Outlook for the U.S. Economy and Europe

1. Outlook for the U.S. Economy and Europe Tim Quinlan, Economist December 6, 2012

2. U.S. Budget Deficit The federal government faces some significant fiscal challenges Source: U.S. Department of the Treasury and Wells Fargo Securities, LLC

3. U.S. Budget Gap Assumes extension of 2001 tax cuts, extension of AMT relief, return of the payroll tax Source: Congressional Budget Office and Wells Fargo Securities, LLC

4. Composition of Potential Changes Taxation is the primary focal point of upcoming changes Source: Congressional Budget Office and Wells Fargo Securities, LLC

5. Wells Fargo Forecast With and Without Fiscal Cliff Our estimates of potential fiscal cliff impact on economic growth Source: Wells Fargo Securities, LLC

6. Real GDP Forecast From recovery to expansion Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

7. Employment We have been adding jobs for more than a year, but the pace of job growth is spotty Source: U.S. Department of Labor and Wells Fargo Securities, LLC

8. Real GDP Forecast Our forecast calls for the sub-par pace of economic growth to continue for the foreseeable future Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

9. U.S. Housing Market Housing is unlikely to collapse further from here Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

10. Household Formations The long-term run-rate of household formations is roughly 1.25 million Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

11. Housing Starts Housing starts remain well below historical levels, but are expected to increase in the coming years Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 11

12. Housing Inventory The U.S. housing market is still being weighed down by the enormous supply of vacant homes for rent and for sale Source: NAR, U.S. Department of Commerce and Wells Fargo Securities, LLC

13. Distressed Home Prices Distressed sales continue to comprise a historically high portion of home sales Source: National Association of Realtors and Wells Fargo Securities, LLC

14. Home Prices Most regions are starting to see improvement in home prices, but the recovery will be slow in areas with significant amounts of distressed transactions Source: Federal Housing Finance Agency, National Association of Realtors, S&P Corp. and Wells Fargo Securities, LLC 14

15. Home Prices The recovery in housing will continue to be uneven across regions Source: S&P Corp. and Wells Fargo Securities, LLC 15

16. Consumer Balance Sheet Although consumer leverage remains high, it is moving in the right direction Source: Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities, LLC

17. Debt Service Ratio Low interest rates are supportive to consumer spending and housing Source: Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities, LLC

18. Real PCE Forecast Continued deleveraging likely will constrain growth in consumer spending over the next year or so Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

19. Corporate Cash The financial health of the corporate sector is very strong Source: Federal Reserve Board and Wells Fargo Securities, LLC

20. Capital Spending The rebound in capex has lost momentum Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

21. Business Surveys ISM has slipped into contraction territory Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 21

22. Business Surveys Other regional surveys are signaling contraction as well Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 22

23. U.S. Forecast

24. Europe & the Sovereign Debt Crisis

25. Eurozone The Eurozone has slipped back into a mild recession, and growth likely will remain lackluster through next year Source: IHS Global Insight and Wells Fargo Securities, LLC

26. Eurozone GDP Growth Rates There is a wide dispersion in growth rates in the euro area at present Source: IHS Global Insight and Wells Fargo Securities, LLC 26

27. Foreign Bank Exposure to Peripheral Europe Foreign bank exposure to peripheral Europe has receded, but it still remains significant Source: Bank for International Settlements and Wells Fargo Securities, LLC

28. Spanish Government Debt Held by Spanish Financial Institutions The Spanish financial system has become more exposed to Spanish government debt Source: Bank of Spain and Wells Fargo Securities, LLC 28

29. Bank Exposure to Peripheral Europe Exposure to peripheral Europe is concentrated in the French and German banking systems Source: Bank for International Settlements and Wells Fargo Securities, LLC

30. U.S. Bank Exposure to Peripheral Europe American banks have limited direct exposure to peripheral European countries Source: Bank for International Settlements and Wells Fargo Securities, LLC 30

31. 3-Month LIBOR LIBOR could spike again if a generalized financial crisis were to hit the Eurozone Source: IHS Global Insight and Wells Fargo Securities, LLC

32. What Will It Take to “Fix” the Eurozone? • The Eurozone is not an Optimum Currency Area • Significant Labor Flows are Unlikely Among Countries • Need More Fiscal Transfers to Offset Country-Specific Shocks • Eurobonds • Quid Pro Quo • Fiscal and Labor Market Reforms • Transfer of Sovereignty to Central Authority • Centralized Banking Regulator and Deposit Insurance • Larger Rescue Facility that Includes Bank Recapitalization • Major Political Changes that Could Take Years

33. European Government Debt Spain and Italy are probably too big to bail out Source: IHS Global Insight and Wells Fargo Securities, LLC

34. The European Sovereign Debt Crisis Spain and Italy are probably too big to bail out Source: IHS Global Insight and Wells Fargo Securities, LLC

35. European Sovereign Yields The sovereign debt crisis in Europe has spread to some larger countries Source: IHS Global Insight and Wells Fargo Securities, LLC

36. What Will It Take to “Fix” the Eurozone? The Eurozone is not an Optimum Currency Area Significant Labor Flows are Unlikely Among Countries Need More Fiscal Transfers to Offset Country-Specific Shocks Eurobonds Quid Pro Quo Fiscal and Labor Market Reforms Transfer of Sovereignty to Central Authority Centralized Banking Regulator and Deposit Insurance Larger Rescue Facility that Includes Bank Recapitalization Major Political Changes that Could Take Years 36

37. Global Forecast

38. Wells Fargo Securities, LLC Economics Group Global Head of Research and Economics Economists Diane Schumaker-Krieg ………………… ……….diane.schumaker@wellsfargo.com Global Head of Research & Economics Azhar Iqbal, Econometrician………………………………azhar.iqbal@wellsfargo.com Tim Quinlan, Economist …………………………………..tim.quinlan@wellsfargo.com Michael A. Brown, Economist ………………… michael.a.brown@wellsfargo.com Chief Economist John Silvia … ....................... … john.silvia@wellsfargo.com Senior Economists Economic Analysts Sarah Watt, Economic Analyst …………………………….sarah.watt@wellsfargo.com Kaylyn Swankoski, Economic Analyst kaylyn.swankoski@wellsfargo.com Mark Vitner, Senior Economist……………....………. . .mark.vitner@wellsfargo.com Jay Bryson, Global Economist …………………....……….jay.bryson@wellsfargo.com Eugenio Aleman, Senior Economist …………….eugenio.j.aleman@wellsfargo.com Sam Bullard, Senior Economist ………………………….sam.bullard@wellsfargo.com Anika Khan, Senior Economist .… . anika.khan@wellsfargo.com Administrative Assistants Peg Gavin, Executive Assistant. peg.gavin@wellsfargo.com Cyndi Flowe, Administrative Assistant cyndi.h.flowe@wellsfargo.com 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. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE 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 Services Authority. The content of this report has been approved by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FSA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, not will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the “Materials”) are provided for general informational purposes only. 38