2015 Economic Outlook - LEA Global

2015 Economic Outlook Anika R. Khan, Senior Economist October 20, 2015 Five Key Themes Overall economic growth is improving at a steady pace. The U.S. Economic Growth Slow Global Growth Risks to U.S. Outlook Data-Dependent Federal Reserve household sector is seeing strong gains and the housing market is advancing. However, capital investment has been lackluster and net exports will continue to be drag on real GDP growth Global real GDP growth is gradually increasing, but remains below its long-run average. Although economic growth in the U.S. is strengthening, activity in other advanced economies are lagging in the recovery The U.S. dollar has strengthened significantly since last summer due to the divergence in the outlook for monetary policy. As a result, the U.S. manufacturing sector is showing weakness. The renewed drop in the price of oil has also been a headwind and unresolved fiscal issues will continue to add uncertainty The Fed is looking at an array of data and will need to continue to see strengthening labor market conditions, inflation moving toward its target and improvement in emerging economies Chinas economic growth continues to slow bringing much China of the commodity export-dependent world down with it. The manufacturing sector is weak and construction is also showing marked declines. Foreign excess reserves have likely peaked 2 Economic Growth We are now six years into the recovery and economic growth is increasing at a steady pace. Despite a slow start to the year, activity is expected to improve in the coming quarters Real GDP Forecast Real Private Final Sales U.S. Real GDP Real Private Final Sales to Domestic Purchasers Bars = CAGR Line = Yr/ Yr Percent Change Bars = CAGR 10% 10% 8% 8% 6% Line = Yr/ Yr Percent Change 8% GDP - CAGR: Q2 @ 3.9% 8% GDP - Yr/ Yr Percent Change: Q2 @ 2.7% 6% Forecast 6% 6% 4%

4% 4% 2% 2% 2% 2% 0% 0% 0% 0% -2% -2% - 2% -2% -4% -4% - 4% -4% -6% -6% - 6% -6% -8% -8% - 8% -8% -10% -10% -12% Forecast 4% - 10% 2000 2002 2004 2006 2008 2010 2012 2014 2016 3 -10% -12% 2000 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook

Real Priv Fin Sales to Dom. Purch. - CAGR: Q2 @ 3.9% Real Priv Fin Sales to Dom. Purch. - Yr/ Yr Pct Chg: Q2 @ 3.5% 2002 2004 2006 2008 2010 2012 2014 2016 GDP Components Businesses still have a considerable amount of cash on the sidelines. We expect some of this money to be redirected into capital spending, but there are downside risks due to the recent drop in oil prices Business Fixed Investment Cash on Sidelines Capital Spending by Type U.S. Nonfin. Corporate Cash Holdings Total Assets Market Value, U.S. Nonfinancial Corporations Year-over-Year Percent Change 30% 30% I ntellectual Property: Q2 @ 7.3% Equipment: Q2 @ 3.3% Structures: Q2 @ 0.2% 20% 5.5% 5.5% Cash Ratio: Q2 @ 4.4% 5.0% 20% 10% 4-Q Moving Average: Q2 @ 4.4% 5.0% 4.5% 4.5% 4.0% 4.0% 3.5% 3.5% 3.0% 3.0% 2.5% 2.5% 10% 0% 0% -10% -10% -20% -20% -30% 2000

-30% 2002 2004 2006 2008 2010 2012 2.0% 2014 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 2.0% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 4 Residential Residential investment spending has made only a marginal contribution to real GDP growth. However, growth in the household sector is gradually improving Residential Investment Spending Household Formations Residential I nvestment Spending Bar = Compound Annual Rate Household Formations Line = Percentage Points at Annual Rate 2.0% Average of CPS/ ASEC and CPS/ HVS, I n Millions 40% Residential I nvestment Spending: Q2 @ 9.37% (Right Axis) Contribution to U.S. Real GDP: Q2 @ 0.30% (Left Axis) 1.5% 3.0 30% 1.0% 20% 0.5% 10% 0.0% 3.0 Survey Averages: 2014 @ 900K 1948 to 2014 Average 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0

0% - 0.5% - 10% - 1.0% - 20% - 1.5% - 30% 0.0 - 40% - 0.5 - 2.0% 85 87 90 93 95 98 01 03 06 09 11 14 - 0.5 60 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 5 64 68 72 76 80 84 88 92 96 00 04 08 12 Consumer Spending Consumer spending is driving overall economic growth Retail Sales Real Consumer Spending Retail Sales Real Personal Consumption Expenditures Bars = CAGR Year-over-Year Percent Change, SA

Line = Yr/ Yr Percent Change 8% 8% 6% 6% Motor Veh. & Parts 4% "Core" Retail Sales 4.3% Health, Pers. Care 4.3% 4% Forecast Nonstore Retailers 2% 2% 0% 0% - 2% -2% Total Retail Sales - 4% -4% Building Materials August 2015 6.9% 5.7% Furniture - 6% Food, Beverages Gas Stations - 8% -8% 2000 2002 2004 2006 2008 2010 2012 2014 3.3% 2.2% 0.9% Electronics -6% PCE - CAGR: Q2 @ 3.6% PCE - Yr/ Yr Percent Change: Q2 @ 3.3% 3.7%

- 20% 2016 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 6 -2.5% -17.2% - 15% -10% - 5% 0% 5% 10% Household Finances Although consumer leverage remains elevated relative to historical norms, it is well off its prerecession high and debt service has returned to more sustainable levels Debt Service Debt to Income Financial Obligations Ratio-Total Household Debt - Consumer & Mortgage As a Percent of Disposable Personal I ncome As a Percent of Disposable Personal I ncome 130% 18.5% 130% 18.5% Total: Q2 @ 15.4% 120% 120% 110% 110% 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 18.0% 18.0% 17.5% 17.5% 17.0% 17.0% 16.5%

16.5% 16.0% 16.0% 15.5% 15.5% 15.0% 15.0% Household Debt: Q2 @ 96.3% 40% 14.5% 40% 60 65 70 75 80 85 90 95 00 05 10 14.5% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 15 Source: Federal Reserve Board and Wells Fargo Securities, LLC 7 Consumer Credit Consumer Credit Year-over-Year Percent Change, 3-Month Moving Average 35% 35% Nonrevolving Credit: Aug @ 7.9% Revolving Credit: Aug @ 4.0% 30% Revolving credit is beginning to come back 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0%

-5% -5% -10% -10% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: Federal Reserve Board and Wells Fargo Securities, LLC 8 Percent change in real GDP by state 2013-2014 WA 3.0 MT 1.8 ID 2.7 OR 3.6 UT 3.1 NV 1.0 AZ 1.4 VT 0.6 NH 2.3 MN 1.4 WI 1.0 SD 0.6 WY 5.1 CA 2.8 ME 0.2 ND 6.3 PA 1.8 IA 0.4 NE 0.7 IL 1.2 CO 4.7 KS 1.8 OK 2.8 NM 1.0 HI 0.8 OH 2.1 IN 0.4 MO

0.9 WV 5.1 VA 0.02 KY 1.0 RI 1.2 NJ 0.4 CT 0.6 DE 1.2 MD 0.8 DC 1.6 SC 2.2 AR 0.8 AL 0.7 GA 2.3 LA 1.9 FL 2.7 AK -1.3 MA 2.3 NC 1.4 TN 1.7 MS -1.2 TX 5.2 NY 2.5 MI 1.9 U.S. = 2.2% (-1.3)% - 0.7% 0.7% - 1.2% 1.2% - 1.8% 1.8% - 2.7% 2.7% - 6.3% Economic Policy Uncertainty I ndex of Economic Policy Uncertainty Black Monday 200 Balanced Budget Act The Index of Economic Policy Uncertainty reached its highest level on record during the debt ceiling debate, but remains well above its long-run trend 250

Debt Ceiling Dispute; European Debt Crisis Obama Election Banking Crisis Lehman and TARP 9/11 Gulf War I Clinton Election 150 Gulf War II Bush Election Russian Crisis/LTCM Fiscal Cliff Debt Celing Dispute 250 Large Interest Rate Cuts , Stimulus 200 150 100 100 2010 Midterm Elections 50 50 Baseline Overall I ndex: Sep @ 138.9 0 0 85 87 89 91 93 95 97 99 01 03 05 07 Source: Economic Policy Uncertainty and Wells Fargo Securities, LLC Economic Outlook 10 09 11 13 15 U.S. Budget Gap

U.S. Budget Gap CBO Baseline Scenario Projections, Percent of GDP 26% 26% Forecast The federal government faces some significant fiscal challengesthe current path is not sustainable 24% 24% 22% 22% Avg. Outlays 1965-2014 20% 20% 18% 18% Avg. Revenues 1965-2014 16% 16% Outlays: 2025 @ 22.0% Revenues: 2025 @ 18.3% 14% 14% 1975 1980 1985 1990 1995 2000 2005 2010 Source: Congressional Budget Office and Wells Fargo Securities, LLC Economic Outlook 11 2015 2020 2025 Treasury Fundamentals Net Foreign Purchases of Treasuries vs. Net I ssuance 12-M Moving Sum; 12-M Moving Average; Billions of Dollars $1,000 $200 Net Foreign Purchases: J ul @ $101.8 Billion (Left Axis) Net Treasury I ssuance: Aug @ $50.1 Billion (Right Axis) Net Treasury issuance and international capital flows remain the key drivers of price dynamics in the market $800 $160 $600 $120

$400 $80 $200 $40 $0 $0 - $200 - $40 98 00 02 04 06 08 Source: IHS Global Insight and Wells Fargo Securities, LLC Economic Outlook 12 10 12 14 Federal Fiscal Policy The composition of federal spending has shifted dramatically. The CBO projects that the debt-to-GDP ratio will reach nearly 80 percent by 2025. Composition of Federal Spending Federal Debt Continues to Rise Federal Spending U.S. Debt Held By The Public Percent of Total CBO Baseline Projections Begin in 2015, Percent of GDP 80% Discretionary 1970 Mandatory Net I nterest 62% 31% 8% Total Spending 1970: 19% of GDP 2014 33% 60% 6% Total Spending 2014: 20% GDP 2050 19% 80% Baseline Debt: 2025 @ 76.9% 62% 19%

70% 70% 60% 60% 50% 50% 40% 40% 30% 30% Total Spending 2050: 27% of GDP 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 20% 1974 100% Source: Congressional Budget Office and Wells Fargo Securities, LLC Economic Outlook 13 20% 1979 1984 1989 1994 1999 2004 2009 2014 2019 2024 Fiscal Policy Outlook Key Issues Oct. 29th - Funding for Highway Trust Fund expires How will the gap be filled? November 5th - Re-establishment of debt ceiling How will Congress increase the borrowing limit? What to watch for in the 114th Congress December 11th - FY 2016 budget debate Current funding runs out Corporate tax reform Both sides agree action is needed, but what will be done?

International trade agreements (TPP, TTIP) Dont expect immediate action, but progress is being made Economic Outlook 14 Five Key Themes Lift-Off Yield Curve & Term Premium Fed Balance Sheet Operations We continue to believe the Fed is on course to begin to raise short-term interest rates later this year. Lift-off December is still on the table, but the risks have shifted in Decomposing the yield curve into the risk-neutral yield and the term premium, we find longer-dated U.S. Treasuries have been lower, principally due to a lower term premium Fed balance sheet operations have had substantial effects on longer-term Treasury Yields, by reducing the term premiums on longer-dated Treasury securities The Fed is looking at an array of data and will need to Data Dependent Safe-Haven Flows & Policy Divergence Economic Outlook continue to see strengthening in global and labor market conditions. The divergence between monetary policies of large economies will continue to put upward pressure on the dollar with continued flows into U.S. assets and longerterm U.S. Treasuries 15 Past Tightening Cycles Historic Fed Tightening Cycles T ightening Cy cles Since 1983 There have been five tightening cycles in the past 25 years Tightening Last Cut Length of Cumulative Cumulative Tightening Terminal Cycle to First Hike Tightening Cycle Tightening First Y ear Fed Funds Rate 1983 - 1984 5.0 Months 16 Months 325 bps

200 bps 11.75% 1986 - 1989 4.0 Months 28 Months 387 bps 100 bps 9.75% 1994 - 1995 17 Months 13 Months 300 bps 250 bps 6.00% 1999 - 2000 7 Months 12 Months 175 bps 175 bps 6.50% 2004 - 2006 12 Months 25 Months 425 bps 200 bps 5.25% Average 9 Months 18.8 Months 322.4 bps 185 bps 7.85% Historic Fed Tightening Cycles Cumulative Tightening (bps) in Months In the 2004 cycle, the Fed stayed on hold for 12 months and hiked rates 425 bps from 1.00% Cumulative Tightening (bps) 500 500 450 450 400 400 350 350 300

300 250 250 200 200 150 150 100 100 50 50 0 0 0 5 10 15 20 Length of Tightening Cycle (Months) Source: Federal Reserve Board and Wells Fargo Securities, LLC Economic Outlook 16 25 30 Lift-Off: Pace of Policy Firming Appropriate Pace of Policy Firming Target Federal Funds Rate at Year-End; Market Data as of Sept. 17 5.0% 4.5% 4.0% The FOMC Committee downshifted its expectations for the Federal Funds rate path in its recent meeting 5.0% September 2015 Median Response J une 2015 Median Response Futures Market Expectations 4.0% 3.5% 3.5% 3.0% 3.0% 2.5% 2.5% 2.0% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5%

0.0% 0.0% -0.5% 2015 2016 2017 Source: Federal Reserve Board and Wells Fargo Securities, LLC Economic Outlook 4.5% 17 2018 Longer Run -0.5% Fed Balance Sheet Federal Reserve Balance Sheet vs. S&P 500 I ndex Trillions, I ndex $5.5 $5.0 $4.5 Although the Fed is largely expected to begin increasing its target shortterm interest rate this year, the Fed will remain accommodative due to its balance sheet holdings 2,200 Agencies & MBS: Sep @ $1,777.9B (Left Axis) Treasuries: Sep @ $2,461.9B (Left Axis) Other Securities: Sep @ $208.1B (Left Axis) S&P 500 I ndex: Oct @ 1,960.5 (Right Axis) 1,800 $4.0 1,600 $3.5 1,400 $3.0 1,200 $2.5 1,000 $2.0 800 $1.5 600 $1.0 400 $0.5 200 $0.0 2007 0 2008 2009 2010 2011

2012 Source: Federal Reserve Board and Wells Fargo Securities, LLC Economic Outlook 2,000 18 2013 2014 2015 Employment Situation Slack in the labor market is steadily diminishing and wage growth is beginning to show some signs of picking up Unemployment Rate Unemployment Rate Unemployment Rates ECI Wage Growth Seasonally Adjusted vs. Small Business Plans to Raise Compensation and Avg. Hourly Earnings 18% 18% FOMC Central Tendency for Longer Run Unemployment Rate: Sep @ 5.1% U-6 Unemployment Rate: Sep @ 10.0% 16% 25% 6% NFI B Plans to Raise Compensation: Q3 @ 14.0% (Left Axis) Average Hourly Earnings (YoY): Q3 @ 2.2% (Right Axis) 16% ECI Wages & Salaries (YoY): Q2 @ 2.1% (Right Axis) 20% 14% 14% 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 94 96 98 00 02 04 06

08 10 12 15% 4% 10% 3% 5% 2% 0% 14 1% 02 Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 5% 19 03 04 05 06 07 08 09 10 11 12 13 14 15 Inflation PCE Deflator Forecast Fed Central Tendency Forecast vs. Wells Fargo Forecast 4.5% 4.5% Central Tendency Forecast Range 4.0% Historical PCE Deflator Wells Fargo Economics Forecast 3.5% Members of the FOMC expect inflation to rise over the course of the year and approach its long-run target this year as the economy gradually strengthens and inflation expectations remain stable Q4-over-Q4 Percent Change FOMC Sep. Forecast 3.0% 4.0%

3.5% 3.0% 2.5% 2.5% 1.9% 1.9% 2.0% 1.5% 2.0% 1.5% 1.0% 0.8% 0.5% 1.0% 0.5% 0.0% 0.0% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: U.S. Department of Commerce, Federal Reserve Board and Wells Fargo Securities, LLC Economic Outlook 20 Inflation Expectations Survey-based inflation expectations remain stable, while market-based measures have fallen Market-Based Inflation Expectations Survey-Based Inflation Expectations Med. I nflation Expectations 1 -Yr vs 5 to 10-Yr TI PS I nflation Compensation & WTI Oil Price University of Michigan Consumer Sentiment 5-Year and 5-Years Forward 4.0% 7% $160 7% Median I nflation Expectations: Sep @ 2.8% 3.5% $140 3.0% $120 2.5% $100 2.0% $80 1.5% $60 1.0% $40 0.5% $20 0.0% 6% Median I nflation Expectation for 5 -10 Years Average 1990 - 2007: 3.2%

5% 5% 4% 4% 3% 3% 2% 2% 1% 1% $0 5-Year Breakeven: Oct-09 @ 1.21% (Left Axis) 5-Year and 5-Years Forward: Oct-09 @ 1.74% (Left Axis) WTI : Oct-09 @ $49.63 (Right Axis) - 0.5% - 1.0% 2008 Median I nflation Expect. For 5- 10 Yrs: Sep @ 2.7% 6% -$20 0% -$40 2009 2010 2011 2012 2013 2014 Source: Bloomberg, LP, University of Michigan and Wells Fargo Securities, LLC Economic Outlook 0% 00 2015 21 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 A Divergence in Central Bank Policy Central Bank Total Assets

I ndex, J an 2008 = 100 600 600 Fed: Sep @ 500.8 BoJ : Sep @ 334.3 500 Over the next year, central bank policies will continue to diverge 500 ECB: Sep @ 196.4 400 400 300 300 200 200 100 100 0 0 08 09 10 11 12 Source: Bloomberg LP and Wells Fargo Securities, LLC Economic Outlook 22 13 14 15 Global Outlook Global Real GDP Growth Real Global GDP Growth Year-over-Year Percent Change, PPP Weights Global real GDP growth has grown slightly below its long-run average in recent years. Although we look for global GDP to increase somewhat next year, we do not expect to see the robust pace of growth seen in the previous expansion 7.5% 7.5% 6.0% 6.0% Period Average WF Forecast 4.5% 4.5% 3.0% 3.0%

1.5% 1.5% 0.0% 0.0% -1.5% -1.5% 1980 1985 1990 1995 2000 Source: IHS Global Insight and Wells Fargo Securities, LLC 24 2005 2010 2015 Eurozone GDP Forecast Eurozone Real GDP Bars = Compound Annual Rate Line = Yr/ Yr % Change 8% 8% Compound Annual Growth: Q2 @ 1.4% Year-over-Year Percent Change: Q2 @ 1.5% 4% 4% Forecast The Eurozone has emerged from its double-dip recession, but the recovery will lag the U.S. 0% 0% -4% -4% -8% -8% -12% -12% 2002 2004 2006 2008 2010 Source: IHS Global Insight and Wells Fargo Securities, LLC 25 2012 2014 2016 The Euro U.S. Dollar/ Euro Exchange Rate

Dollars/ Euro We expect the dollar to strengthen against the euro on stronger US growth and higher interest rates 1.60 1.60 1.50 1.50 1.40 1.40 1.30 1.30 1.20 1.20 1.10 1.10 U.S. Dollars/ Euro: Oct-02 @ 1.13 1.00 2006 1.00 2007 2008 2009 2010 2011 Source: IHS Global Insight and Wells Fargo Securities, LLC 26 2012 2013 2014 2015 China Chinese GDP Forecast Chinese Real GDP Forecast Year-over-Year Percent Change Growth in China is not expected to return to the double-digit rate seen earlier in the decade 13% 13% 12% 12% 11% 11% 10% 10% 9% 9% Forecast 8%

8% 7% 7% 6% 6% 5% 5% Year-over-Year Percent Change: Q2 @ 7.0% 4% 2000 4% 2002 2004 2006 2008 2010 Source: IHS Global Insight and Wells Fargo Securities, LLC 28 2012 2014 2016 China Manufacturing & Reserves Manufacturing activity in China continues to weaken and is also starting to weigh on the markets. China has begun whittling down its war chest of foreign exchange reserves Manufacturing Activity vs. S&P 500 Foreign Exchange Reserves Caixin China Manufacturing PMI vs. S&P 500 I ndex Chinese Foreign Exchange Reserves Seasonally Adjusted; Year-over-Year Percent Change 53 Trillions of USD 30% $4.5 $4.5 Foreign Exchange Reserves: Sep @ $3.5 Trillion 52 25% 51 20% 50 15% 49 10% 48 5% 47 0% 46 Oct-12 Manufacturing PMI : Sep @ 47.2 (Left Axis) S&P 500 I ndex Year-over-Year: Sep @ -1.6% (Right Axis) Apr- 13

Oct- 13 Apr- 14 Oct- 14 Apr- 15 - 5% Oct-15 $4.0 $4.0 $3.5 $3.5 $3.0 $3.0 $2.5 $2.5 $2.0 $2.0 $1.5 $1.5 $1.0 $1.0 $0.5 $0.5 $0.0 1996 Source: Bloomberg LP and Wells Fargo Securities, LLC 29 $0.0 1998 2000 2002 2004 2006 2008 2010 2012 2014 Chinese GDP vs Industrial Metals Bloomberg I ndustrial Metals I ndex vs. Chinese GDP I ndex, Year-over-Year Percent Change in Real GDP 270 15% I ndustrial Metals I ndex: Q3* @ 108.4 (Left Axis) Chinese Real GDP: Q2 @ 7.0% (Right Axis) 250 * Quarterly Average to Date 230 A weakening Chinese economy has weighed heavily on prices, specifically industrial metals 14%

13% 210 12% 190 11% 170 10% 150 9% 130 8% 110 7% 90 6% 70 5% 50 4% 94 95 97 98 00 01 03 04 06 07 09 10 Source: IHS Global Insight, Bloomberg LP and Wells Fargo Securities, LLC 30 12 13 15 China Household Assets Financial Assets of Chinese Households Trillions of Yuan 80 70 60 Equities play a limited role in the allocation of Chinese financial wealth 80 Other: 2013 @ 6.6T Yuan Currency: 2013 @ 4.9T Yuan Bonds: 2013 @ 0.9T Yuan Stocks: 2013 @ 6.4T Yuan I nsurance: 2013 @ 9.0T Yuan Bank Deposits: 2013 @ 47.8T Yuan 70 60

50 50 40 40 30 30 20 20 10 10 0 0 04 05 06 07 08 Source: CEIC and Wells Fargo Securities, LLC 31 09 10 11 12 13 Bank Exposure U.S. Bank Exposure to China Billions of Dollars $120 $120 Total Exposure: Q1 @ $96.9 Billion $100 American banks are not overly exposed to China $100 $80 $80 $60 $60 $40 $40 $20 $20 $0 $0 05 06 07 08 09

10 11 12 13 Source: Bank for International Settlements and Wells Fargo Securities, LLC 32 14 15 Chinese Trade Chinese Trade Year-over-Year Percent Change, 3-Month Moving Average Although Chinese trade has clearly weakened over the past few years, part of the recent decline can be attributed to price effects. Moreover, the direct effects to the U.S. appear to be minimal. China accounts for just 7 percent of U.S. exports and less than 1 percent of real GDP 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% - 20% -20% Exports: Sep @ -5.9% I mports: Sep @ -14.1% - 40% 2000 -40% 2002 2004 2006 2008 2010 Source: IHS Global Insight and Wells Fargo Securities, LLC 33 2012 2014 Construction Started in China Construction Started in China Square Meters, Yr/ Yr Pct. Change of YTD Total Residential and nonresidential construction have slowed markedly 40% 40%

30% 30% 20% 20% 10% 10% 0% 0% -10% -10% Construction Started: Q2 @ -17.2% -20% -20% 05 06 07 08 09 Source: CEIC and Wells Fargo Securities, LLC 34 10 11 12 13 14 15 U.S. Forecast Wells Fargo U.S. Economic Forecast Actual Forecast 2015 Real Gross Domestic Product Personal Consumption Inflation Indicators PCE Deflator 1 2015 Forecast 2016 2017 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 0.6 3.9 1.0

2.8 2.6 2.6 2.6 2.5 1.5 2.4 2.4 2.5 2.4 1.8 3.6 3.7 3.0 2.5 2.6 2.5 2.3 1.7 2.7 3.2 2.8 2.4 2 Consumer Price Index Industrial Production 1 Corporate Profit s Before Taxes Trade Weighted Dollar I ndex Unemployment Rate Housing Starts Actual 2013 2014 2016 2 3 4 0.2 0.3 0.3 0.8 1.6 1.6 1.7 1.9 1.4 1.4 0.4

1.7 2.0 - 0.1 0.0 0.2 0.8 2.1 1.9 2.0 2.1 1.5 1.6 0.3 2.0 2.2 - 0.3 - 2.6 1.9 1.4 2.7 2.5 3.0 3.5 1.9 3.7 1.4 2.1 3.3 4.6 0.6 5.9 6.6 6.2 6.9 5.4 6.1 2.0 1.7 4.4 6.1 5.5 92.1 89.9 92.3 91.8 92.8 94.0

95.3 96.5 75.9 78.5 91.5 94.6 98.1 5.6 5.4 5.2 5.0 4.9 4.8 4.7 4.6 7.4 6.2 5.3 4.7 4.5 0.98 1.16 1.17 1.22 1.24 1.24 1.25 1.26 0.92 1.00 1.14 1.25 1.35 5 Quarter- End Interest Rates Federal Funds Target Rate 0.25 0.25 0.25 0.50 0.50 0.75 1.00 1.25 0.25 0.25 0.31

0.88 1.81 Conventional Mortgage Rate 3.77 3.98 3.89 3.92 3.94 3.99 4.11 4.25 3.98 4.17 3.89 4.07 4.45 10 Year Note 1.94 2.35 2.06 2.08 2.10 2.15 2.25 2.37 2.35 2.54 2.11 2.22 2.52 Forecast as of: October 7, 2015 1 C ompound Annual Growth Rate Quarter-over-Quarter 2 Year-over-Year Percentage C hange 3 Federal Reserve Major C urrency I ndex, 1973=100 - Quarter End 4 Millions of Units 5 Annual Numbers Represent Averages Economic Outlook 35 Appendix Wells Fargo Economics Group Publications A Sampling of Our Recent Special, Regional & Industry Commentary Recent Special Commentary Date

Title Authors U.S. Macro To view any of our past research please visit: http://www.wellsfargo.com/ economics September- 24 Capitol Hill Update: Down- to- the- Wire Votes Expected September- 24 J ob Openings vs. Turnover: Mixed Messages from J OLTS Silvia & Brown September- 23 U.S. Manufacturing & USD: Setting the Record Straight September- 14 Equipment Spending: It's Not About Rates Anyway Quinlan, House & Nelson September- 10 Will Higher Rates Impact Consumption? Alemn & Brown U.S. Regional September- 17 California Employment Conditions: August 2015 Vitner & Batcheller September- 18 Lower Oil Prices Are Clearly Weighing On Texas J ob Growth Vitner & Batcheller September- 18 Floridas Economy Continues to See Solid J ob Gains Vitner & Batcheller September- 17 New J ersey Adds 13,600 J obs in August Vitner & Batcheller September- 17 Minnesota Added 7,300 J obs in August Vitner & Batcheller House & Moehring Quinlan, House & Nelson Global Economy To join any of our research distribution lists please visit: http://www.wellsfargo.com/ economicsemail Economic Outlook October- 07 TPP Agreement: More Than Initially Meets the Eye Bryson & Nelson October- 07 Brazil: Been There, Done That Alemn October- 05 Mexican Economy: The Boom That Never Was? Alemn September- 29 Is the Eurozone Economy About to "Break Out" September- 21 Argentine Government Spending Boosts Growth in Q2 2015 October- 07 Interest Rates/Credit Market Fiscal Policy Likely to Induce Greater Rate Volatility Bryson & Nelson Alemn Silvia, Vitner & Brown September- 30 Silos Fall in a Financial Windstorm: Realty TV for Investors Silvia, Vitner & Brown

September- 21 FOMC Decides: Markets Assess What's Next Silvia, Vitner & Brown September- 16 Household Credit Healthy for Now Silvia, Vitner & Brown September- 09 We Do Not Expect a Repeat of the Taper Tantrum Silvia, Vitner & Brown Real Estate September- 30 Housing Chartbook: September 2015 Vitner, Khan & Batcheller September- 30 Nonresidential Construction Recap: September Khan September- 01 Housing Data Wrap- Up: August 2015 Vitner & Khan August- 31 Nonresidential Construction Recap: August Khan August- 07 Commerial Real Estate Chartbook: Q2 Khan 37 Wells Fargo Securities, LLC Economics Group Global Head of Research and Economics Economists Diane Schumaker-Krieg . [email protected] Global Head of Research & Economics Chief Economist Azhar Iqbal, Econometrician [email protected] John E. Silvia [email protected] Tim Quinlan, Economist [email protected] . Eric J. Viloria, Currency Strategist [email protected] ...................... . Sarah House, Economist Economic Analysts [email protected] Erik Nelson, Michael A.Economic Brown,Analyst Economist [email protected] [email protected]

Senior Economists Mark Vitner, Senior Economist..... . [email protected] Jay H. Bryson, Global Economist [email protected] .... . Alex Moehring, Economic Analyst [email protected] Sam Bullard, Senior Economist [email protected] Misa Batcheller, Economic Analyst Administrative Assistants [email protected] Michael Pugliese, Economic Analyst Donna LaFleur, Executive Assistant. [email protected] [email protected] Nick Bennenbroek, Currency Strategist [email protected] Wells Fargo Securities Economics Group publications Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Eugenio J. Alemn, Senior Economist are produced by Wells Fargo Cyndi Burris,Protection Senior Administrative Assistant Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Corp. Wells Fargo Securities, LLC, distributes these [email protected] [email protected] publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International WellsFargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered Anika R. Khan, SeniorLimited, Economist . [email protected] the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLCs research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. 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 2015 Wells Fargo Securities, LLC. 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 Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authoritys rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor 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 .

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