing market saw strong growth but was not a bubble market. Nevertheless, excesses need to be worked off. Home prices have declined modestly over the past year and are down a cumulative 11 percent from their peak, as measured by the S&P/Case-Shiller index. Worries about the region’s financial employment base will weigh on the housing market in coming quarters. Single-family construction has declined nearly 80 percent from its peak, reflecting pull backs by national builders and the effects of tighter credit. Population growth in 2008 totaled 55,000 in the MSA and close to 70,000 in the broader CSA, which includes emerging suburbs and employment markets in Mooresville, Denver and Lancaster County.
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
17
Charlotte CSA
Employment concerns dominate the outlook for Greater Charlotte
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
18
York County
Manufacturing Layoffs Have Pushed Unemployment Significantly Higher
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
19
Lancaster County
Retirees are Boosting the Northern Portion of the County but Manufacturing is Clearly Struggling Elsewhere
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
20
Appendix
| Economics
21
Economics Group Publications A Sampling of Our Recent Special, Regional and Industry Commentary Distribution Lists
Recent Special Commentary
Monthly Economic Outlook Weekly Economic & Financial Commentary
Special Reports Economic Indicators Global Economic Commentary Federal Reserve Commentary Real Estate & Housing Consumer & Retail Chief Economist List To join any of our research
distribution lists please visit our website: http://www.wachovia.com/economic semail
| Economics
22
Wells Fargo Securities, LLC Economics Group
Diane Shumaker-Krieg Global Head of Research & Economics
[email protected]
Mark Vitner
Jay H. Bryson, Ph.D.
Senior Economist
Global Economist
[email protected] U.S. Macro Economy Real Estate
John E. Silvia, Ph.D. Chief Economist
[email protected] Global Economies Foreign Exchange
[email protected]
Scott Anderson, Ph.D.
Eugenio Aleman, Ph.D.
Senior Economist
[email protected] U.S.
Macro Economy
Senior Economist
[email protected]
U.S. Macro Economy
Sam Bullard
Anika Khan
Azhar Iqbal
Adam G. York
Economist
Economist
Econometrician
Economist
[email protected] Desk Operations Financial Services
[email protected] Real Estate Retail & Automotive
[email protected] Quantitative MacroEconomic Modeling
Ed Kashmarek
Tim Quinlan
Kim Whelan
Economist
Economic Analyst
Economic Analyst
[email protected]
[email protected] Global Economies Business Investment
[email protected] U.S. Macro Economy Business Investment
U.S.
Macro Economy
[email protected] U.S. Consumer Real Estate
Yasmine Kamaruddin Economic Analyst
[email protected] U.S.
Macro Economy
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, Wachovia Bank N.A., 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 © 2009 Wells Fargo Securities, LLC.
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
| Economics
23
September 15, 2009
Table of Contents
I.
National Economic Overview
II.
Residential Real Estate Summary
III.
The Carolinas
Appendix
| Economics
2
National Economic Overview
| Economics
3
U.S. Economic Overview The U.S. Will Likely Continue to Struggle in the Months to Come, but Signs of Stabilization Are Here Highlights
We believe the recession may have ended in June. The downturn turned into the longest of the post war period at 19 months, but some signs of stabilization are appearing. We are beginning to see some small positives in many key indicators mixed in with smaller declines. The labor market remains the primary concern as job losses have reached 6.9 million on their way to more than 8.0 million before the end of the cycle. This will easily exceed every downturn since the aftermath of World War II. The unemployment rate should exceed 10 percent later this year.
Wells Fargo U.S. Economic Forecast
Level One Level Two
Level Three Level Four
Source: Federal Reserve Board, U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
4
U.S. Economic Overview The Domestic Economy Has Been Extremely Weak but Is on Track for a Modest Recovery Highlights
Real "core" GDP, or private
domestic final sales, lines up well with the persistent weakness in the domestic economy more clearly than GDP. The measure has been negative in the past six quarters, and we expect it to turn positive for the second half of this year. International trade collapsed last year. Imports have fallen dramatically this year while exports have fallen less. Businesses have struggled to bring inventories in line with demand. Massive liquidations occurred in the first and second quarters. We expect the drawdown process to proceed, albeit more slowly, for several more quarters. Nominal GDP, a measure of revenue growth for the economy, has already seen the steepest decline since 1958, and will likely turn positive in the second half of this year.
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
| Economics
5
Consumer Overview Consumer Spending Plunged in the Late 2008 and Early 2009, but the Declines Moderated This Spring Discretionary Consumer Spending
Negative
Positive
Collapsing Labor Market The torrent of layoffs and job
Fiscal Stimulus A reduction in payroll
losses is unlikely to abate until the end of this year. Housing and Home Equity Housing prices and home equity are falling, weighing on consumer spending and sentiment.
withholdings provided a lift to take-home pay in the middle of this year. Consumer Confidence While the confidence for the present situation is still low, consumers’ expectations for the future have rebounded off of their lows.
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
| Economics
6
Credit Spreads & The Yield Curve Fed and Treasury Actions Have Helped Narrow Credit Spreads Highlights
Credit markets began a steady thaw late last year, and progress has continued in recent weeks. The TED spread has moved to its lowest level since the credit crunch began and is now at a more normal level. Corporate borrowing has improved as credit spreads have narrowed. Credit is still relatively expensive and hard to qualify for small businesses and consumers. Mortgage rates were pushed sharply lower by the Fed’s intervention in the MBS market, reaching historically low levels in April. Mortgage rates have since inched up and are now at more than five percent.
Source: British Bankers’ Association, Federal Reserve Board, Freddie Mac and Wells Fargo Securities, LLC
| Economics
7
Global Growth & The Dollar The Global Recession Drags On Highlights
After declining in 2009, global economic growth is poised to rebound in 2010. European economies have contracted more than the U.S. economy, but there are tentative signs that European recessions are coming to an end. The dollar should continue to grind higher against most major currencies over the next few quarters as U.S. growth prospects continue to improve.
Wells Fargo Bank Currency Strategy Group Forecast
Source: Bloomberg LP, Federal Reserve Board, International Monetary Fund and Wells Fargo Securities, LLC
| Economics
8
Unemployment by County Large Portions of the U.S. Face Serious Unemployment Issues Unemployment Rate
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
9
Residential Real Estate Summary
| Economics
10
Homebuilding Construction May Have Bottomed, but This Will Likely Not Be the End of the Problems for Housing Highlights
We estimate an overbuild of roughly 2.0 million units occurred at the peak,
and, unfortunately, little progress was made in reducing inventories in 2008 despite the collapse in new home construction. Inventory levels have improved this year but still remain elevated. This will continue to pressure new construction activity and prices. Housing starts remain at low levels. Starts probably bottomed during the first half of this year, but we are at least two years away from seeing starts move back above 1 million units. Excess supply from builders and the rising tide of foreclosed properties have driven prices sharply lower. We expect the pace of price declines to continue moderating in the coming months. Progress will likely remain uneven, and we do not expect to see house prices trough until 2010. Wells Fargo Housing Outlook
Source: Federal Housing Finance Agency, National Association of Realtors, S&P Corp, U.S. Department of Commerce and Wells Fargo Securities, LLC
| Economics
11
Residential Real Estate While Construction May Have Seen a Trough, We Expect Prices to Continue Declining for Some Time Highlights
New home sales have improved
markedly in recent months. Sales fell sharply last autumn despite lower mortgage rates and increased incentives from builders. Existing sales have held up better and have also increased recently. A large portion, however, is foreclosure and distressed sales. The first-time homebuyers’ tax credit is likely providing a lift to home sales. The tax credit, however, is due to expire at the end of the year. The near-term relevance of the housing affordability measure has diminished because prices have been pushed down by foreclosure activity and fewer people can qualify for conventional mortgages. Credit standards loosened somewhat in the third quarter but still remain tight. Continued caution is understandable given the rise in delinquency rates and foreclosures. Source: Federal Reserve Board, National Association of Realtors, S&P Corp, U.S. Department of Commerce and Wells Fargo Securities, LLC
| Economics
12
Home Price Declines from Peak Home Price Declines Will Likely Continue into 2010 FHFA (OFHEO) Home Price Index
Source: FHFA and Wells Fargo Securities, LLC
| Economics
13
The Carolinas
| Economics
14
North Carolina Unemployment and Housing Freeze the Economy Highlights
North Carolina’s unemployment rate is now the eighth highest in the nation. Labor force growth has certainly contributed to the rise in the unemployment rate, but layoffs have also mounted at an alarming rate. Layoffs are most notable in the construction and manufacturing sectors, which still account for about 20 percent of total employment in the state. Payroll employment declined more than five percent from its peak in several major metro areas including Charlotte and Greensboro. Recently, however, the declines have been slowing. With such severe job losses, personal income will likely fall in the state this year, hitting the state’s retailers and other consumer sectors. New single-family building activity has declined considerably from cycle highs as local and national builders scaled back. Construction likely bottomed earlier this year, and single-family construction activity has inched up recently. Most of the state did not experience the same rapid home price appreciation during the housing boom as in other parts of the country. Home prices declined more than six percent in the second quarter, and we do not expect price appreciation to return for at least another year.
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
15
South Carolina South Carolina’s Persistently High Unemployment Rate Remains Troublesome Highlights
South Carolina’s unemployment rate is the sixth highest in the nation. It now stands at the highest level since the series began but now shows some tentative signs of leveling off. Manufacturing layoffs are a major drag on the state, particularly in rural areas. Employment growth collapsed earlier but has slowly edged up, although the trend remains down. Layoffs have risen quickly throughout the state. Population growth remained strong, though slightly off the record-setting highs of 2007. The state’s relatively affordable housing continues to attract new residents, but recently the strongest gains have been in the Upstate and the greater Charlotte area. Housing construction activity has slowed nearly 70 percent from its peak in mid2005, with much of the deceleration occurring along the coast. Investor activity drove up property values along the coast, and natural disasters increased insurance premiums. These factors combined to hurt affordability in Myrtle Beach, Charleston and Hilton Head.
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
16
Charlotte Unemployment Is a Major Concern Highlights
After an incredibly dreadful year, job
losses have shown signs of slowing and the unemployment rate seems to be topping out. Charlotte’s housing market saw strong growth but was not a bubble market. Nevertheless, excesses need to be worked off. Home prices have declined modestly over the past year and are down a cumulative 11 percent from their peak, as measured by the S&P/Case-Shiller index. Worries about the region’s financial employment base will weigh on the housing market in coming quarters. Single-family construction has declined nearly 80 percent from its peak, reflecting pull backs by national builders and the effects of tighter credit. Population growth in 2008 totaled 55,000 in the MSA and close to 70,000 in the broader CSA, which includes emerging suburbs and employment markets in Mooresville, Denver and Lancaster County.
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
17
Charlotte CSA
Employment concerns dominate the outlook for Greater Charlotte
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
18
York County
Manufacturing Layoffs Have Pushed Unemployment Significantly Higher
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
19
Lancaster County
Retirees are Boosting the Northern Portion of the County but Manufacturing is Clearly Struggling Elsewhere
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
| Economics
20
Appendix
| Economics
21
Economics Group Publications A Sampling of Our Recent Special, Regional and Industry Commentary Distribution Lists
Recent Special Commentary
Monthly Economic Outlook Weekly Economic & Financial Commentary
Special Reports Economic Indicators Global Economic Commentary Federal Reserve Commentary Real Estate & Housing Consumer & Retail Chief Economist List To join any of our research
distribution lists please visit our website: http://www.wachovia.com/economic semail
| Economics
22
Wells Fargo Securities, LLC Economics Group
Diane Shumaker-Krieg Global Head of Research & Economics
[email protected]
Mark Vitner
Jay H. Bryson, Ph.D.
Senior Economist
Global Economist
[email protected] U.S. Macro Economy Real Estate
John E. Silvia, Ph.D. Chief Economist
[email protected] Global Economies Foreign Exchange
[email protected]
Scott Anderson, Ph.D.
Eugenio Aleman, Ph.D.
Senior Economist
[email protected] U.S.
Macro Economy
Senior Economist
[email protected]
U.S. Macro Economy
Sam Bullard
Anika Khan
Azhar Iqbal
Adam G. York
Economist
Economist
Econometrician
Economist
[email protected] Desk Operations Financial Services
[email protected] Real Estate Retail & Automotive
[email protected] Quantitative MacroEconomic Modeling
Ed Kashmarek
Tim Quinlan
Kim Whelan
Economist
Economic Analyst
Economic Analyst
[email protected]
[email protected] Global Economies Business Investment
[email protected] U.S. Macro Economy Business Investment
U.S.
Macro Economy
[email protected] U.S. Consumer Real Estate
Yasmine Kamaruddin Economic Analyst
[email protected] U.S.
Macro Economy
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, Wachovia Bank N.A., 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 © 2009 Wells Fargo Securities, LLC.
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
| Economics
23
