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The Kids Are Alright . Ed Kashmarek, Economist May 3, 2012. Agenda. United States Labor Market Inflation/Interest Rates Housing Market Credit Quality Lending Consumers Manufacturing International Trade Economic Outlook Budget Deficit/Debt Education Bad Good Questions.

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the kids are alright

The Kids Are Alright

Ed Kashmarek, Economist

May 3, 2012

slide2

Agenda

  • United States
      • Labor Market
      • Inflation/Interest Rates
      • Housing Market
      • Credit Quality
      • Lending
      • Consumers
      • Manufacturing
      • International Trade
      • Economic Outlook
      • Budget Deficit/Debt
  • Education
      • Bad
      • Good
  • Questions
employment
Employment

The economy has added nearly 2 million jobs over the past year.

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

industry job growth
Industry Job Growth

Professional/business services and education/health services have led the way in job growth over the past year, while budget cuts have trimmed government payrolls.

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

unemployment rate
Unemployment Rate

The unemployment rate has seen noticeable improvement recently, but remains uncomfortably high.

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

housing related employment
Housing-Related Employment

A major factor behind high unemployment is the millions of jobs lost in housing-related employment.

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

inflation
Inflation

Inflation has moderated recently, but input costs have been rising much faster than selling prices over the past two years.

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

core inflation
Core Inflation

Core inflation has accelerated, but remains within the Fed’s comfort zone of 1-2%, but just barely.

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

fed funds futures
Fed Funds Futures

Interest rates are expected to remain very low for the foreseeable future.

Source: CBOT and Wells Fargo Securities, LLC

mortgage rates
Mortgage Rates

Mortgage rates are at record lows, but many still cannot take advantage.

Source: Freddie Mac and Wells Fargo Securities, LLC

mortgage applications and home sales
Mortgage Applications and Home Sales

Home sales have improved, but purchase applications remain weak despite record low mortgage rates.

Source: Mortgage Bankers Association, National Association of Realtors and Wells Fargo Securities, LLC

home prices
Home Prices

Home prices are starting to show signs of stabilization again.

Source: National Association of Realtors and Wells Fargo Securities, LLC

housing starts
Housing Starts

While single-family housing starts remain subdued, multi-family starts have jumped.

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

total loan delinquency rates
Total Loan Delinquency Rates

Loan delinquency rates have improved, but are still near or above levels seen in prior recessions.

Source: Federal Reserve Board and Wells Fargo Securities, LLC

credit card loan delinquency rates
Credit Card Loan Delinquency Rates

Credit card delinquency rates have improved markedly amid household deleveraging and bank charge-offs.

Source: Federal Reserve Board and Wells Fargo Securities, LLC

bankruptcies
Bankruptcies

Both business and personal bankruptcies declined further in the fourth quarter.

Source: Administrative Office of U.S. District Courts and Wells Fargo Securities, LLC

household debt
Household Debt

Despite recent improvements, households remain highly indebted.

Source: Administrative Office of U.S. District Courts and Wells Fargo Securities, LLC

total loans outstanding
Total Loans Outstanding

Loan growth has finally turned positive for the first time since the end of the recession.

Source: Federal Reserve and Wells Fargo Securities, LLC

willingness to lend
Willingness to Lend

Bankers’ willingness to lend to consumers improved noticeably after the recession, but has turned down again over the last few quarters.

Source: Bloomberg, Federal Reserve and Wells Fargo Securities, LLC

consumer confidence
Consumer Confidence

Consumer confidence has rebounded recently amid improvement in the labor market and better economic data.

Source: The Conference Board and Wells Fargo Securities, LLC

personal spending and income
Personal Spending and Income

Rising confidence has supported a rebound in personal spending recently, but this may not be sustained due to slowing income growth.

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

personal saving rate
Personal Saving Rate

A war chest of savings has helped to support spending, but the savings rate has declined over the last year as income growth has slowed, suggesting recent spending strength may not be sustainable.

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

manufacturing
Manufacturing

Manufacturing slowed noticeably amid fears of a global slowdown and sovereign debt concerns, but has improved a bit since last summer.

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

production and manufacturing jobs
Production and Manufacturing Jobs

Although production has rebounded, manufacturing job growth has been scarce.

Source: Federal Reserve, U.S. Bureau of Labor Statistics and Wells Fargo Securities, LLC

export and import growth
Export and Import Growth

Growth of both exports and imports has slowed substantially.

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

exports and imports share of gdp
Exports and Imports Share of GDP

Imports as a share of GDP have doubled in the last two decades.

Source: U.S. Bureau of Economic Analysis, U.S. Census Bureau and Wells Fargo Securities, LLC

imports from china
Imports from China

Nearly one fifth of all U.S. imports now come from China.

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

trade deficit with china
Trade Deficit with China

The deficit with China continues to widen.

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

trade deficit
Trade Deficit

The trade deficit has widened again since the end of the recession.

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

real gdp forecast
Real GDP Forecast

We believe modest consumer spending and further declines in government spending will keep economic growth subpar. Business investment should remain decent, while residential investment should improve.

Source: U.S. Bureau of Economic Analysis and Wells Fargo Securities, LLC

federal budget deficit
Federal Budget Deficit

The deficit as a share of GDP is at levels not seen since World War II.

Source: Congressional Budget Office and Wells Fargo Securities, LLC

federal budget deficit1
Federal Budget Deficit

The deficit as a share of GDP is at levels not seen since World War II.

Source: Congressional Budget Office and Wells Fargo Securities, LLC

federal debt
Federal Debt

Total debt, including debt owed to government accounts, is almost 100% of GDP.

Source: Congressional Budget Office and Wells Fargo Securities, LLC

federal debt forecast
Federal Debt Forecast

Debt to the public (not including debt owed to government accounts) will be a much larger share of GDP if the CBO’s alternative scenario occurs.

Source: Congressional Budget Office and Wells Fargo Securities, LLC

youth unemployment rate
Youth Unemployment Rate

Youth unemployment is higher than overall unemployment and is the highest in decades.

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

labor force participation rate
Labor Force Participation Rate

Youth participation in the labor force is the lowest in decades.

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

household net worth
Household Net Worth

Many older workers are staying in the workforce longer after the value of their investments and houses declined, leading to fewer job opportunities for younger workers.

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

population forecast
Population Forecast

As older workers retire, more opportunities should become available for younger workers.

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

college tuition costs
College Tuition Costs

College tuition costs have been increasing at a far higher rate than overall inflation for years.

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

student loans outstanding
Student Loans Outstanding

Federal student debt held by the government has soared, partly due to the new law whereby only the federal government can issue new government guaranteed student loans.

Source: Federal Reserve and Wells Fargo Securities, LLC

student loan defaults
Student Loan Defaults

The default rate on student loans is on the rise and in 2009 was the highest since 1997.

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

slide54

Moving Back Home After College?

  • Population Growth (2007-2010)
    • Age 20-24: +2.8%
    • Age 25-29: +3.0%
  • Educational Attainment (2007-2010)
    • Holders of bachelor’s degree or higher: +6.0%
  • Household Growth (2007-2010)
    • All households: +1.3%
    • Households headed by holders of
      • high school diploma: +1.0%
      • some college or associates degree: +4.0%
      • bachelor’s degree or higher: +5.8%
    • Households by age of householder
      • 20-29: -3.9%
      • 20-49: -3.2%
      • Over 50: +6.5%
  • Conclusions
    • Young population growing
    • Highly-educated population growing
    • Only household growth is for age 50+
    • Reasonable to conclude young graduates moving back home after college
federal budget deficit2
Federal Budget Deficit

Higher education is vulnerable to cuts in an effort to reduce the federal budget deficit.

Source: Congressional Budget Office and Wells Fargo Securities, LLC

u s budget gap
U.S. Budget Gap

The current trajectory of spending relative to revenue is unsustainable, but is mainly due to growth in entitlement outlays, not education.

Source: Congressional Budget Office and Wells Fargo Securities, LLC

employment comparisons
Employment Comparisons

The employment-population ratio is back near pre-recession levels for college grads, but has barely budged for the overall labor market.

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

lifetime earnings
Lifetime Earnings

Educational attainment has a huge impact on lifetime earnings.

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

minnesota educational attainment
Minnesota Educational Attainment

About a third of all Minnesotans 25 and older have a bachelor’s degree or higher.

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

regional educational attainment
Regional Educational Attainment

Minnesota has the highest educational attainment in the Midwest.

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

regional unemployment
Regional Unemployment

High educational attainment is one reason Minnesota has a lower-than-average unemployment rate.

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

regional disposable income
Regional Disposable Income

High educational attainment has also fostered higher levels of disposable income.

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

metro educational attainment
Metro Educational Attainment

The Twin Cities and Rochester have the highest educational attainment among major Minnesota metro areas.

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

metro unemployment
Metro Unemployment

Mankato and Rochester have the lowest unemployment rates in Minnesota, which can be partly attributed to high educational attainment.

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

slide67

Key Takeaways

  • Job growth – is looking better but still way below pre-recession levels
    • weak labor demand (productivity, off-shoring)
    • weak product demand (unemployment)
    • skills imbalance
    • regulations (healthcare, Dodd-Frank, EPA)
    • uncertainty
  • Housing Market – seeing encouraging signs but challenges remain
    • weak labor market
    • tight lending standards
    • buyers fear further price declines, more foreclosures
    • sellers can’t sell (low offers, low appraisals, negative equity)
    • shadow inventory
  • Budget Deficits – will likely weigh on growth
    • tax increases, reduction or elimination of deductions
    • spending cuts (education?)
    • higher interest rates?
    • less domestic investment, lower income growth
  • Education – benefits outweigh costs…for most
    • fear of not finding job to pay off student loans
    • job opportunities and lifetime earnings are much better for higher educated workers
    • greater educational attainment benefits both students and economies
    • globalization is changing the cost/benefit equation for education
questions ed kashmarek@wellsfargo com www wellsfargo com com research economics
Questions?ed.kashmarek@wellsfargo.comwww.wellsfargo.com/com/research/economicsQuestions?ed.kashmarek@wellsfargo.comwww.wellsfargo.com/com/research/economics

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wells fargo securities llc economics group
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

Ed Kashmarek, Economist …………………………….ed.kashmarek@wellsfargo.com

Michael Brown, Economist ………………………..michael.a.brown@wellsfargo.com

Chief Economist

John Silvia, Chief Economist ............................. …john.silvia@wellsfargo.com

Senior Economists

Economic Analysts

Mark Vitner, Senior Economist……………....……………. ..mark.vitner@wellsfargo.com

Jay Bryson, Global Economist …………………....……….jay.bryson@wellsfargo.com

Scott Anderson, Senior Economist……………………scott.a.anderson@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

Joe Seydl, Economic Analyst …………………………….joseph.seydl@wellsfargo.com

Sarah Watt, Economic Analyst …………………………….sarah.watt@wellsfargo.com

Kaylyn Swankoski, Economic Analyst kaylyn.swankoski@wellsfargo.com

Executive Assistant

Peg Gavin ………………………...………………. peg.gavin@wellsfargo.com

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