30120 wcob businessforecast2015 bk (2)

Business ForecastPresented by: Center for Business and Economic Research

AEP SWEPCOCharles Schwab & Company

City of Fort SmithFriday, Eldredge and Clark

HoganTaylor LLPJ. B. Hunt Transport Services, Inc.

McKee Foods Corporat ionRegions Bank

City of West MemphisWright, L indsey & Jennings LLP

Center for Retai l ing Excel lenceGreenwood Gearhart Inc.

Walmart /Sam’s Club

Walton Business Partners

Walton Academic Partners

Walton Presenting Partners

SPONSORS

Walton Corporate PartnersFrost, PLCC

Reece Moore Pendergraft LLPSmith Hurst PLC

Tyson Foods, Inc.

Walton Media PartnersArkansas Money & Pol i t ics

Northwest Arkansas Democrat GazetteTalk Business & Pol i t ics

Business Forecast 2015Friday, January 30, 201511:30 a.m. 1:30 p.m.Schedule of Events

Welcome and Special Remarks Eli Jones, DeanSam M. Walton College of Business, University of Arkansas

2014 Contest Awards Kathy Deck, DirectorCenter for Business and Economic ResearchSam M. Walton College of Business, University of Arkansas

Introduction of Moderator Eli Jones

Introduction of Panelists John JamesFounderAcumen Brands

Presentations

Global Forecaster Carl TannenbaumChief EconomistNorthern Trust

Domestic Forecaster John SilviaChief EconomistWells Fargo

State and Local Forecaster Kathy Deck

Panel Discussion John James, Carl Tannenbaum, John Silvia, Kathy Deck

Recognitions and Announcements Eli Jones

Business Forecast 2015 is in association with the National Association for Business Economics (NABE).

Please use Twitter hashtag #BF2015 for this event.

John James is the founder of Acumen Brands, an ecommerce company in Fayetteville, Arkansas.Previously he was a family practice physician who, on the last day of his residency, gave up medicinefor the adventure of innovation. James paid for medical school with proceeds from his firstecommerce company, a quiz bowl question business, founded from his dorm room at the Universityof Arkansas in 1995. John has built and sold multiple businesses centered around search enginemarketing, including ventures in keyword arbitrage, multichannel niche retail, and hyperlocal onlinemedia. James is currently the CEO of Acumen Brands, which includes Country Outfitter, with over 10million social followers and email subscribers. His company has raised over $100 million in venturefunding, including an $88 million Series C led by General Atlantic. He holds a B.S. from the Universityof Arkansas and a M.D. from the University of Arkansas for Medical Sciences.

Carl Tannenbaum is the chief economist for Northern Trust. Prior to joining Northern Trust, Carl leda team at the Federal Reserve Bank of Chicago whose charter was to analyze financial risk, itsimplication for the broad economy and policy choices to address it. He served as the head of theentire Federal Reserve System's risk group in Washington for a year, working closely with FederalReserve SystemGovernors and senior officials. Preceding his work at the Federal Reserve, Carl servedas chief economist and head of balance sheet management at LaSalle Bank/ABN AMRO, where heworked for 24 years. He received a bachelor's degree in finance and economics and a Masters ofBusiness Administration degree from the University of Chicago. He is a past chairman of theConference of Business Economists and also a past president of the National Association for BusinessEconomics and the North American Asset/Liability Management Association.

John Silvia is managing director and chief economist for Wells Fargo. Previously, he was a senioreconomist for the U.S. Senate Joint Economic Committee and chief economist for the U.S. SenateBanking, Housing and Urban Affairs Committee. Prior to that, he was chief economist of KemperFunds andmanaging director of Scudder Kemper Investments, Inc. Silvia is on several Bloomberg BestForecast lists, is chair for the Economic Advisory Committee of the Securities Industry and FinancialMarkets Association, serves on the Blue Chip Panel of Economic Forecasters for the Federal ReserveBank of Philadelphia, the Economic Advisory Roundtable, and the finance committee for the MintMuseum in Charlotte, N.C. He is the author of "Dynamic Economic Decision Making" and "Economic& Business Forecasting." He has served as president of the Charlotte Economics Club and on advisorycommittees to the Federal Reserve Bank of Cleveland, the Federal Reserve Bank of Chicago, and thePublic Securities Association. Currently, he serves on the President’s Council for Charlotte’s CentralPiedmont Community College. Silvia holds B.A. and Ph.D. in economics from Northeastern Universityand a M.S. in economics from Brown University.

Kathy Deck is the director of the Center for Business and Economic Research in the Sam M. WaltonCollege of Business at the University of Arkansas. Her research interests include local economicdevelopment, industry market structure, and education and health care economics. Deck also acts asa media resource for economic analysis of current events and trends. She was named Communicatorof the Year in 2009 by the Northwest Arkansas Public Relations Society of America, was recognizedas one of the 40 under 40 by Arkansas Business and the Northwest Arkansas Business Journal, andnamed aWoman of Influence by Arkansas Business. Before joining the Center, Deck was the antitrusteconomist for the Arizona Attorney General. Deck earned a B.A. in economics from the College ofWilliam and Mary and a M.S. in economics from the University of Wisconsin Madison.

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Themes

Global economic growth has been good, but unevenWill the leaders pull everyone forward, or be drawn back to the pack?

Energy price realignment will be a mixed blessingConsumers will benefit but there is potential for instability amongproducers

Diverging fortunes create anxiety within and betweennations

Politics and economics have gotten more complicated

Central bankers have a challenging set of objectivesMonetary policy remains in uncharted territory


Carrying the Freight


United Kingdom

3%

4%

5%

6%

7%

8%

9%

2006 2008 2010 2012 2014

UK Unemployment

Solid growth and falling unemploymentNo exit yet from central bank

Source: Haver Analytics

7%6%5%4%3%2%1%0%1%2%3%4%

2009 2010 2011 2012 2013 2014

YOYCh

ange

UK GDP Growth


The De Leveraging Process

60%

80%

100%

120%

140%

160%

180%

2002 2005 2008 2011

Household Debt/Income Ratio

US Eurozone UK Canada

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

US UK Euro Canada

Year

over

Year

Chan

ge

Real Consumer Spending

Deleveraging is well along in some places, not othersA key driver of consumption

Sources: Haver Analytics, Bloomberg


China: Growth Issues?

4%

6%

8%

10%

12%

14%

16%

2006 2008 2010 2012 2014

Year

over

Year

Chan

ge

China: Real GDP Growth

40%

20%

0%

20%

40%

60%

80%

100%

2008 2010 2012 2014Year

over

Year

Chan

ge

China: Residential Real Estate

Starts Values

A challenging transition to sustainable growthControlling credit without creating a crash

Sources: Haver Analytics/China Index Academy/Sofun


Slowing Progress


The Eurozone’s Malaise

1.0%

0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Germany France Italy SpainPe

rcen

tcha

nge,QoQ

annu

alized

rate

Real Gross Domestic Product(2014:Q3)

Eurozone growth is very soft, and uneven


Eurozone

Average

6%

5%

4%

3%

2%

1%

0%

1%

2%

3%

4%

2009 2011 2013

YOYPercen

tCha

nge

Eurozone GDP Growth


Eurozone Challenges

4%

2%

0%

2%

4%

6%

8%

10%

12%

14%

2000 2002 2005 2007 2010 2012

Percen

tcha

nge,Ye

arto

year

Eurozone: Lending to the Private Sector

Deepening disinflationPoor bank health restricts credit


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2011 2012 2013 2014

Percen

tcha

nge,year

over

year

Eurozone Inflation Trends


Japan: Challenges

Back into recession after sales tax increaseInflation is finally positive

15

10

5

0

5

10

15

2010 2011 2012 2013 2014

Percen

tcha

nge,an

nualized

rate

Japan: Real GDP Growth

1.51.00.50.00.51.01.52.02.53.03.54.0

2010 2011 2012 2013 2014Pe

rcen

tcha

nge,year

toyear

Japan: Consumer Price Index



Fuel for the Fire


Energy Realignment

25

50

75

100

125

Jan 14 Apr 14 Jul 14 Oct 14 Jan 15

WestT

exas

Interm

ediate,$

perb

arrel

Price of Crude Oil

A stunning declineFlagging Chinese demand is among the root causes


0

5

10

15

20

25

30

35

40

45

2008 2009 2010 2011 2012 2013 2014

Percen

tcha

nge,year

over

year

China: Slowing Activity

Retail Sales

Industrial Production


The Supply Side

OPEC: not your father’s cartel

Monies needed to combat insurgents, placate thepopulace

Internal dissonance

Punitive impulses

Russia is among those under the most pressure

Competitive strategy

Are traditional producers tying to push new producersbelow breakeven?


Consequences

ConsumersU.S. fares especially well

ImportersJapan, India, eurozone

Some manufacturersOutside of energyproduction

FrackersHigher breakeven costs

RussiaOverreliance on energy

Peripheral producersVenezuela, Nigeria, Iran,etc.

Winners Losers


Domino Effects

Strain on some corporate borrowers in emerging marketsBreakeven prices have two dimensions

Sources: BIS, The Economist

25%

30%

35%

40%

45%

50%

2006 2008 2010 2012

Shareof

TotalB

orrowing

U.S. Dollar Credit to NonbanksOutside of the U.S.


Not on the Same Track


Global Economic Ties

10%

15%

20%

25%

30%

35%

1980 1985 1990 1995 2000 2005 2010

Shareof

WorldGD

P

World Exports

0%

5%

10%

15%

20%

25%

30%

35%

1980 1985 1990 1995 2000 2005 2010

Shareof

WorldGD

P

Outward Foreign DirectInvestment

Trade and capital flows have expanded substantially inthe last generation

Sources: International Monetary Fund, United Nations


Economics and Social Stability

0

5

10

15

20

25

30

1910 1930 1950 1970 1990 2010

Percen

t

Top 1% Share of Income: AdvancedEconomies

Australia CanadaUnited Kingdom United States

Globalization has leveled income across countries, but exaggeratedinequality within countriesA rising sense of disenfranchisement

Sources: http://topincomes.g mond.parisschoolofeconomics.eu/, OECD

0%

10%

20%

30%

40%

50%

60%

US UK CAN GER ESP

Youth Unemployment


Backlash Ahead?

Income inequality and high unemploymentcreate discontent

Does the system work for me?

Populist politicians are quick to capitalize

Anti market, anti trade, anti immigrant

Redistributive policies can diminish growth

Companies can move to a friendlier haven


The Engineers


Zhou XiaochuanPeoples Bank of China

Raghuram RajanReserve Bank of India

Haruhiko KurodaBank of Japan

Janet YellenFederal Reserve

Mario DraghiEuropean Central Bank

Mark CarneyBank of England


The Course of Central Banking

Cheap liquidity to promote growthDifferent markets in different phases

Sources: Federal Reserve, ECB, BOC, BOE, Bloomberg, Haver Analytics

0

1

2

3

4

5

6

7

2006 2008 2010 2012 2014

Percen

t

Central Bank Policy Rates

U.K. U.S. Euro Japan

50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

2007 2008 2009 2010 2011 2012 2013 2014

Percen

tofG

DP

Central Bank Assets: Increase Since 2007

ECB BOJ BOE Fed


Inflation Issues

Well below targeted levelsGlobal capacity exerts downward pressure

Sources: Bloomberg, Haver Analytics

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

CPI PCE Deflator

Percen

tcha

nge,year

over

year

U.S. Inflation

Overall Core

0

1

2

3

4

5

6

2011 2012 2013 2014

Percen

tcha

nge,year

over

year

Global Inflation Trends

Eurozone US UK


Parting Thoughts

The global outlook remains positive

Forward readings are encouraging

Performance will continue to be somewhatuneven

Some regions and sectors are further along

Risks to the outlook are varied

Geopolitics tops the list

For all of today’s challenges, we’ve come a longway

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Where Are We Now?

Source:

Five benchmarks for good decision making

Inflation InterestRates

Growth

Profits The Dollar


Expectations for the Future

Wells Fargo vs. Consensus

How do we differ from consensus?

Sustained-trend growth

Employment—cyclical and structural change

Still cautious on consumer segments

Housing improving—multifamily especially

State and local governments—still restructuring

Unsustainable long-run fiscal policy

Europe weak growth path

China growth sub 7 percent


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2000 2002 2004 2006 2008 2010 2012 2014 2016

U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change

GDP - CAGR: Q3 @ 5.0%GDP - Yr/Yr Percent Change: Q3 @ 2.7%

Forecast

Upswing 2H 2014: One-off or Sustained?

Following a poor start to the year, GDP growth has

rebounded smartly. Solid growth prospects in the year

ahead.

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


25

30

35

40

45

50

55

60

65

25

30

35

40

45

50

55

60

65

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

ISM Manufacturing & Non-Manufacturing Composite Index

ISM Non-Manufacturing Index SA: Dec @ 56.2

ISM Manufacturing Index SA: Dec @ 55.5

Manufacturing & Services

Indexes on business activity suggest an improving near-term

outlook

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


70

75

80

85

90

95

100

105

110

115

-60

-40

-20

0

20

40

60

80

100

120

04 05 06 07 08 09 10 11 12 13 14

Wells Fargo Small Business Survey & NFIBOverall Situation, NFIB Small Business Optimism 1986=100

Wells Fargo Overall Situation: Q4 @ 58.0 (Left Axis)

Small Business Optimism: Q4 @ 98.2 (Right Axis)

Small Businesses

Small Businesses:A full recovery in small business

optimism is still distant, taxes and regulation the two big issues

Source: National Federation of Independent Businesses, Gallup, Wells Fargo Bank and Wells Fargo Securities, LLC


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Real Personal Consumption ExpendituresBars = CAGR Line = Yr/Yr Percent Change

PCE - CAGR: Q3 @ 3.2%PCE - Yr/Yr Percent Change: Q3 @ 2.7%

Forecast

Consumer Spending

Faster job growth, asset appreciation and more access to

credit are supportive to the consumer spending outlook



0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

2005 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Bloomberg Consumer Comfort by Income12-Week Moving Average

Income Between $25K and $39.9K: Jan-04 @ 34.6Income Between $50K and $74.9K: Jan-04 @ 46.4Income Between $75K and $99.9K: Jan-04 @ 50.9Income Over $100K: Jan-04 @ 63.7

Consumer Confidence: By Income Group

Confidence improves with income, but remains historically

low across all income ranges

Source: Bloomberg LP and Wells Fargo Securities, LLC


Auto Lending

There has been an increase in auto sales to sub and near-prime

buyers

Source: CNW Research and Wells Fargo Securities, LLC


Auto Lending

The rise in sub-prime auto sales has been most prevalent in the

used auto sales market

Source: CNW Research and Wells Fargo Securities, LLC


0%

50%

100%

150%

200%

250%

0%

50%

100%

150%

200%

250%

Lowest 20percent

Second 20percent

Third 20percent

Fourth 20percent

Highest 20percent

Income Growth by QuintilePercent Change from 1984 to 2012, After-Tax Income

Income Growth: Rising at Different Rates

After-tax nominal income has increased the most for the lowest and highest income

households since the mid-1980s

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


-3.4%

1.2%

3.5%

5.6%4.7%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Lowest 20percent

Second 20percent

Third 20percent

Fourth 20percent

Highest 20percent

Income Growth by QuintilePercent Change in Nominal After-Tax Income 2007-2012

Income Growth: Rising at Different Rates

Since 2007, income growth has been clearly concentrated in the

upper quintiles



Inflation & Interest Rates

Inflation InterestRates

Growth

Profits The Dollar

CoreInflation

MonetaryPolicy

YieldCurve

Real Interest Rates

Wage-PriceSpiral

MarketExpectations

Key Drivers


-2%

-1%

0%

1%

2%

3%

4%

5%

-2%

-1%

0%

1%

2%

3%

4%

5%

92 94 96 98 00 02 04 06 08 10 12 14

PCE Deflator vs. Core PCE DeflatorYear-over-Year Percent Change

PCE Deflator: Nov @ 1.2%"Core" PCE Deflator: Nov @ 1.4%

Inflation: Rising – Not Low

Inflation remains historically low, but has picked up as growth

accelerates and excess slack lessens



Inflation

Services continue to underpin overall inflation, led by rising shelter costs as the housing market has recovered. Between 2008 and 2013, total prices are up 8.2 percent vs. 16.8 percent

for medical care.

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

92 94 96 98 00 02 04 06 08 10 12 14

U.S. "Core" CPI - Services vs. Goods Year-over-Year Percent Change

Core Services CPI: Dec @ 2.4%Core Goods CPI: Dec @ -0.8%


Shelter CostsServices vs. Goods

-1%

0%

1%

2%

3%

4%

5%

6%

7%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

88 90 92 94 96 98 00 02 04 06 08 10 12 14

Shelter, OER & Rent CostsYear-over-Year Percent Change

Shelter: Dec @ 2.9%Rent: Dec @ 3.4%OER: Dec @ 2.6%


Yield Curve: Rates Rise Without Fed

The Fed will begin to raise the funds rate in mid-2015


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Yield CurveU.S. Treasuries, Active Issues

January 12, 2015December 15, 2014January 13, 2014


-30%

-20%

-10%

0%

10%

20%

30%

40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

90 92 94 96 98 00 02 04 06 08 10 12 14

Commercial and Industrial LoansAt Commercial Banks in the United States

Year-over-Year Change: Dec @ 13.2%3-Month Annualized Rate: Dec @ 12.0%

Business Lending

Commercial and industrial lending has surged over the past quarter, helped by easier credit

and increased demand

Source: Federal Reserve Board and Wells Fargo Securities, LLC


0%

2%

4%

6%

8%

10%

12%

14%

0%

2%

4%

6%

8%

10%

12%

14%

47 51 55 59 63 67 71 75 79 83 87 91 95 99 03 07 11

Corporate ProfitsAs a Percent of GDP

Rest of World: Q3 @ 2.3%Domestic: Q3 @ 10.0%

NAFTA

ChinaJoins WTO

Corporate Profits: Increasing Role of Global Profits

Profits as a percentage of GDP are historically high and are

being boosted by profits earned abroad post NAFTA



U.S. Companies listed in the S&P 500 with Greater Than 50 Percent of Sales Abroad

(A Sample)

Corporate Profits from Abroad

Many U.S. companies rely on the health of international

economies

Goodyear TireBorgWarnerPriceline.comNikeCoca-ColaHeinzProctor & GambleAvonExxon MobilAFLACIntelApplied MaterialsOracleJohnson & Johnson

MerckBoeingEaton Corp.Emerson ElectricFluorGE3MCaterpillarCiscoQualcommAppleeBayIBMSymantec


-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

After-Tax Corporate Profit GrowthYear-over-Year Percent Change, 2-Year Moving Average

After-Tax Profits: Q3 @ 5.3%

Corporate Profit Growth

Corporate profit growth remains firm—typical mid-cycle

slowdown



-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

66 70 74 78 82 86 90 94 98 02 06 10

U.S. Homeowners vs. RentersAnnual Change in Occupied Units, In Thousands

Renters: 2013 @ 525.5 ThousandHomeowners: 2013 @ -76.5 Thousand

Series Break 1981

Housing: Emergence of Renters as Occupants

The number of renters has been accelerating steadily since 2007,

while homeowners have been declining



Commercial Real Estate: Divergence

Apartments have seen the greatest improvement in operating fundamentals but are also seeing intense new development. The industrial market has also improved quite significantly.

-75

-50

-25

0

25

50

75

100

2%

3%

4%

5%

6%

7%

8%

9%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Apartment Supply & DemandPercent, Thousands of Units

Apartment Net Completions: Q3 @ 47,293 Units (Right Axis)Apartment Net Absorption: Q3 @ 37,691 Units (Right Axis)Apartment Vacancy Rate: Q3 @ 4.2% (Left Axis)

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

Industrial Supply & DemandApartment Supply & Demand

-80

-60

-40

-20

0

20

40

60

80

4%

5%

6%

7%

8%

9%

10%

11%

12%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Industrial Supply & DemandPercent, Millions of Square Feet

Industrial Net Completions: Q3 @ 22.6M SF (Right Axis)Industrial Net Absorption: Q3 @ 34.6M SF (Right Axis)Industrial Vacancy Rate: Q3 @ 7.0% (Left Axis)


Commercial Real Estate

Office and retail commercial real estate have not seen the same type of improvement as apartments and industrial space, as vacancy rates remain somewhat elevated.

-40

-30

-20

-10

0

10

20

30

0%

3%

6%

9%

12%

15%

18%

21%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Office Supply & DemandPercent, Millions of Square Feet

Office Net Completions: Q3 @ 5.8M SF (Right Axis)Office Net Absorption: Q3 @ 8.0M SF (Right Axis)Office Vacancy Rate: Q3 @ 16.8% (Left Axis)

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

Retail Supply & DemandOffice Supply & Demand

-8

-4

0

4

8

12

16

20

0%

2%

4%

6%

8%

10%

12%

14%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Retail Supply & DemandPercent, Millions of Square Feet

Retail Net Completions: Q3 @ 1.4M SF (Right Axis)Retail Net Absorption: Q3 @ 2.7M SF (Right Axis)Retail Vacancy Rate: Q3 @ 10.3% (Left Axis)


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

2007 2008 2009 2010 2011 2012 2013 2014 2015

Federal Reserve Balance Sheet vs. S&P 500 Index Trillions, Index

Agencies & MBS: Jan @ $1,775.5B (Left Axis)Treasuries: Jan @ $2,461.3B (Left Axis)Other Securities: Jan @ $222.3B (Left Axis)S&P 500 Index: Jan @ 2,033.9 (Right Axis)

Fed Balance Sheet: Challenge to Asset Values

We have seen a strong correlation in the expansion of the Fed’s balance sheet and the

rise in the S&P 500



Federal Government Spending: Entitlements in the Driver’s Seat

The unfunded liabilities of the entitlement programs reflect a commitment to spend in the

future

Source: Congressional Budget Office and Wells Fargo Securities, LLC

$0.0T

$0.5T

$1.0T

$1.5T

$2.0T

$2.5T

$3.0T

$3.5T

$4.0T

$0.0T

$0.5T

$1.0T

$1.5T

$2.0T

$2.5T

$3.0T

$3.5T

$4.0T

2013 2015 2017 2019 2021 2023

U.S. Federal Government Mandatory OutlaysTrillions of U.S. Dollars, Projections Begin in 2014

Other Programs: 2024 @ $0.2TIncome Security: 2024 @ $0.3TSocial Security: 2024 @ $1.5THealthcare Programs: 2024 @ $1.6T


50

60

70

80

90

100

110

120

80

90

100

110

120

130

140

150

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

U.S. Trade Weighted Currency IndexesMarch 1973=100

"Other ITP" Index: Jan @ 139.3 (Left Axis)

Major Currency Index: Jan @ 85.8 (Right Axis)

U.S. Trade Weighted Currency Indexes

The dollar has experienced recent strength against both

major and emerging currencies



40

60

80

100

120

140

160

180

200

2200.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2.20

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Euro, Pound & Yen Exchange RatesUSD per Euro, USD per Pound Yen per USD

Dollars per Euro: Jan @ 1.18 (Left Axis)Dollars per Pound: Jan @ 1.52 (Left Axis)Yen per Dollar: Jan @ 118.50 (Right Axis, Inverted)

Global Economies: A Stronger Dollar

The dollar has appreciated against the euro, pound and yen

recently.



0.85

0.95

1.05

1.15

1.25

1.35

1.45

9.50

10.70

11.90

13.10

14.30

15.50

16.70

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Dollar Exchange Rates: Canada & MexicoForeign Currency per U.S. Dollar

Mexican Pesos/U.S. Dollar: Jan @ 14.60 (Left Axis)Canadian Dollars/U.S. Dollar: Jan @ 1.19 (Right Axis)

Global Economies: A Stronger Dollar

The Canadian dollar and Mexican peso have both seen

recent depreciation against the U.S. dollar



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 2024.

Source: Congressional Budget Office and Wells Fargo Securities, LLC

Federal Debt Continues to RiseComposition of Federal Spending

18%

35%

62%

60%

59%

31%

22%

6%

7%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2050

2013

1970

Federal SpendingPercent of Total

Discretionary Mandatory Net Interest

Total Spending 1970: 19 percent of GDP



20%

30%

40%

50%

60%

70%

80%

20%

30%

40%

50%

60%

70%

80%

1974 1979 1984 1989 1994 1999 2004 2009 2014 2019 2024

U.S. Debt Held By The PublicCBO Baseline Projections Begin in 2014, Percent of GDP

Baseline Debt: 2024 @ 77.2%


U.S. Forecast

2012 2013 2014 2015 2016

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Real Gross Domestic Product 1 -2.1 4.6 5.0 3.0 2.7 2.6 2.8 2.9 2.3 2.2 2.4 3.1 2.9Personal Consumption 1.2 2.5 3.2 4.5 3.0 2.7 2.7 2.6 1.8 2.4 2.5 3.1 2.6

Inflation Indicators 2

PCE Deflator 1.1 1.6 1.5 1.1 0.8 0.7 0.9 1.4 1.8 1.2 1.3 1.0 2.0Consumer Price Index 1.4 2.1 1.8 1.2 0.7 0.5 0.8 1.7 2.1 1.5 1.6 0.9 2.4

Industrial Production 1 3.9 5.7 4.0 5.9 4.7 4.9 3.5 3.1 3.8 2.9 4.3 4.7 3.6

Corporate Profits Before Taxes 2 -4.8 0.1 1.4 1.5 3.7 3.6 4.1 4.6 11.4 4.2 -0.4 4.0 5.2

Trade Weighted Dollar Index 3 76.9 75.9 81.3 85.1 86.8 88.0 89.3 90.5 73.5 75.9 78.5 88.6 92.9Unemployment Rate 6.6 6.2 6.1 5.7 5.5 5.4 5.3 5.2 8.1 7.4 6.2 5.4 5.0

Housing Starts 4 0.93 0.99 1.03 1.02 1.06 1.13 1.21 1.24 0.78 0.92 1.00 1.17 1.28

Quarter-End Interest Rates 5

Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.50 0.75 1.00 0.25 0.25 0.25 0.63 2.00Conventional Mortgage Rate 4.34 4.16 4.16 3.86 3.60 3.72 3.87 3.89 3.66 3.98 4.17 3.77 4.5610 Year Note 2.73 2.53 2.52 2.17 1.99 2.21 2.29 2.30 1.80 2.35 2.54 2.20 2.82

Forecast as of: January 14, 20151 Compound Annual Growth Rate Quarter-over-Quarter2 Year-over-Year Percentage Change3 Federal Reserve Major Currency Index, 1973=100 - Quarter End4 Millions of Units5 Annual Numbers Represent Averages

2015ForecastActual Forecast

2014Actual

Wells Fargo U.S. Economic Outlook

Source: U.S. Department of Commerce, U.S. Department of Labor, Federal Reserve Board, Freddie Mac and Wells Fargo Securities, LLC

Appendix


Recent Special Commentary

Wells Fargo Economics Group Publications

To join any of our research distribution lists please visit our

website: http://www.wellsfargo.com/

economics

Date Title AuthorsU.S. Macro

January-06 Making Sense of Household Formations Vitner & KhanDecember-15 Profits: Understanding Why and How of Cyclical Variation Silvia & IqbalDecember-15 Just Another Final Hour Budget Deal Silvia & BrownDecember-12 What If We Just Need Fewer Jobs? Silvia, Iqbal & House

U.S. Regional

January-05 Pennsylvania 2015 Economic Outlook Vitner, Wolf & MoehringDecember-30 Florida Consumers Getting Better All the Time Vitner & WolfDecember-30 Colorado Economic Outlook: December 2014 Vitner & MoehringDecember-19 California Employment Conditions: November 2014 Vitner & Wolf

Global Econom yJanuary-06 Argentina's Economy Continued to Deteriorate in Q3 2014 AlemánJanuary-02 Real GDP Growth in Singapore Ends Year on Weak Note Bryson

December-22 Which Developing Countries Have External Debt "Issues"? Bryson & NelsonDecember-19 Russian Central Bank Acts to Stop Ruble's Fall Quinlan

Interest Rates/Credit Market

January-07 Are Higher Rates a Liability for Households? Silvia, Vitner & BrownDecember-17 FOMC Patiently Lays Groundwork Bullard & BrownDecember-17 A Look Ahead to 2015: A Flatter Yield Cure, Refinancing Risk Silvia, Vitner & BrownDecember-10 Fed Tightening Cycles and Yield Spreads: Flatter Silvia, Vitner & Brown

Real EstateDecember-23 Nonresidential Construction Recap: December 2014 KhanDecember-17 Housing Chartbook: December 2014 Vitner & KhanDecember-16 Dodge Momentum Index Inches Higher in November KhanDecember-10 Commercial Real Estate Chartbook: Q3 Vitner & Khan

University of Arkansas

Wells Fargo Securities, LLC Economics Group

33

John E. Silvia … ....................... … [email protected]

Global Head of Research and Economics

Diane Schumaker-Krieg ………………… ………[email protected] Head of Research & Economics

Chief Economist

Mark Vitner, Senior Economist……………....………. . [email protected]

Jay H. Bryson, Global Economist …………………....…… …[email protected]

Sam Bullard, Senior Economist [email protected]

Nick Bennenbroek, Currency Strategist ……[email protected]

Eugenio J. Alemán, Senior Economist… …………[email protected]

Anika R. Khan, Senior Economist … . [email protected]

Senior Economists

Zachary Griffiths, Economic Analyst [email protected]

Mackenzie Miller, Economic Analyst [email protected]

Erik Nelson, Economic Analyst [email protected] Moehring, Economic Analyst [email protected]

Economists

Azhar Iqbal, Econometrician………………… ……………[email protected]

Tim Quinlan, Economist …………………… ……………[email protected]

Eric J. Viloria, Currency Strategist [email protected]

Sarah Watt House, Economist …………… …………[email protected]

Michael A. Brown, Economist ……………… … [email protected]

Michael T. Wolf, Economist ………………… … [email protected]

Economic Analysts

Administrative Assistants

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, theFinancial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, butnot limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells FargoSecurities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member ingood 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 ingood 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 thispublication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receivecompensation 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 andopinions 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 liabilityfor 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 generalinformation 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 aseparate 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 theFinancial 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 Authority’s rules, this reportconstitutes 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 FinancialServices 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, andshould not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposesonly.

Donna LaFleur, Executive Assistant. [email protected]

Cyndi Burris, Senior Administrative Assistant [email protected]

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$

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Per Capita Personal Income

United States Arkansas Northwest ArkansasSource: Bureau of Economic Analysis

1,080

1,100

1,120

1,140

1,160

1,180

1,200

1,220

1,240

Jan07

Jul0

7

Jan08

Jul0

8

Jan09

Jul0

9

Jan10

Jul1

0

Jan11

Jul1

1

Jan12

Jul1

2

Jan13

Jul1

3

Jan14

Jul1

4

Jan15

Jul1

5

Arkansas Non Farm Employment Forecast

Source: Bureau of Labor Statistics, January 2015 CBER Forecast

Thou

sand

s

Mining, Loggingand Construction

4%Manufacturing

12%

Trade,Transportation and

Utilities21%

Information1%

Financial Activities3%Professional and

Business Services19%

Education andHealth Services

12%

Leisure andHospitality

10%

Other Services3%

Government15%

Northwest Arkansas Employment by Sector November 2014

Source: Bureau of Labor Statistics

1.1%

10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

Trade, Transportation and Utilities

Manufacturing

Information

Non Farm

Other Services

Professional and Business Services

Government

Education and Health Services

Financial Activities

Leisure and Hospitality

Mining, Logging and Construction

Change in Northwest Arkansas MSA Employment by Sector,November 2013 November 2014

Source: Bureau of Labor Statistics, CBER Calculations

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

Unemployment Rates, Not Seasonally Adjusted

United States Arkansas Northwest ArkansasSource: Bureau of Labor Statistics

4.0%

2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

Labor Force, Year Over Year Percent Change

United States Arkansas Northwest ArkansasSource: Bureau of Labor Statistics

155

165

175

185

195

205

215

225

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

Jan15

Northwest Arkansas Employment Forecast

Source: Bureau of Labor Statistics, January 2015 CBER Forecast

Thou

sand

s

Mining and Logging1%

Construction4%

Manufacturing13%

Trade,Transportation and

Utilities20%

Information1%

Financial Activities4%

Professional andBusiness Services

11%

Education andHealth Services

15%

Leisure andHospitality

9%

Other Services4%

Government18%

Arkansas Employment by Sector November 2014

Source: Bureau of Labor Statistics

1.5%

10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

InformationGovernment

Professional and Business ServicesTrade, Transportation and Utilities

Financial ActivitiesOther Services

Non FarmEducation and Health Services

Leisure and HospitalityManufacturing

Mining and LoggingConstruction

Change in Arkansas Employment by SectorNovember 2013 November 2014

Source: Bureau of Labor Statistics, CBER Calculations

30120 wcob businessforecast2015 bk (2)

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