Ask Our Economists

>> Intro: Welcome to the Wells Fargo Ask Our Economist podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world - All which helps you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

 >>Jay Bryson Hello, this is Jay Bryson, chief economist of the Corporate and Investment Bank at Wells Fargo. And you're listening to our Ask Our Economist podcast series. I'm joined here today by senior economist Michael Pugliesi to talk about a report we recently wrote on the expiration of the Tax Cuts and Jobs Act of 2017. So, Mike, let's level set here. Just kind of walk through it for us. What's going on here with this legislation and what's the outlook?

>>Mike Pugliese Yeah. Thanks, Jay. So the Tax Cuts and Jobs Act or the TCJA, as we'll say for short for the rest of the podcast for brevity sake, it was the tax cut bill that was enacted under President Trump and congressional Republicans in 2017. And that bill did a lot of different things, but primarily it reduced taxes on households and businesses. So on the business side, it produced the corporate income tax rate from 35 to 21%. And on the household side, it reduced marginal income tax rates across the board. It doubled the standard deduction, expanded the child tax credit and made a whole bunch of changes. But in order to comply with congressional budget rules, large parts of that law were set to expire when it was passed. And that sunset date is coming up. So it occurs at the end of 2025 at year end. Now, most of the corporate changes and those were not given a sunset date. So, for example, I mentioned the corporate income tax reduction earlier from 35 to 21%. That's not scheduled to change next year, but most of the household changes will expire, meaning that under current law, if Congress does nothing, then tax rates on households, generally speaking, would increase across the board in January 2026. So now this is going to be a big focus of Congress and the next president, regardless of who wins the election, because we're talking about... call it one and a half percent of GDP is about the size of this expiration. So it's meaningful. It's a pretty sizable bill. Let me take it back to you, Jay, for a moment and just kind of thinking through a lot of different scenarios depending on what happens with the election? Will it be extended? Will it not? Maybe. Let's just start very simply, what happens if Congress extends the TCJA in full?

>>Jay Bryson Right. So the Congressional Budget Office took a look at this and they estimated that over a ten year period, it would cost roughly $4.6 trillion. Now, some of that is because of higher debt service cost. What happens is, you know, you're not getting the same revenue in so that increases the size of the deficits. You have to borrow more and increase the overall cost in terms of debt service. But still, we're looking at about $4.6 trillion over ten years. And assuming it expires, it goes away. Still, you're looking at deficits over the next ten years on the order of roughly 6% of GDP or so. And if we extend it, if we don't have as much revenue coming in as expected, then we're looking at deficits on the order of 8% or so of GDP. And --keep in mind, if we extend it, it's not going to have any meaningful effect on the economy. It's not like your taxes are going to go down. They're just not going to go up. It's not like you're going to see any more money in your take home pay because of that. So back to you now, Mike. So I guess it really depends on politics here. What happens after the election? Who gets elected? So talk through some of the potential scenarios here.

>>Mike Pugliese Yeah. So I kind of break it down into three different buckets. You know, there's the prospect of divided government where one party controls the White House or, you know, the other party controls at least one chamber of Congress. And then on a sweep scenario where, you know, the Republicans control all three, the House, the Senate, the White House or the Democrats have the same. You're going to get much different outcomes, right, when it comes to the Tax Cuts and Jobs Act at a very high level. No Republican support fully extending it. It was their bill originally, of course, passed under Donald Trump and congressional Republicans. Democrats did not support it, didn't vote for it. And so Republicans are the most gung ho about extending it. And on the Democratic side, views differ a little bit depending on who specifically is talking about the policies. But I would say at a high level, there is support for extending the tax cuts for people making below a certain income threshold. So both Joe Biden and Kamala Harris have expressed support for extending tax cuts for people making less than $400,000 per year and having taxes go up or expire. The tax cuts expire for people above an income threshold around there. So those are I would say, at a very high level, some of the stakes and guidelines depending on what shakes out of the election.

>>Jay Bryson So might this zero in on what happens if former President Trump becomes president again and, you know, let's assume that there is some sort of Republican sweep. What's going to happen there under that sort of scenario? And is there any attempt to potentially maybe raise some revenue to try to pay for this? I mean, after all, a simple extension is $4.6 trillion. If we expand that, it's going to be even more so, is there even going to be an attempt to pay for some of that?

>>Mike Pugliese Well, I think it's an open question, Jay. And I think where we want to start is President Trump supports extending the TCJA, of course, which is quite costly, like you just mentioned. But he's also expressed some support for additional tax cuts. And there's a long list of them. You know, we won't go through all of them right now. But just as a few examples, he's expressed interest in reducing the corporate income tax rate further to 15%. He's talked about exempting Social Security benefits from income taxation and exempting tip income from taxation. And those things, of course, are costly as well. I think the two biggest potential pay-fors are increa sing tariffs on U.S. imports and potentially repealing some green energy subsidies that were enacted under the Biden administration. On the tariffs side, Donald Trump has proposed a 10% tariff on all imports into the United States and a 60% import tariff on goods coming from China. If those were implemented in full, it would raise quite a bit of money. Estimates vary a little bit, but I think something in the ballpark of three, maybe three and a half trillion dollars over a decade, if that were implemented in full. Now, that would also have a counter kind of drag on economic growth. You know, if you extend the TCJA, we've already talked about how, you know, that wouldn't boost economic growth a whole lot. And so paying for it would say higher tariffs would probably be a drag on the economy. Now, if those higher tariff duties were used to pay for new tax cuts, right, the lower corporate income tax rate or expanded child tax credit or something like that, in addition to an extension, now that might be a little more of a wash on economic growth, but of course, it would also be a lot more costly to both extend and expand the TCJA. One other kind of pay for that I think is lingering out there that doesn't raise as much money, but Republicans have expressed some interest in, is repealing the green energy tax credits and subsidies in President Biden's Inflation Reduction Act. So, the IRA was passed. It did a whole bunch of things. But one of the things it did was both initiate and expand some tax credits for producing clean energy, consuming clean energy, stuff like that. And, you know, repealing those could probably raise another six or $700 billion over a decade. So if we got much higher tariffs and repealing those green energy tax credits, that might be, you know, close to enough to pay for a TCJA expansion, but it wouldn't come close to covering the full cost of both extending the TCJA and expanding to all these other kind of tax cut proposals that are on the table and that have been suggested by the former president. So kicking it over to you again, Jay, How about Vice President Kamala Harris? What are some of her stances and how does the election potentially factor into that?

>>Jay Bryson Yeah I think you mentioned it earlier. You know, she supports what the Biden administration has suggested, and that is extending it for people who make $400,000 a year or less. You know, people above that threshold would see their taxes go back up. We had a precedent of this. If you think back to the Bush tax cuts of the early part of this century, they expired at the end of 2012. Some listeners may remember the so-called fiscal cliff. This was about that, those expiration of those tax cuts. And what ultimately Congress decided to do there was extend the tax cuts for people who make less than $400,000 a year. And so, you know, again, there's precedent here. You know, if you do that and you allow taxes for the upper income individuals to rise, it doesn't it doesn't save you a whole heck of a lot of money. We talk about $4.6 trillion of full extension. If you do it for just people who are making less than $400,000 a year, it's still going to cost on the order of 4 trillion or so. So it's still, again, pretty expensive. Now, she would also try to raise some revenue. One of the things she's talked about is raising the corporate income tax rate from 21% up to 28%, raising capital gains taxes on the most wealthiest Americans. But, you know, on the other hand, she's also talked about some other spending prerogatives as well. That is significant expansion of the child tax credit and, you know, a $25,000 subsidy for first time homebuyers. And what I would note here and Mike, you talked about this earlier, is that the possibility of a Democratic sweep seems to be relatively low. And so even if Vice President Harris becomes president, all her wish list, if you will, may not happen if Republicans control one or both houses of Congress. So, Mike, let's kind of wrap it up here and let's talk about this now in a broad sort of perspective. What does this all mean for the long-term fiscal outlook for the US economy?

>>Mike Pugliese Yeah, well, I think there's a few different ways we can pull this all together. First, just to level set, U.S. deficits are likely going to remain historically large under pretty much all scenarios. You mentioned earlier, Jay, the US budget deficit over the next decade probably averaged something like 6% of GDP, and that assumes the tax cuts expire as scheduled and there are no new tax cuts or spending programs put in place. 6% of GDP, to put that in a little bit of context, the average deficit over the past half a century is about three and a half percent. So not double, but close. So I think deficits are probably going to remain pretty big regardless. But the delta between scenarios can be pretty big. In a divided government scenario, say it's Vice President Harris becomes the president, but Republicans take the Senate where the Senate map is pretty favorable for them this year. I think that's probably going to, on the margin, give you the most fiscal tightening. Maybe you get higher taxes on higher income individuals. And, you know, most of the TCJA is extended, but not all of it and probably not a whole lot of new initiatives. I think it's in the sweep scenarios where deficits increase the most and just kind of stacking up the two plans and looking at the political outlook. The Republicans have the potential to gain, I think, the biggest majorities in the Senate, just given what the map looks like and when you stack on just kind of the pretty sizeable tax cuts that Donald Trump has proposed in addition to the TCJA, you know, that's probably your biggest deficit increasing scenario, but it's up for debate. It will depend a lot on how Republicans feel about historically large tariffs. It'll depend a lot on their majorities and kind of how they structure things. So definitely a topic we're still keeping an eye on. The range of outcomes here are still pretty broad, even as deficits remain large going into the future. But I think it's that Republican sweep scenario where they have a really good night that opens up the widest range of possibilities in terms of changes to U.S. tax policy going forward.

>>Jay Bryson Okay. Well, thanks, Mike. Thanks for those insights. And thank you all for listening. You know, this story obviously is not going to go away. Election Day, as you know, a few weeks out from here. And once we know more about how all the dust settles out from the election, we'll have a better sense of what may be going on here. And we'll be writing follow up reports on that and perhaps even another podcast or two on that topic. So again, thank you all for listening today. Please keep the questions that you've been submitting, please keep them coming and we wish you all a good day. Thank you.

>>Outro: That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>>Disclosures: This report is produced by the Economics Group of Wells Fargo Bank, N.A. (“WFBNA”). This report is not a product of Wells Fargo Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, Wells Fargo Securities, LLC, Wells Fargo & Company, Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Europe S.A., and Wells Fargo Securities Canada, Ltd. Wells Fargo Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of Wells Fargo & Company. © 2024 Wells Fargo Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, 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 (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by Wells Fargo Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

>>Intro
Welcome to the Wells Fargo Ask Our Economist podcast series, where we explore what's on our clients minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues, and challenges that impact our world. All which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson
Hello, this is Jay Bryson, chief economist of the Corporate and Investment Bank at Wells Fargo. And you're listening to our Ask Our Economist podcast series. Recently, we had a listener who submitted a question that revolves around housing affordability. Here to answer the question are Charlie Daugherty and Jackie Benson. Both Charlie and Jackie cover real estate for us, as well as regional economics.
So Charlie, let me start with you. Just to kind of level set here. I mean, can you kind of just describe what's happened to home prices and more broadly, home affordability over the last few years?

>>Charlie Dougherty
Sure. I would say that housing affordability is the worst it's been in quite a long time in the United States, certainly this century. And you'd probably have to go back to the early 1980s to find a less affordable housing market. So just to put some numbers there, you know, if you look at the average monthly mortgage payment, it's essentially doubled since 2020.
So going from almost $1,000 per month to just over $2,000 per month in about a four year span. So what's going on here? Well, home prices have skyrocketed, right? Since 2020. Home prices have risen by about 50%. Meanwhile, households have only seen about a 25% rise in income over that same time period. So, home price appreciation has far exceeded income growth.
The other part of this, of course, is restricted monetary policy from the Federal Reserve. So a higher Fed funds rate has put significant upward pressure on mortgage rates. So if you go back to 2021, the average 30 year mortgage rate was about 3%. It rose to almost 8% at last year's peak. Yeah, mortgage rates have come back down a little bit. Right. Right now, they're sitting comfortably below 7%, but mortgage rates are still relatively high.

>>Jay Bryson
Okay. Well, thanks for that depressing news there, Charlie. That's very edifying there. So our listener pointed out that he thinks that there's been like a shortage of housing over the past, say, 15 years or so. That's helped push up home prices. You know, is there any truth to that about being a shortage out there in terms of housing?
Are we under building in any sense? Is that helping to push up house prices?

>>Charlie Dougherty
So, the short answer there, Jay, is yes, there does appear to be a significant housing shortage. I think it would be unusual for home prices to go up as fast as they have without a housing shortage. So I think we haven't built enough homes. And I think the question is, well, how much are we undersupplied? So if you did a quick back of the envelope calculation, you know, if you compared the amount of new construction that we've had since 2000 and compared it with the average pace of construction the 25 years before that, you end up with somewhere around a shortage of about 3 million single family homes.

Now, on top of that, there's this growing body of literature that takes a little bit more of a sophisticated approach and that 3 million deficit number I just said is consistent with all of those findings. So low supply, I think, is one major reason why home prices have shot up so much. Now, on top of there being, you know, an undersupply in terms of new construction, there is also very low supply in the resale market. Existing supply has come up recently. But overall, you know, if you zoom out, inventories still not far from the record low that we saw last year in 2023. So scarce resale supply, that's due to a number of factors. But that mortgage rate lock in effect, meaning most homeowners have a mortgage with a rate well below the prevailing rates that we have currently that's clearly held down. Supply demand is also playing a role, right? So you have demographics with large cohorts of millennials were getting married and having kids and wanting a single family house. Remote work is also, I think, pushing up on demand a little bit. More people are spending more time at home and as a result, people are willing to spend more for extra space for things like a home office. So ultimately, demand is outrunning supply, and that's the reason for the rapid home price appreciation that we've seen recently.

>>Jay Bryson
Okay. Well, thanks, Charlie. And so up to this point, we've kind of talked just about national sort of patterns here. Jackie, let me bring you in here. And is there any regional sorts of stories here, any sort of the regions of the different countries where house prices, you know, stand out? Well, well above average or well below average? You know, what's the regional picture look like?

>>Jackie Benson
Sure. First, CoreLogic tracks selling prices from transactions in about 950 markets around the country. As of June, selling prices were up year over year and 90% of those markets. So this home price appreciation that we're seeing is pretty pervasive. You know, of course, there's varying degrees of price growth, though. For example, markets in the Northeast are generally experiencing faster price appreciation, and that coincides with weaker supply. Chicago, Philadelphia, Boston, the area surrounding New York City, those all come to mind as markets are experiencing more significant home price growth than the U.S. average. Meanwhile, price growth is somewhat softer down south, especially places like Florida and Texas, where builders have focused most of their efforts in the single family, supply picture is somewhat healthier. Those two states are actually responsible for over one third of the overall increase in listings over the past year. That's according to Realtor.com. So in addition to that, greater supply, you know, Charlie noted that demand is solid overall, but it relatively weaker in some of those markets down south. So, for example, my parents, they actually live in the Gulf Coast of Florida and their case you have home insurance providers raising the cost of home insurance quite dramatically, especially in areas more subject to flooding risk. And then you have places in Texas like Austin, which are high tech worker populations. And the Fed's interest rate hiking has caused outright declines in tech jobs, which has softened incomes and put downward pressure on housing demand. In Austin specifically, we've actually seen year over year declines in home prices versus the appreciation that is evident elsewhere. So, Jay, you know, Charlie just talked about how high mortgage rates have kind of kept the housing market in a lull. But he mentioned that, you know, although mortgage rates have come down, they're still more than double what they were in 2021. How does our Fed outlook influence our expectation for where mortgage rates might go?




>>Jay Bryson
Yeah, that's a good question, Jackie. And so in terms of the Fed right now, just to step back, you know, the Fed hiked rates by 525 basis points in the course of about a year. Now. They've been on hold now for this whole year. But looking forward, we expect that the Fed will be cutting rates pretty substantially in coming months. So, you know, if you look between this fall and, say, mid-part of 2025, we're looking for the Fed to bring rates down by about 200 basis points or so. You know, what we're seeing is inflation's coming down. The labor market is starting to soften somewhat and by any measure, monetary policy is very restrictive right now. And so the Fed has to be bringing rates down. They have to probably bring them down pretty significantly in order to avoid a recession. Now, some of this is already priced into markets right now. You know, Charlie had talked about a 30 year fixed rate mortgage before, and that's usually priced off some spread over the ten year Treasury security. And so, you know, at the back end of the yield curve, those expectations for Fed easing are already priced in right now. And so as we go forward, as the Fed cuts, we do expect to see the yield on the ten year Treasury security come down a little bit more from where it is right now. It's just under 4% as we talk. And what that should do is that should help to bring the 30 year fixed rate mortgage rate down somewhat as well, again, to levels that if you go back to what Charlie was saying four years ago, that mortgage rate was around 3% or so.
It's currently somewhere around six and a half percent. You know, we expect that to drift back down to maybe 6%. And so it's coming down. But again, we think it's very unlikely that the interest rate on a 30 year mortgage, you know, comes back down to 3%. Jackie, let me turn back to you and Charlie mentioned earlier about house prices being up 50% or so and house affordability, the worst it's been in this century. I'm starting to wonder, you know, is there like signs of a house price bubble out there? I mean, do we have to start worrying about what we saw back in 2000, 6 to 2012 when we saw house prices on a, you know, on a nationwide basis come down by 30%?

>>Jackie Benson
I don’t think so. Home prices have risen quite sharply compared to before the pandemic, but we've already had a bit of a correction in the last half of 2022. So at that point, home prices were up about 40% relative to January 2020 before the pandemic. But even then, from start to finish, prices on average only fell about 2%. So the big difference between today's housing market and the market of 2000 6008 is the supply picture. Back in 2006, there were nearly 4 million homes for resale. But today that's down to just over 1 million. Limited supply is putting a floor under prices and that's going to prevent some of the drastic declines like we saw during the housing bust.
Thanks for that, Jackie.

>>Jay Bryson
 That certainly is reassuring news. Hopefully, we're not looking at what we saw, you know, just 15 years ago. Hopefully we don't have to go through that whole thing again. So, Charlie, let me come back to you to kind of wrap it up here. So what is our outlook for house prices and residential real estate more broadly over the next few years?

>>Charlie Dougherty
First thing, mortgage rates are likely to come down a little bit more and that should eventually help lift the overall pace of home buying and selling, which again, is still running at a really sluggish pace of really energetic rebound. Though, does not seem likely and it doesn't seem likely for a few different reasons. For one. You know, affordability is still going to be a major headwind.
Lower rates will help around the margin. But as you alluded to, mortgage rates probably won't fall back to the lows that we saw back in 2021. As Jackie said, home prices likely are going to remain elevated and you're going to see some slowdown in terms of income growth. And that's sort of a reminder that another potential challenge that lays ahead for buyers will be a slowing economy, which I think itself will limit homebuying. So overall, you're likely to see a little bit better balance in the housing market over the next few years, but demand probably still runs ahead of supply with a tilt towards it being a seller's market. So that should lead to a more quote unquote normal pace of home price appreciation, likely somewhere in the 4 to 5% range.

>>Jay Bryson
Okay. Thank you, Charlie, for that. And thank you, Jacki. As well. And thank everyone for listening today. And thank you for the questions that you continue to submit to us. Please keep those questions coming. And we will be back with more podcast to answer those questions and to also talk about other issues in terms of the economy. So again, thank you for joining us today.

>>Outro
That's all for this episode of the Ask Our Economist podcast. And we thank you for joining us. If you enjoyed today's episode, please share with colleagues, family, friends and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at Ask our Economists at Wells Fargo dot com Ask our Economists.
 
>>Disclosures:
This report is produced by the Economics Group of Wells Fargo Bank, N.A. (“WFBNA”). This report is not a product of Wells Fargo Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, Wells Fargo Securities, LLC, Wells Fargo & Company, Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Europe S.A., and Wells Fargo Securities Canada, Ltd. Wells Fargo Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.
 
This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of Wells Fargo & Company. © 2024 Wells Fargo Bank, N.A.
 
Important Information for Non-U.S. Recipients
 
For recipients in the United Kingdom, 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 (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by Wells Fargo Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

>> Intro: Welcome to the Wells Fargo Ask Our Economist podcast series, where we explore what's on our clients minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever changing investment landscape. Our economists provide their views on the latest domestic and global trends. Insights on the demographics, social issues and challenges that impact our world. All which helps you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson: Hello, this is Jay Bryson, Chief Economist of the Corporate and Investment Bank at Wells Fargo, and you're listening to our Ask Our Economist podcast series. Recently, we've made some pretty major changes to our outlook for Federal Reserve policy. And here to talk about those changes, Senior Eonomist Michael Pugliese. So Mike, can you just outline some of the changes that we've made recently.

>>Mike Pugliese: Yeah. Jay. So the changes we've made have been pretty substantial. We've both added monetary policy easing to our forecast and also sped it up. So our previous forecast from early to mid-July looked for two 25 basis point rate cuts from the FOMC by the end of this year. So one in September, one in December, with another 100 basis points of easing next year, so 150 cumulatively. What we're looking for now is 50 basis points of easing in September. Another 50 basis points in November and then 25 basis points of rate cuts by the end of this year. So 125 total and then 75 basis points more in 2025. So cumulatively,  it's gone from 150 basis points of cuts to 200 and also faster with those 50 basis points back to back early in the easing cycle. Now maybe I'll kick it back to you, Jay. What led us to both add easing and speed up the process?

>>Jay Bryson: Yeah. Great question Mike. So let's step back for a second and just ask, you know, what's the Fed trying to accomplish. So the F ed has two objectives. It's called its quote dual mandate. And so one of its objective is what's called price stability. And the way the Fed defines that is a rate of change of consumer prices of 2% a year, at least over the medium term horizon. The other objective is what they call full employment. And nobody really knows exactly what that is. That's kind of a concept that's kind of hard to measure. But when the labor market is strong, it's really what they're trying to achieve. And so up until recently, what the fed is really been focused on is that price stability part of their mandate, making sure inflation comes back down to 2%. And the labor market has really been strong. Well, in recent months we've seen some signs of some softening there. We're just not getting the same amount of job growth that we had before. The unemployment rate has moved up above 4%. And so we're starting to see some softening there. And the most recent jobs market report, which we got in early August, show that the unemployment rate actually moved up to 4.3%. And that was, I think, for us, the catalyst that really made us bring about this more aggressive pace of Fed easing. And Federal Reserve officials have been saying we've been focused on the inflation part of our mandate. Now, we've really got a focus on the labor market part of that as well. So that's really what's brought about that change is that we're starting to see some real softening in the labor market. And at the same time, in terms of inflation, we're just seeing inflationary pressures continue to subside. So if you look at the Fed's preferred measure, the way they measure consumer prices, if you look at the rate of change of that between March and June, and if you annualize that rate of change, that's only 2.3%. I mean, you're essentially back down to 2% right now. And so now it's really time to start focusing in on the labor market. And that's what brought about that change. So let me kick it back to you now. There's been some talk about the Fed having to do an emergency rate cut to mean their next FOMC meeting is on September the 18th, seven weeks away at this point. And some folks are saying the Fed's going to have to cut rates even before then a so-called emergency cut. What do you make of talk of an emergency rate cut?

>>Mike Pugliese: I'm skeptical. Of course. Never say never. But they're, I think, two reasons I'm skeptical that inner meeting or emergency rate cut is coming between now and the September FOMC meeting. The first is the economic data have deteriorated to the point you just made a moment ago, but they haven't completely collapsed. A job growth was still positive. Last month's GDP growth is pretty good in Q2. We got, you know, a bounce back in the ISM services recently just as another example. And so I don't think the economic data warrant an emergency rate cut just a week or two after the Fed last met and held rate steady. The second reason I'm skeptical is that, while financial markets have been volatile and have clearly adopted a more risk off tone, we're not in a full blown financial crisis or credit crunch or seeing major funding markets stress. Of course, that could happen, right? It could evolve in a much more negative way in the coming weeks. But between now and that September meeting. But some pain is a natural reflection of an economic outlook that looks like it's dark in recent weeks based on the data. And so sure stocks selling off of credit spreads widening is not what the Fed ever wants to see. But I don't think we've seen anywhere near the degree of financial market chaos or pain that would be necessary to push the Fed to do an emergency rate cut.

>>Jay Bryson: Okay, so let's say they make it to September 18th and they don't cut rates. So next meeting September 18th. The presidential election is only 6 or 7 weeks after that. Can the Fed really be cutting rates six weeks before a presidential election? Don't they want to be seen as, "apolitical"? And could it rate cut September 18th be interpreted as a political move?

>>Mike Pugliese: Well, it certainly could be interpreted that way, but I don't think that that's going to stop the FOMC from acting. And the reason I think that is because they're going to follow the data. And Chair Powell has made this very clear. Other Federal Reserve officials have made it very clear. And the evidence backs that up. When you look at the historical record in past elections or even just look more recently, there was an instance earlier this year where people thought the Fed might cut, and their read on the data was a little more hawkish, and they held. There have been instances over the course of the last few years, just more broadly, when the Fed has done their best to kind of react and do what they think is appropriate in order to best meet their dual mandate. And given what's happened in recent weeks and months, the case for a rate cut has very clearly been built at that September meeting. And so to me, I don't think the election precludes them from it because as a final point, they're likely going to be criticized no matter what they do, whether they cut at the meeting before the election, or they sit tight and do a rate cut, maybe at the November meeting right after the election or even December. So it's probably going to be hard for them to avoid the political pressure, no matter what they do and their best path forward, at least in my view, and I suspect in theirs as well, is to just craft monetary policy as best they can, given the uncertainties and given the data they have in hand. And and that's what I think they'll do. And that argues for a rate cut. So pivoting back to the economy, Jay, I think something we've been dancing around a little bit is the prospect of recession just hanging over our heads. Right. The Sahm rule has been violated, right. With this rising unemployment rate, stocks not doing well. It seems like some of the signs are there. How are you thinking about the recession outlook going forward?

>>Jay Bryson: So let's level set here, if you go back to the end of the Second World War to today, the U.S. economy has been in recession roughly 15% of the time. So think of that as your underlying run rate. You know, at any point in time or the probability of a recession in the next call it years, probably at least 15%. We've been saying for some time, we thought the probability of recession, although not above 15%, is elevated. Call it 30%, maybe 40%. Right now we have seen some cracks in terms of the economy. We've seen delinquencies on auto loans, and we've seen delinquencies on credit cards all move higher. Job growth is softening here. The unemployment rate is moving higher. So we're seeing cracks there. That said, you know, as you said earlier, Mike, it's not like the economy's falling apart. We are continuing to hire. But I look at the financial health of the household sector in aggregate, it remains pretty good. There's no reason to expect a massive pullback on spending there. When I look at the financial health of the business sector in general, that remains pretty good as well. There's no necessary reason to expect businesses are just going to let people go en masse. Our base case is we don't have a recession. We think we're going to be growing at rates between, you know, let's call it one, maybe 1.5%, which is slow in the next few quarters. And to the level set, if you go back and you look at 2010 to 2019 economic expansion, the economy grew on average 2.5% per year. So if you're only growing 1 to 1.5%, you're still growing, but it's relatively slow. It's not our base case. Risk of recession, I think is elevated. But, you know, again, it's not our base case. We do believe we will continue to see a soft landing.

>>Mike Pugliese: Let's say for argument's sake, a recession does materialize and growth slips negative. The unemployment rate rises more. Do we have enough Fed easing in the forecast, or do you think a lot more easing would be in store above and beyond what we already have forecast?

>>Jay Bryson: Yeah, Mike, we probably don't have enough Fed easing. You know, if there is a recession are rates going to bottom out at roughly three and a quarter to 3.5% next year where we have it, my answer to that is probably no. And the reason why is we measure the stance of monetary policy, what's what's called the "the real fed funds rate". And so that nominal interest rate minus the inflation rate. If we get to let's call it 3.25% for argument's sake, and the inflation rate is roughly two, the real fed funds rate is 1% positive. If you have a recession, typically you need to have the fed funds rate go to negative territory, at least marginally. So you need to have the nominal interest rate below the inflation rate to get a negative real interest rate to bring the economy back. And so if you're inflation rates roughly 2%, then you need a fed funds rate of below 2%, maybe as low as 1% to bring that about. And obviously it would depend if you were to have a recession, how deep it was. You know, if you think at the last two recessions, the pandemic and then the aftermath of the financial crisis, the fed took interest rates down to essentially 0%. For us to go back to down to zero, I think you would need to have a very, very deep recession. But even if we have just a modest sort of recession, that our guess rates are going to go below the 3.5% which we're penciling in right now. But obviously all that remains in the future. There's a lot of things that could happen between now and then. We're keeping a close eye on it, and as we continue to make changes to our forecast, we will keep you updated. So again, thank you very much for listening to these podcasts. Thank you for participating in this series. Please keep the questions coming. And again, thank you very much for listening today.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.


>>Disclosures:
This report is produced by the Economics Group of Wells Fargo Bank, N.A. (“WFBNA”). This report is not a product of Wells Fargo Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, Wells Fargo Securities, LLC, Wells Fargo & Company, Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Europe S.A., and Wells Fargo Securities Canada, Ltd. Wells Fargo Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.
 
This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of Wells Fargo & Company. © 2024 Wells Fargo Bank, N.A.
 
Important Information for Non-U.S. Recipients
 
For recipients in the United Kingdom, 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 (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by Wells Fargo Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

>>Intro
Welcome to the Wells Fargo Ask Our Economist podcast series, where we explore what's on our clients minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues, and challenges that impact our world. All which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence. 

>>Jay Bryson:
Hello, this is Jay Bryson, Chief Economist of the Corporate and Investment Bank at Wells Fargo, and you're listening to our Ask Our Economists podcast series. We recently released our International Economic Outlook, where we talk about our outlook for foreign economies and for the global economy. And so, to talk about that in detail today, are our international economists Nick Bennenbroek and Brendan McKenna. So global GDP not only includes major foreign economies such as, you know, the Eurozone or China, Japan, etc., but obviously it also includes the United States. So let me just briefly talk about our forecast for the United States. In general, if you look at the U.S. economy right now, today, it continues to chug along at a fairly decent clip. Last year, U.S. GDP on an annual average basis expanded 2.5%. We have seen some signs of slowing this year, and that's in our forecast. We're looking for 2.3% growth this year and then next year, 2025, shifting down to roughly a 2% or so sort of range. So some slowing growth. But you know, we don't have a recession in the forecast. And one of the benefits that comes about by slower economic growth is it helps to bring inflation down. So last year inflation as measured is what's called the PCE deflator. And I know you've all heard of CPI before. The PCE inflation is very similar to that. I'm not going to get into the technical differences. Just suffice it to say most economists, including those at the Fed, think it's probably the best way to measure consumer price inflation. Last year, PCE inflation was running at 3.7%. This year we're looking for it to shift down to about 2.5%, and next year 2.2%. And so, what that allows is inflation comes down as the economy slows, is for the Fed to start cutting rates. And so, we look for the Fed to cut rates by 50 basis points this year and then 100 basis points next year. So, you know that's in a nutshell is kind of the US economy. So, Nick let's talk about the rest of the world starting with Europe. And Europe is obviously a big entity. And for our purposes here in this discussion, that's going to include the Eurozone and the United Kingdom. So, Nick, can you briefly talk about our views on the Eurozone and the UK? 

>> Nick Bennenbroek:
Thanks, Joe. So yeah, as you mentioned, Europe, obviously a key part of the global economy. I'll talk about the Eurozone, which essentially you could argue is much of continental Europe, and then the United Kingdom. And there's quite a lot of similarities in terms of what we see going on there. Now, both of these regions struggled quite a bit in the second half of 2023. The Eurozone stagnated. And actually there was a small contraction in the United Kingdom in the economy, but they had a lot of inflationary pressures, energy price spikes, and that really hurt the consumer. As we've been going through 2024, though, the outlook is improving. We've seen in terms of some of these so-called sentiment surveys, the purchasing managers indices, they have generally been improving over the early part of this year. And in particular, what we're seeing in both the Eurozone and the United Kingdom is some improvement as the inflation outlook has sort of receded, real household incomes have improved, and that's a function of both ongoing employment, but also these households are able to stretch the euro or the pound a little further with the inflationary pressures. Not quite as much as they were previously. So they are both regions. We are seeing a gradual upswing in terms of GDP growth for the Eurozone. In the United Kingdom this year, we're looking at 0.8% GDP growth. Now that doesn't sound great, but it's still an improvement from what we saw last year for the Eurozone. We were at 0.6%. And for the United Kingdom we're at 0.1%. So pretty much on an overall upswing. And actually, if anything, we expect that economy to keep on strengthening as we go into 2025. We're looking at GDP growth for both the Eurozone and the United Kingdom at around about 1.5% next year. So a gradual upswing with those household incomes improving. And that's a function of the ongoing increases in wages and employment. And while higher wages are certainly helping, I think the consumer and households, it's not quite as good as news from an inflation perspective. Wage growth is still somewhat elevated in both countries. Now, to be fair, with the relatively slow growth, we're not seeing a lot of inflationary pressures. And in fact, if anything, especially in the Eurozone, inflation has been actually improving more quickly than here in the United States. And that allowed the European Central Bank to actually start its interest rate reduction cycle. In June, they lowered their policy interest rate from 4% down to three and three quarters. We do think that the European Central Bank is going to be a little bit careful as we move forward, with the wages still running around about 5% and their core inflation measure right now, still at 2.9%. Over the rest of this year, would look for another half percentage point in reduction in terms of the ECB interest rates. And then as we go through next year, another percentage point. And that would bring the policy rate in Europe down to two and a quarter. You know, as far as the United Kingdom is concerned I mentioned some similarities. They just haven't made as much progress yet. On the inflation front, their core CPI measure, the one that excludes food and energy, is still running at around about 3.5%. And that's a little bit above the target. And so they haven't lowered interest rates yet. In fact we think they're only going to lower interest rates a couple of times this year in August and November, which would bring that policy rate down from five and a quarter currently all the way down to four and four and a quarter, and then continuing to  lower policy rates gradually through 2025. 

>> Jay Bryson:
Okay. Let's shift our view now and go to the other side of the world. What do you see in there in Japan? 

>> Nick Bennenbroek:
Yeah, I mean, in Japan, it's kind of interesting as well because unlike most countries that have been dealing with rather high inflation and wanting to get inflation a little bit lower. In Japan, they have had a temporary bout of inflation. But historically they've really been more concerned about inflation being too low or even negative. That is deflation for quite some time. And so if anything, at this point, they're actually welcoming or would welcome a little bit more on the inflationary side. But before we get there, let's very briefly talk about what's happening in terms of the economy. The recovery is still a little bit uneven. In fact, GDP in Japan contracted in the first quarter. And if you looked at both consumer spending as well as business investment, they were both down in the first quarter as well. A hopeful sign for the economy, though, is that if you look at the largest trade union federation in Japan, they announced that this year in the spring in Japan, they secured an average wage increase for the workers of 5.25%. That's the largest wage gain that we have seen since the early 1990s. And so coming back to that favorable household income trend that that we were mentioning in Europe, we would hope to see that as we go through the course of this year, those larger wage increases start to get reflected in the pay packets of, you know, Japanese workers. That growth becomes a little bit more steady. And as that occurs, the types of inflation rates that we're seeing now. And in the case of Japan, I think the last inflation reading we saw was in the range of two and a half to 3%. We can actually hope to see those inflation readings remain above the 2% inflation target for a little while longer. So at this point, I think the central bank, the Bank of Japan, is hoping to see more solid economic growth and is also hoping to see that inflation rate remain above that 2% level for a little while. They're one of the last major economies around the world, too, shall we say, remove their emergency monetary policy settings and in particular these negative policy interest rates. They just brought their policy interest rates out of zero territory in March of this year. And if we continue to see sort of some more stability and growth over the course of this year, sort of zero growth this year and next year, we're looking at GDP growth of 1.5%. Again, as long as we continue on that improving track, we do think that the Bank of Japan can gradually raise interest rates. And I really highlight the word gradually. I would be looking for a 15 basis point increase in October in the policy interest rate in Japan, and then maybe all the way until April next year, 25 basis points, or a quarter percent increase in the Bank of Japan's policy rate, that is still leave the policy rate in Japan very, very low at just a half a percentage point. 

>>Jay Bryson:
Up to this point, we've been talking about advanced economies around the world. It's time now to look at some of the larger developing economies. So let's bring in Brendan to talk about that. So Brendan, start off by talking about the Chinese economy. What do you see going on there and what's our outlook for the Chinese economy? 

>> Brendan McKenna:
Thanks, Jay. China is obviously very important for the overall health of the global economy. So gauging the state of China's economy is pretty crucial. But as far as the health of China's economy, growth actually held up pretty well over the first half of this year. But going forward, we think China's economy will probably soften and structural issues start to dampen growth prospects over time. You know, China has demographic problems, geopolitical issues that they're in the center of that are challenging China's export driven growth model, deflation, weak consumption, but also just a really persistent deterioration in the local real estate sector. We continue to see home prices fall, construction and investment activity contract, and the risk of an overall China financial crisis remaining quite elevated for the time being. So given that mix, we're forecasting growth of around 5% this year. And for a more material slowdown in China's economy next year, forecasting growth closer to 4% in 2025. 

>>Jay Bryson:
Okay. So let's also then talk about another very large economy, India. India is now the most populous country in the world by many measures, and it's been in the news recently because of the election there they had recently. So what are we seeing in India? Same thing that we seen in China or is a little bit different there, Brendan.

>> Brendan McKenna
It's a little bit different than what's going on in China. And you're absolutely right. India's general election was a surprise. And a surprise in the sense that Prime Minister Modi's party lost its parliamentary majority. But despite the political surprise, India is still one of the only success stories, or not only for this year, but also maybe in the post Covid era. But actually, India's story is almost the exact opposite of the China story that we just spoke about. India is becoming more integrated into the global economy through improved manufacturing capabilities. It's replacing China in the global supply chain. The demographic trends are actually very encouraging. And it also looks like India is set to receive a pretty sizable amount of new capital inflows from having local securities set to be included in local bond indices. So, you know, China also, India has maintained neutrality and just about all the world's major geopolitical conflicts, which could actually act as a net positive for the economy, even in a world that's slowly fragmenting along geopolitical lines. So despite the political surprise, we’re relatively optimistic on India's economy, the forecast calendar year growth of about 7% this year and actually a very similar growth profile in 2025 as well. 

>>Jay Bryson
Well, thank you, Brendan. So it certainly sounds like India is doing a lot better than China right now. So Nick, can you sum it all up? I mean, we've talked about some of the major economies around the world. I mean, what does this all mean for global GDP growth right now and as we go forward. 

>> Nick Bennenbroek:
Yeah sure. So we're looking for a very respectable pace of growth for the global economy in 2024. We're looking for GDP growth of 2.9% this year. Now that would be a modest slowdown from what we saw in 2023, which was 3.2%. You know what's going on there. Well, just to recap very quickly, you know, some countries we're seeing a slowdown. The United States and China, for example, some areas we're seeing improving like in across Europe and for example India remaining very very strong. So different economies are moving in different directions. But overall we're seeing only a gentle deceleration. So that's 2.9% growth this year, 2.8% GDP growth the year after in 2025. And to give that some sort of context, historically, the global economy has grown on average by 3.25%. So that slowdown to 2.9%, yes, it's a little below average, but it really is still a respectable performance. And we've heard in the United States about a soft landing for the US economy. I think I would tend to typify what we're seeing happening in the global scenario or the global backdrop, as well as also, you know, a generally a relatively soft landing for the global economy, just a little bit like below average. 

>>Jay Bryson:
I'm glad you noted that. Soft landing. That's certainly I think what we're looking for. You're looking for a slowdown, but it's certainly not a disaster by any stretch of the imagination. Brendan, let me turn it back to you. One of the things that we do in our international economic outlook was we forecast major dollar exchange rates. So in general, what are we looking for in terms of the value of the dollar versus major currencies? 

>> Brendan McKenna:
Yeah, So I would say our outlook for the dollar's maybe a little bifurcated. And I say bifurcated in the sense that at least in the short term, we think the dollar can continue to broadly strengthen against most foreign currencies. You know, as we kind of mentioned, the U.S. economy is showing signs of slowing down. But U.S. economic trends are still relatively favorable for the time being. And also, the Federal Reserve continues to be patient when approaching rate cuts. So we believe the dollar can strengthen through the end of Q3 of this year. But longer term, call it through the end of 2025. We believe the dollar can enter this period of prolonged depreciation, and that prolonged depreciation should really stem from a Federal Reserve that's ultimately going to lower interest rates and ease monetary policy. And also as foreign economy growth starts to converge towards the growth that we expect in the United States. Also, we believe the Fed easing monetary policy can really create a backdrop of easier global financial conditions, which can be a supportive environment for foreign currencies, but also maybe not so supportive for the traditional safe haven currencies such as the US dollar. So at least in the short term, Jay, we're looking for some dollar strength against many of the world's major foreign currencies. But longer term, call it Q4 of this year and to the end of 2025, we do expect a cycle of U.S. dollar depreciation. 

>>Jay Bryson:
Thank you, Brendan, and thank you, Nick, for joining us today. And I'd like to remind listeners that they can find our international economic outlook and any of the reports that we write, and it's on our website. wells.fargo.com/economics. And so if you want to get more details of our outlooks certainly go there for those reports. So again, thank you for joining us today to listen in to this podcast. We'll have more of these podcasts going forward. Again, thank you for your questions. Keep them coming and we thank you for joining us today. 

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>>Disclosures:
This report is produced by the Economics Group of Wells Fargo Bank, N.A. (“WFBNA”). This report is not a product of Wells Fargo Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, Wells Fargo Securities, LLC, Wells Fargo & Company, Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Europe S.A., and Wells Fargo Securities Canada, Ltd. Wells Fargo Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of Wells Fargo & Company. © 2024 Wells Fargo Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, 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 (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by Wells Fargo Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

>>Intro:
Welcome to the Wells Fargo, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence. 

>>Jay Bryson:
Hello, this is Jay Bryson, chief economist of the Corporate and Investment Bank at Wells Fargo. And you're listening to our Ask Our Economists podcast series. Recently, we wrote a five-piece special report on potential economic growth here in the United States. And joining me today to discuss the findings of that series of reports are economists Sarah House and Shannon Seery Grein. Before we turn it over to them, though, let's just kind of level set and talk about what potential economic growth is. Essentially what it is, it's the rate at which an economy can grow over a long period of time without generating either higher rates of inflation or lower rates of inflation and potentially deflation. So think of, of it’s the long term sustainable growth rate of the economy. Now, any quarter, an economy can grow, you know, whatever. I mean, it just so happened that in the first quarter of the year, the economy expanded 1.3% at an annualized rate and it bounces around on a quarter by quarter basis depending on what's happening to demand in the economy, depending on what's happening to, you know, different shocks and etc.. So if you go back to the second quarter of 2020, the economy contracted roughly 25% at an annualized rate and the following quarter it actually expanded 35%. Now, it's not like, you know, long term economic growth is bouncing around. That's just the shock of the pandemic closing down and then reopening the economy. So, again, it's long run potential growth rates. And it really boils down to two things. It boils down to the growth rate of the labor force. So the more people you have who potentially can work, the more goods and services the economy can make. And even if you don't have labor force growth, the economy can still grow at a positive rate over a long period of time if it has positive productivity growth that is, each worker can make more and more. And so if you go back and you look at history, so back in the 1950s and the 1960s, kind of what people may refer to as the halcyon days of the US economy, the potential growth rate at the time was 4% and even higher. And what was happening back then is we look at the labor force. There was two big demographic shifts that happened. One was the baby boomers were entering the workforce for the first time. And then the second thing was a lot of women started to join the workforce for the first time as well. That demographic lift lasted from the late 1950s up into the early 1970s. And also back then, you had still pretty strong productivity growth because of transistors and television and other inventions like that of the mid 20th century were still playing a big role. Over time, we kind of downshifted. We got a burst again of productivity growth in the late 1990s because of the Internet and the networking of computers. But more recently, things have slowed down not only in terms of the labor force but in terms of productivity growth. And so right now, most estimates of the long run potential growth rate of the US economy is somewhere around 2% or so. And again, that's down significantly over the last few decades. So, you know, again, we talked about growth in the labor force, growth in productivity. So, Sarah, let me turn to you. You're our labor force guru. What's happened recently in terms of the labor force growth rate? 

>>Sarah House:
Yeah. Thanks, Jay. So we did see the labor force downshift pretty significantly in the 2010s. So the average annual rate of labor force growth was about 0.6% compared to 1% or more over each of the prior five decades. But we have seen labor force growth pick up over the past couple of years. So, for example, it rose almost 2% in 2022 and then another 1.7% in 2023, which marks the strongest growth rates we've seen since 2000. Now, part of that is stronger population growth. So the past couple of years we saw lower mortality since the first few years that COVID was on the scene, but also robust immigration. But this is also a function of higher participation. So, for example, we've seen the labor force participation rate among primary age workers. It's hovering near its highest level in about two decades. And among women, it's actually reached a record high thanks to, in large part, some of the flexibility afforded by remote work that we've seen over the past couple of years. 

>>Jay Bryson:
Thanks for that. It's happened recently, but what we're talking about here in this series of reports is what we think potential economic growth is going to be going forward. So what's our expectation there when you look at labor force growth going forward? 

>>Sarah House:
I think there are reasons to be optimistic, but there's also a lot of uncertainty here. So I think whether the faster pace of labor force growth that we saw over the past few years can be sustained will depend a lot on what happens with immigration. So when you look at the CBO's projections for population growth over the next decade, so they’re expecting that the native born population is going to grow about half the pace over the next ten years that it did over the 2010s. And immigration is going to be an important offset to that. But the outlook there is very uncertain, and it's going to depend a lot on economic conditions as well as political decisions, both here in the United States and abroad. Now, when we look at the labor force participation side of the labor force growth. I think you could see some, some tailwinds there that could, if not raise overall participation, at least limit the decline caused by population aging. And that could happen through, I think, further penetration of remote work. You’ve also seeing a lot of fiscal efforts to support infrastructure or strategic industries that have helped particularly male dominated industries, and see male participation rise. But I think even just avoiding the shock of another major downturn like we saw around COVID that pushed a lot of older workers out of the workforce could also raise participation rates by just seeing fewer exits. Now, it's not all upside risk. I think there are some downside risks as well, such as the possibility that we have seen essentially the big lift from remote work and we may be won't get further prevalence of remote work. We could also see immigration maybe fall faster than some expect and that would be notable for participation since foreign born workers do have a higher propensity to participate in the labor market. And there's also the risk of maybe further fiscal policy tightening just given the debt situation, which maybe amid higher taxes, you don't see as big of an increase in participation. So when you put it all together, I think there is a case for somewhat stronger labor force growth versus the 2010s. But at the end of the day, this isn't going to be a huge game changer. So maybe it adds 0.1 to 0.3 points more towards potential growth. So not a ton, but at least directionally helpful. 

>>Jay Bryson:
Okay. Well, thanks for that. And now, Shannon, let's turn to you now for the second part of this productivity growth. And before we do that, productivity growth itself is comprised of three different components. Okay. So the first would be changes in the net capital stock. So if you give workers more capital, they can be more productive. So think of a worker who's making, say, a baseball bat. Okay. And initially this worker had just a pocketknife to be able to do that. You give them a lathe and they could be very, very productive and make more baseball bats per hour. So one is the net increase in the capital stock. The second would be what's called total factor productivity. I'll ask Shannon to define that in just a minute. And then the third would be changes in labor composition. So changes in the age structure of the workforce, education levels, things of that nature. When you go back and you look at it over the last, say, 50 years, on balance, that labor composition has had very little effect on overall productivity. The big contributors have been this total factor productivity and changes in the net capital stock. So what we did is we just didn't talk about labor composition in terms of our reports here. So Shannon, let's focus on the first one there changes the net capital stock. What are we seeing there and what do you expect kind of going forward? 

>>Shannon Seery Grein:
Thanks, Jay. I know you just described net capital stock. And really just when we think about it, I think it's really just comes down to the value of the economy's capital assets. Right. So as you use that example, if you give workers more assets, they can produce more with that. It's really defined as structures, equipment and intellectual property products. It's defined by business fixed investment spending, less depreciation. And when we think of what's happened with capital stock and where it's headed. Capital stock growth did downshift after the tech build out of the 1990s. So leading up to the 2000s, we saw manufacturing capital stock running close to a 3% annual rate for the services sector. It was north of 4% and it obviously downshifted after that bubble in terms of the tech situation. But there's also reason to believe we'll see some acceleration going forward here as well. So the best example I'd say is there has been a surge in the construction of manufacturing facilities recently. And while the factory sector is only a small slice of the economy today, we're also seeing business spending on hardware and software accelerate and outpace broader investment spending, which I think is a positive as we think about capital stock growth going forward. The development of automation, artificial intelligence will likely also require further investment than we've seen. So when we just think about where the economy is headed. I think you'd see some continued build out that would be supportive of capital stock. So somewhat as a thought exercise, we looked at if investment growth resembles the tech build out of the 1990s, then net capital stock growth in the business sector could rise at an annual rate between two and a half and 3% per year by the end of the current decade, which is above the more recent run rate of an average rate of of 1.8% over the past decade. 

>>Jay Bryson:
So let's set the net capital stock aside for just a second and then turn to the second thing, this mouthful total factor productivity. So first, Shannon can you describe what the heck that is? Put that in lay terms and then talk about a little bit what's happened there and again, what we think going forward. 

>>Shannon Seery Grein:
So total factor productivity, it goes by many names, TFP multi-factor productivity, but it seeks to measure the portion of output growth that is not attributable to capital or labor inputs, right? So not attributable to the things we've previously discussed, such as efficiency improvements and process improvements and things of that nature. So there's also implications I think, for total factor productivity going forward, which also slumped in the wake of the global financial crisis and remained lackluster over the past expansion. When we think of TFP growth going forward, I think you could see a lift from both remote work, which Sara touched on in terms of its labor force implications. I think it could give individuals the ability to focus more closely. A lot of studies do suggest that remote worker work from home has raised the quality of workers output, which could translate to TFP gains. We could also see a rise in TFP amid automation and artificial intelligence. Generally, though, we'd acknowledge that the technological advancements made in the past have generally affected productivity with a long lag, which just makes it incredibly uncertain, just kind of how quickly those gains would translate to TFP. So while it's ultimately, I think, very, very uncertain from a TFP perspective, we do expect any gains to translate at a slower pace than the net capital stock. And we think it's somewhat reasonable to expect TFP growth could reach about a 1.2% annual rate by 2029, given current trends, which would basically put it in line with its long run annual average. 

>>Jay Bryson:
All right, great. So let's put it all together here. So what does all this mean? So, you know, again, if you look at most estimates of what potential growth in the United States is today, its long run sustainable growth rate, most folks would say it's somewhere probably or most economists who estimate these things would say it's probably somewhere around 2%. The Congressional Budget Office, Sarah, had mentioned them before. They peg it at roughly 2.2%. But, you know, keep in mind, there's uncertainty around these. These are only estimates. You have to estimate these things. Statistically, it's not observed. So that's where we are right now. So, you know, we did a bunch of math here to try to back out all these sorts of estimates and our best guess is, and I think we feel comfortable saying by the end of the decade we think it could be up to two and a half percent per year and we certainly wouldn't rule out 3%. Now, both Shannon and Sarah mentioned uncertainty here and that certainly, you know, could play a role. But, you know, all this may sound a little bit academic to some of you listeners, but at the end of the day, it really makes a big difference. So if we grow at 2.2% between now and the end of the decade, then compare that to a situation where we grow at 3% between now and the end of the decade. The difference at the end of the decade is roughly $1,000,000,000,000 of real GDP. Right now, the size of the economy is roughly in real terms. It's roughly $23 trillion or so. And so, I mean, you're talking a material increase in terms of the size of the economy. If we can just ramp it up by 0.8 percentage points by the end of the decade. So it really has some real implications. As I noted at the very, very start here, this is a five-part series. And so those of you who are really interested in this, I would invite you to go to our Web site, Wellsfargo.com/economics. All the reports are posted there. And you can really get down deeper into the analysis that we did here. Sarah, thanks for joining us today. Shannon, thank you for joining us to describe this. And thank you for listening today and thank you for all the questions that you continue to submit for this podcast series. And again, thank you for joining us today. 

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo. 

>>Disclosures:
This report is produced by the Economics Group of Wells Fargo Bank, N.A. (“WFBNA”). This report is not a product of Wells Fargo Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, Wells Fargo Securities, LLC, Wells Fargo & Company, Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Europe S.A., and Wells Fargo Securities Canada, Ltd. Wells Fargo Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report. 

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of Wells Fargo & Company. © 2024 Wells Fargo Bank, N.A. 

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, 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 (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by Wells Fargo Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

>>Intro:
Welcome to the Wells Fargo, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson:
Hello, this is Jay Bryson, Chief Economist of the Corporate and Investment Bank at Wells Fargo. And you're listening to our Ask Our Economists podcast series. So recently a listener was at the grocery store and noticed that some of the shelves there were bare and question popped into his head that he submitted to us about what's happening with supply chains. And so to talk about it, joined today by senior economist Tim Quinlan. So, Tim, you know, if you go back to the pandemic, all that just wreaked havoc on the nation's supply chains and kind of faded out of the consciousness for a while. But then there was this ship that hit this bridge in Baltimore about a month or so ago and caused that to collapse. And it closed down the harbor there in Baltimore. So, you know, can you describe just in general where we are in terms of supply chains? You know, when you think about supply chains, you know, what sort of metrics are you looking at? And, you know, do these metrics suggest that we're back to, we'll call it, quote, normal?

>>Tim Quinlan:
Sure, Jay. So at the height of the supply chain difficulties we were having during the pandemic, you might recall, we built a tool called the pressure gauge at the time, and it looked at various measures of volume, time, price, inventory and labor to try to get our finger on the pulse of where we were with respect to supply chains. And so in preparation for our discussion today, updated that. And most of these guys are still kind of flashing green, in other words, signaling there's not much to worry about with respect to supply chains, with one notable exception. We've seen some hot spots with respect to shipping, particularly shipping costs. So to use one widely followed measure, the Shanghai Containerized Freight index that jumped almost 20% last week alone, which puts the May 10th reading as high as it's been at any point since it's pandemic driven boom. And that's the fifth straight weekly increase. So what's going on here? Well, a lot of the shipping liners have successfully pushed through some rate increases. I think they generally feel like they've got a little bit of leverage right now because there's a worsening situation with respect to port congestion. They've had to reroute some ships around the Red Sea because of the Houthi rebels there. And then finally, just you talked about the bridge situation in Baltimore. Firms have kind of brought forward demand to kind of mitigate some of those cargo delays.

>>Jay Bryson:
Let me ask you this, then. Know, we talked about Baltimore. I mean, is Baltimore an issue? You know, is Baltimore another pandemic sort of dislocation when it comes to supply chains?

>>Tim Quinlan:
You know Jay, there's plenty to worry about these days, but the collapse of the Francis Scott Key Bridge is not near the top of the list, at least not in our view. It's tested the supply chains, but for the most part, supply chains really passed the test. Since the March 26th collapse, four channels, none of them as deep as the main one, but four kind of side channels have opened up there that have allowed some of the trade to continue passing through the port. The salvage efforts of the old bridge are being led by the Army Corps of Engineers, and they plan to safely take down the remaining parts of the bridge, refloat the dolly. That's the cargo ship that lost power and struck the bridge and reopened the main channel all by the end of the month of May. And kind of similar to Superstorm Sandy or the dockworkers strikes in Los Angeles and Long Beach, both of which have occurred in the past decade or so. Shippers have learned to kind of reroute and adjust things pretty quickly. And they've got a lot of options on the East Coast. There’s the Port of New York, Hampton Roads, Savannah and Charleston. And, you know, it may take years to rebuild the new bridge, but the port itself should be operational again by this summer.

>>Jay Bryson:
That certainly is good news. So, you know, when you think about the supply chains disruptions that we saw, you know, a few years ago in conjunction with the all the different stimulus measures that we got with the pandemic, we just saw a surge in good prices back then. What's happened to good prices more recently?

>>Tim Quinlan:
Yeah, you're right, Jay. We did have really strong growth in goods prices during the pandemic. In fact, it was well into double digit territory with year over year prices at the height of those supply chain difficulties in 2021, topping out at north of 20%. But they've really cooled pretty substantially since then. Price growth is, you know, we talked about inflation more broadly. We talk about just the rate of growth in prices coming down. In the case of goods, it's been actual outright declines in prices. But, you know, we've talked about this before. You know, core goods only account for about 20% or so of consumer prices. Services account for a much larger share, more than 60% of CPI. So what are we seeing in terms of the growth of price of services?

>>Jay Bryson:
If you look at services, as you just noted, Tim, they account for 60%, more than 60% of the CPI. And whereas we've gotten significant disinflation in terms of goods prices and in some cases, as you noted, some outright price declines in terms of goods. When you look at services, not so much. At its peak, the core services index was running six and a half percent on a year over year basis. It's come down a little bit, but it's down to only five and a half percent. And recently it's kind of has stalled out at five and a half percent. And so if you’re just doing the math. You know, if 60% of the CPI is services and you want to get back down to 2% as the Fed does, then you really need to have some more disinflation coming out of the service sector. Now, as we look forward in terms of services, you know, a big component of services is shelter. So that would be rent of apartments and also the way they measure housing in the CPI measures as kind of a rent sort of calculation. And when you look at what's really going on in real time in terms of rents, we've seen significant price slowing in terms of rents. Now, the problem is it comes into the CPI with a relatively long lag. And so the point here is as we go forward, those measures in the CPI should be catching up with the rent that we see out there in the real economy. And so that's going to continue to come down as we go forward. The second thing is we think about most service providers, the biggest cost of them of doing business is wages and salaries. And so if you want to have service price disinflation, you kind of need to have some moderation in wages and salaries. And in fact, that's what we have seen in recent months. The labor market is getting into better balance. And so just most recently, a very widely followed measure of wage growth has slowed to about 4% or so on a year over year basis. And so that's moving back down as well. And so the bottom line here of all of this is we should see service prices continue to disinflate and bringing the overall rate of CPI inflation continue to come down.

>>Tim Quinlan:
Okay. So for the sake of our reader who sees these empty spaces in the grocery store and the context of all this stuff about services, inflation, what are the implications of all that stuff for the Fed?

>>Jay Bryson:
Yeah, so I mentioned the Fed before, right? You know, the Fed, once it has an inflation target of roughly 2% and it is dead serious about getting back to 2%. We're not at 2% right now. If you look at the overall rate of CPI inflation, it's roughly three and a half percent or so. And so we need to see signs that we're moving back towards 2% on a sustained basis. Now, as I just pointed out, we think we’re, that's happening now, it may be two steps forward and one step back in coming months. But we do think we're going to be trending lower. And once the Fed is confident that we are starting to move back towards 2%, then that raises the likelihood of rate cuts. Now, I should warn our listeners here that we don't think the Fed's going to be cutting rates any time soon. It seems to us that the earliest that would happen would be sometime this fall. It's maybe at the September FOMC meeting. If I'd have to say, you know, which way is the risk skewed to that? I would say maybe later November, even December or rather than September. You know, again, the Fed needs to see evidence that inflation is coming back down to 2% on a sustained basis. We're moving there, but it's not real, real fast. And so until the Fed is confident that inflation's going back to 2%, they're probably going to keep rates on hold. But that wraps up our podcast here for today. I'd like to thank our listener for submitting that question. And please all of you who are listening, please feel free to submit more questions to us. This issue is not going to go away any time soon. We'll keep following it and we'll keep writing about it and speaking about it on coming podcasts. So thank you very much for joining us today.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>>Disclosures:
This report is produced by the Economics Group of Wells Fargo Bank, N.A. (“WFBNA”). This report is not a product of Wells Fargo Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, Wells Fargo Securities, LLC, Wells Fargo & Company, Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Europe S.A., and Wells Fargo Securities Canada, Ltd. Wells Fargo Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of Wells Fargo & Company. © 2024 Wells Fargo Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, 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 (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by Wells Fargo Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

>>Intro:
Welcome to the Wells Fargo, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson:
Hello, this is Jay Bryson, chief economist for the Corporate and Investment Bank at Wells Fargo. And you're listening to our Ask our Economist podcast series. So recently we received a question from a listener about the labor market, recent dynamics in the labor market. So, we thought we would delve into that. And so here to join me today is senior economist Sarah House, who is our labor market expert. So, Sarah, when we talk about what's happening in the labor market, that's a really broad question. So, let's just start in terms of employment. And there's two surveys. The Bureau of Labor Statistics does two surveys every month. One is where they send the survey out to individuals, asking them about the labor market. And then the other survey goes out to businesses, asking them about the amount of payroll. So, level set for us here. Just tell us, you know, what's happened to both of those surveys in recent years.

>>Sarah House:
Overall, we've seen employment by both of those surveys more than recover from the pandemic job losses. So, if you're looking at the payroll survey, we've seen an additional 5.8 million jobs since February 2020, but we haven't seen quite as impressive of a recovery if we're looking at that household measure of people employed. So that's up only about 2.8 million. And really, when you look at the dynamics of employment growth over the past year or so, you are seeing a weaker picture coming out of that household survey. So, by that measure, we've only added about 1.2 million workers versus nearly 3 million jobs, according to the payroll survey. Now, the household survey, it does tend to be more volatile. It's based on only a sample of about 60,000 households, whereas the establishment survey covers work sites that capture about 30% of all employed workers. So, we do put more weight in the payroll numbers, which show that hiring continues on at a pretty brisk clip here. But I think the household numbers are worth keeping an eye on as we are in an environment where the Fed is still trying to tamp down overall activity.

>>Jay Bryson:
So, it's broadening out now a little bit. So, the good thing about the household survey is that's where we get data on labor supply, our labor force and unemployment rates and a few other things. So, focusing on that household survey, can you talk a little bit what's happened to the labor force and labor supply in recent years?

>>Sarah House:
When we look at the overall labor supply and also just the general tightness of the labor market, so we continue to see a labor market that's very tight. So, we saw the unemployment rate fall to about 3.4% early in 2023. So that was about a 50-year low, and it has crept slowly higher. So right now, we're at an unemployment rate of 3.8%. But a big part of that has been because you have seen a rebound in terms of labor supply. So, if you look at just growth in the labor force over the past two years, the labor force has grown close to 2% on average. And so that's the best two year run we've seen since 1980 and 1981. Now, the participation rate is still not back to where it was before COVID, and we don't think it's going to get there just due to the aging profile of the U.S. population. But if you look at within cohorts like prime age workers, so those 25 to 54 where you don't see those numbers heavily influenced by demographics, we've seen participation in that group has actually surpassed its pre-COVID peak. And in fact, when you just look at the sheer share of those 25 to 54 that are employed, it's hovering at its highest since 2001. So overall, still seeing some pretty strong dynamics in terms of both unemployment and certainly the labor supply in recent years.

>>Jay Bryson:
That's good news. I mean, obviously employment is growing. We're creating jobs. I mean, I guess, you know, the question is, or a skeptic could say, yeah, we're creating jobs, but they're not good jobs. They're all part time jobs or they're low paying jobs. You know. So, what do you think about that, that criticism, Sarah.

>>Sarah House:
Over the cycle, I think by and large, these have been disproportionately good jobs. So, we look at this by detailed industries and what the jobs in those industries pay on an average weekly basis. So, factoring in not just the wages and salaries, but just how many hours these workers are getting. And what we've seen is over the cycle that jobs in the highest two paying quintiles have grown about 7% versus just 2% in your two lowest quintiles. And that reflects the fact that we've seen a lot more jobs in professions like professional business, services, finance information over the past couple of years, whereas leisure and hospitality jobs have only recently gotten back to where they were before. COVID and retail jobs are up only 1% or so since February 2020. Now, over the past year or so, it's been a little bit more, even though in terms of job growth, we've actually seen jobs in the very lowest quintile increase the fastest. And that does relate to the fact that we have seen part time jobs grow faster than full time jobs over the past year. So, part time jobs are up about 3.5% versus 1%. But I will note that many of these part time jobs are for people who want to work part time. And we see that in terms of the share of people who would like to work full time but can only find part time work, that's the lowest share of part time employment that we’ve seen basically since the end of the last cycle and around the lows that we saw in the prior cycle. So, it's not all bad, but from an income perspective, it does mean that we are seeing somewhat lower quality of jobs when we think about what the increase in headcount that we see in the non-farm payroll numbers can really pack in terms of a punch for income and spending growth.

>>Jay Bryson:
Okay, great. So, let's drill down a little bit more on that. You talked about, you know, the labor supply being a labor force being up 2%. So, you know, there's a number of ways that that can happen, right? One would be we'll just call it natural demographics, right? You know, the population grows over time and kids graduate from high school and they move into the labor force. You know, another one and you touched on this would be labor force participation. So you could have the same number of people out in the population often. But not everyone's working for different reasons. But, you know, if they start to participate more, that's another way to get it. And then there's the immigration sort of thing. People coming into the country either legally or illegally, who can also join the labor force. So can you tell us a little bit more about, you know, these different three channels there? How much have they contributed to the, you know, the labor supply increasing in recent years?

>>Sarah House:
Yes. When I think about growth in the labor force, I like to break it up into the bucket of population growth. So essentially growth in the pool of potential workers and then participation. So maybe just starting with growth in the population. So, if you look at the civilian, non-institutionalized populations, working age over 16 and so this is really that pool of potential labor that employers have. It's up about 3% since 2019, but it hasn't been a through line in terms of how quickly we've gotten there. So, we saw population growth up about only just half a percent per year in 2020 and 2021, as we did see mortality rise with the pandemic. But we've seen civilian age population pick up over the past two years growing about 1% each year. And a big part of that has been growth in the foreign-born population. So, in other words, immigration. So, if you look at the BLS numbers for growth in the foreign-born civilian, non-institutionalized population, that's up about 4% per year on average over the past two years, whereas your native-born population that's 16 and over, that's increased only about half a percent. So, seeing much faster growth in terms of the foreign-born population. Now in terms of the participation rate, so we have seen that that's partially recovered again, held down by just the aging demographics. But if you look across different younger age cohorts, so basically all those under 65, you have seen participation recover. But we've really seen that the outside growth in the foreign-born population has been a big part of that. So foreign born workers, they tend to be younger and therefore they have higher rates of labor force participation. And among foreign born workers, we've actually seen the labor force participation rate rise this cycle. So that's providing a lift. But we've also seen participation rates surpass for prior cycle peaks for other demographic groups. If you look at Blacks, for example, or Hispanic women, we've seen participation more than recover in those groups. And then also just highlight that Prime age women, so 25 to 54 participation rates among them are the highest we've seen on record, as that group has really benefited from increased remote work, flexible policies, as well as just secular trends in terms of women getting married later, having children later, which leaves them more time to form attachment with the labor force. It's really a mix of factors that's contributed to the upward trend in participation that we've seen.

>>Jay Bryson:
So just to sum up, I don't want to necessarily put words in your mouth, so correct me if I'm wrong here, but it sounds like a lot of the increase in the labor supply in recent years has been due to immigration and also higher rates of participation among minorities and women. And so, looking forward, do you think those trends will continue? Will minorities and immigration and women be a big driver in terms of the labor supply in coming years?

>>Sarah House:
Well, I think we'll certainly be important factors for where labor force growth goes from here. So, if you look at just the natural increase in the U.S. population projection, so those are pretty underwhelming. So, for example, you have the CBO projecting that the natural rate of population growth essentially births minus deaths. That's only going to grow about half the pace over the next decade that we're currently at. And when you think about what those dynamic means for the labor force, so we really saw fertility rates begin to plummet in 2007. So that means we're right at those years where you're starting to see those smaller inflows into the labor force from our native population. But you're also at a time when your youngest baby boomers are only about age 60. So, you're still in a period where you're likely to see pretty large outflows at the same time. So that's going to keep immigration a key swing factor, especially in terms of what happens with the labor supply in the short term. So, we saw the CBO recently revised up its labor force projections over the next couple of years and even just between now and 2026, they're expecting the labor force to be almost 5 million workers larger than what they're projecting a year or so ago. With most of that increase, they say, due to recent immigration trends. So that's certainly going to be important factors to keep an eye on. And then also whether we see the ongoing secular rise in participation among other groups like women and other racial and ethnic minorities. So, Jay, maybe I can turn this back to you. So why do these labor force dynamics matter for the broader macro outlook?

>>Jay Bryson:
Yeah, it's a good question, right? I mean, why do we care? Is this just like an academic exercise or does it have real consequences? And the answer is it has real consequences. I mean, when you look at what's called the potential growth rate of an economy, so that's the growth that the economy can grow at a long run, sustained sort of pace without either generating inflation or deflation. There's really two factors there. One would be the growth of the labor force. So, the more workers you have, the more goods and services you can make everything else equal. And then the other thing is productivity growth. You have the same number of workers, but each worker can make more goods and services. So, what we focused on here in this podcast is growth in the labor supply. And so, if the labor supply is growing faster than what we saw before and if it continues to grow faster, then what that means is the US economy can grow at a faster pace over a long period of time without generating inflation or necessarily deflation as well. And that has some real-world consequences right. You know, an economy that grows 2% versus an economy that grows 3%. I mean, just because of the power of compounding, that turns out to be big differences over a period of, you know, just even a few years. And so, you know, if the US economy continues to grow at a relatively fast pace, then we all can have more goods and services. It gives the ability of the US to project geopolitical, economic, military, whatever you want to say, power as well. And so, these, you know, labor force dynamics do have a very important role in terms of long run economic growth. So, thanks Sarah for joining us today. So, to go through some of this, thank you to our listener who submitted that question. And just by the way, we are working on a series of reports I talked about potential GDP growth, potential economic growth. We're working on a series of reports that we hope to publish in coming weeks about the outlook for potential economic growth here in the United States. So, keep your eyes open for those reports as we publish those. And again, thank you for listening today and thank you for your questions. Please keep them coming in and thank you very much again for joining us today.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>>Disclosures:
This report is produced by the Economics Group of Wells Fargo Bank, N.A. (“WFBNA”). This report is not a product of Wells Fargo Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, Wells Fargo Securities, LLC, Wells Fargo & Company, Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Europe S.A., and Wells Fargo Securities Canada, Ltd. Wells Fargo Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of Wells Fargo & Company. © 2024 Wells Fargo Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, 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 (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by Wells Fargo Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

>>  Intro:
Welcome to the Wells Fargo, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson:
Hello, this is Jay Bryson, chief economist at the Corporate Investment Bank of Wells Fargo. And you're listening to our Ask Our Economists podcast series. So earlier this year, the first podcast of the season, we recorded a podcast on the upcoming election in November and its implications for fiscal policy. But there's also other implications for other sorts of policies, specifically for trade policy. And so recently two of our economists, Shannon Grein and Nicole Cervi wrote a paper on its effects on trade policy. So we're here today with the podcast to talk about that paper and some of the findings. So, Shannon, let me start with you. Why don't you kind of level set, you know, back in 2018, 2019, the U.S. had a bit of a trade war with China. You know, we're four years out from that, four or five years out from that now. What's the status of U.S. trade policy right now? And has anything changed since those years?

>>Shannon Grein:
Sure, Jay. So there actually hasn't been much change to trade policy in recent years. The last major trade war overhaul actually came with that phase one trade agreement between the U.S. and China that was enacted in December of 2019. And since then, there hasn't been any new tariffs enacted, but there has been slight changes to existing policy. So since the Biden administration took office, for instance, they've made minor tweaks to policy like excluding some European allies from specific tariffs or importing quotas that have to be matched for it for a tariff to be enacted. But overall, the tariff policy that was enacted under the Trump administration largely remains in place today. And when we think of total U.S. tariff revenue, it only represents about 2.2% of total import value today. So in general, tariffs remain low, but they're still higher than they were prior to the trade war in 2018, when revenue represented less than 1.5% of import value. Now when we think of China, which has obviously the largest exposure still to tariffs. That tariff revenue as a share of import value is closer to 9%. So it's still a sizable share of U.S. imports that are exposed to tariffs today.

>>Jay Bryson:
Wow. So, I mean, that's like, you know, 4X you know, the tariffs that we have on China is kind of like four times what it is on our other trading partners. So you would think that that might move around trade flows just because Chinese imports now are much more expensive. So, you know. So, Nicole, have we seen any effects on on terms of import allocation?

>>Nicole Cervi:
Yeah. So we saw some evidence of substitution actually pretty soon after the trade policies took effect in 2018 and 2019. So if you're looking before the pandemic struck, we actually saw the US imports of Chinese goods were declining while over that same period, imports from the European Union and other countries in Asia were picking up. But then, of course, you had the pandemic, which kind of threw a wrench in that whole process. Imports slowed to a crawl, but after the initial lockdown period kind of faded in the United States, we saw U.S. consumer demand really ramp up, which led to an aggressive drawdown in inventories and left many domestic businesses with little flexibility to kind of pivot away from their tariff impacted suppliers if they hadn't done so already. So if you're looking at U.S. trade flows with China between 2021 and 2022, we actually saw U.S. imports of Chinese merchandise goods gradually ramp up over that period. So now more recently, bring you closer to today, we've actually seen that U.S. imports from China have retrenched. And so if we're looking at the end of 2023 relative to the end of 2019, U.S. imports from China on a value basis actually ended 2023, down 3% relative to 2019, compared to above 50% growth in countries such as Singapore, Taiwan and Vietnam.

>>Jay Bryson:
So just to make sure I understand you correctly then, it seems like those tariffs have had a pretty dramatic effect on this kind of trade reallocation, right? 

>>Nicole Cervi:
Yes. 

>>Jay Bryson:
Ok, good. So, you know, big reallocation in terms of trade flows. Shannon, what about economic impacts of that? You know, is there anything that we can see from the economy that's being affected by this reallocation of trade flows?

>>Shannon Grein:
Yeah. So now that we're over five years out from the initial round of tariffs, as you mentioned on the onset, Jay, we're able to parse out some of those economic effects. But as Nicole just hinted at, it's sometimes difficult to disentangle these effects from the pandemic that we just experienced in recent years. So when we sit back and think of just the tariff period, the initial tariff period, we did see some increased domestic costs. So there was little evidence of Chinese exporters, for example, lowering their prices to spur demand for U.S. imports, which led to what we can call a complete pass through rate of the tariff. So that translated to higher costs for U.S. businesses and consumers who didn't diversify away from Chinese tariffed products. That said, the overall hit to consumer prices was relatively contained. Given that most of the tariffs do target intermediate inputs and capital equipment. So the consumer impact wasn't as large, especially in comparison to that recent bout of inflation we've experienced obviously, due to the pandemic and the supply chain issues that we experienced then. But the federal government's overarching objective when enacting tariffs tends to be to protect domestic industries from foreign competition and support or spur domestic production. And there was some instance of production increases. So the US International Trade Commission, for example, estimated that the steel tariffs increased domestic production of steel and aluminum in 2021, but it also increased the selling price, which led to negative effects for industries who use steel as a key input in their production. So at the end of the day, I think broad manufacturing production has been essentially flat since the onset of the trade war, and we've seen the U.S. importing more goods from countries outside of China. So I think overall it really suggests one of the largest effects has been a shift in global supply chains rather than a large on-shoring of operations.

>>Jay Bryson:
Okay. So not huge effects economically so far, it sounds like. But, Nicole, is that going to be the same for the 2024 elections? Anything, do you think may differ this time around?

>>Nicole Cervi:
Yes. So in this upcoming election cycle, we ultimately expect more pronounced changes to trade policy should the Republicans secure the White House instead of the Democrats. So if former President Trump is reelected, we could see a significant re-escalation in the trade war. He's recently stated that he's in favor of a 10% baseline tariff on all US imports, for example, and increasing current tariffs on Chinese imports to 60% or higher. Although no formal proposals have been released by his administration quite yet. But if we do take these as fact and consider that these policies are enacted to the proposed degree, it would be a significant escalation in existing trade policy that we would suspect further increased cost pressures facing U.S. importers. That said, if you're looking at corporate profit margins at the moment, they're pretty elevated relative to the 2010s, so your past business cycle, especially among manufacturers and wholesalers. So this suggests that suppliers do have some room to absorb additional tariff costs, especially if those tariffs are enacted on industrial inputs and capital equipment, like Shannon said previously, which the previous rounds were. But on the other hand, if you're looking at retailers, they comparatively have thinner profit margins, which leaves that sector a little bit less nimble in a rising cost environment. So if new tariffs are enacted, let's say they're targeting finished goods, we suspect that the pass through to consumer prices will be greater then. And then, so that's kind of our expectation for if the Republicans secure the White House. Now, if President Biden were to be reelected, we’d essentially expect trade policy to stay the course. We don't look for much change.

>>Shannon Grein:
Yeah, I’d agree with that, Nicole. I think if a Biden administration is reelected, they may revisit tariffs enacted on key US allies such as the European Union or the United Kingdom. But it's unlikely to in part as much of an escalation in trade policy as a Republican administration would, in our view. But I think, you know, maintaining that status quo is notable in itself because the continuation of trade policy enacted under the Trump administration suggests both presidents have somewhat of a similar objective for the country's trade relations with China, which just makes this, I think, a key topic headed into the election.

>>Jay Bryson:
Thanks for the recap and just FYI for listeners out there. The report that this podcast is based on is on our website www.wellsfargo.com/economics. It's up there if you want to read further about our thoughts here and in general we'll continue with this podcast series. Thank you for the questions that you're submitting. Please keep submitting those. And as things evolve, as we get closer to the election, we will continue to produce more podcasts on topical sort of issues. So again, thank you for joining us today.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>>Disclosures:
This report is produced by the Economics Group of Wells Fargo Bank, N.A. (“WFBNA”). This report is not a product of Wells Fargo Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, Wells Fargo Securities, LLC, Wells Fargo & Company, Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Europe S.A., and Wells Fargo Securities Canada, Ltd. Wells Fargo Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of Wells Fargo & Company. © 2024 Wells Fargo Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, 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 (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by Wells Fargo Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

>>  Intro:
Welcome to the Wells Fargo, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson:
Hello, this is Jay Bryson, Chief Economist of the Corporate and Investment Bank at Wells Fargo. And you're listening to season two of Ask Our Economists Podcast series. Today, I'm joined by senior economist Charlie Dougherty to talk about the outlook for the housing market. So, Charlie, over the last few years, the run up in mortgage rates has really done quite a number on the housing market. And just to kind of level set here, you know, if you go back to the end of 2021, the interest rate on the 30 year fixed rate mortgage, which is kind of the benchmark, was down around 3%. Late last year, we made a run at almost 8%, which would be the highest in probably 30 some years there. That said, you know, it's it's kind of retreated recently. We're just a tad below 7% on the 30 year fixed rate mortgage. So could you talk a little bit about what's going on there in terms of interest rates coming down?

>>Charlie Dougherty:
Yeah, you know, mortgage rates have dropped a bit over the past few months. You mentioned, you know, we're down from almost 8% currently, a little bit below seven. But I think what's interesting is, you know, why are mortgage rates down? And what I think it all boils down to is that really inflation is subsiding. So the big reason why interest rates really across the board shot up over the past several years is that the Fed, the Federal Reserve, has tightened monetary policy and raised the federal funds target rate pretty aggressively in response to inflation, picking up significantly. So as you may recall, at one point, the CPI or the Consumer Price Index was up over 9% on a year to year basis. Now, we're looking a lot better in terms of the trend there. And the CPI is running closer to 3%. So still on the hot side of what I think the Fed would prefer, but substantially improved. And the point here is that now that price pressures have eased, the Fed can begin to think about cutting interest rates. Now, they don't directly control mortgage rates, but if the Fed does begin to lower rates this summer, as we currently anticipate, then mortgage rates should follow that same general trajectory downward. And so as the FOMC makes monetary policy less restrictive, and then we can expect a gradual decline in mortgage rates over the next few years. So right now, we have penciled in mortgage rates closer to 6% at the end of 2024, and then the high 5% range at the end of 2025.

>>Jay Bryson:
Okay, good. So it sounds like rates are coming down, although not back to where they were post-pandemic down around 3%. But still, rates coming down is certainly good. So I would think that that would be, quote, good for the housing market. So talk a little bit about our expectations for the housing market and we'll get to home prices in just a minute. But what does it mean for like transaction volumes or housing starts, things of that nature in terms of the housing market?

>>Charlie Dougherty:
Yes. So, you know, generally speaking, I think lower mortgage rates should help slightly improve affordability for buyers and that should promote a slightly stronger pace of housing activity, especially compared to what we've seen recently. Now, keep in mind, you know, the pace of existing home sales, for example, has contracted pretty sharply over the past two years and it’s still running at a pretty slow pace. In fact, the 4 million or so unit pace that we've been averaging over the past six months is the slowest since 2010. And remember, that was in the aftermath of the housing bust and the Great Recession. But if mortgage rates do continue to fall, I think that will certainly help pull more buyers off the sidelines and allow sales to gradually improve a little bit. You know, one thing, if you look at mortgage demand over the past few months, mortgage purchase applications have risen from those really low levels that we saw throughout last year. And that tells me that demand is already starting to pick up a little bit. That being said, I think a full rebound doesn't seem all too likely at this point. You know, just given that affordability conditions are likely to remain as a significant hurdle for most homebuyers. So, of course, mortgage rates are just one factor in that affordability equation. So you look at home prices, home prices have risen at a much faster rate than household incomes over the past years. And just to kind of put some numbers behind that on a cumulative basis, home prices have risen by about 45%, while household income has increased by less than 20%. So mortgage rates, you know, moving lower may help, but unless there's a significant correction in home prices or maybe a substantial rise in income, then affordability is not likely to meaningfully improve and home sales very likely remain sluggish. Now, this is especially an issue for younger age cohorts, most notably the millennial generation who are coming down the pike and buying homes. So the sheer number of these individuals rival the baby boom generation and they're getting married. They’re having kids. Now, in one sense, the millennials represent a pretty strong source of underlying demand and should continue to be a support factor over the next few years. The problem is this demographic wave is crashing into a highly unaffordable housing market. Now, one sort of encouraging development has been on the supply front. So if you look at for sale, inventories, still pretty low, but they are starting to increase. Part of the slowdown in demand, I think, is helping inventories rise a little bit. But there is some sign that more owners are listing their homes for sale. So remember, one effect of the higher mortgage rate environment is that kind of remove the incentive to sell your home because who wants to give up that low monthly mortgage payment? But eventually, I think what's kind of happening now is that, you know, life is in a sense happening. And, you know, economic factors aside, you know, life events, whether it's births, deaths, retirements, marriage, some of the things that got disrupted by the pandemic perhaps. But these are happening and sort of contributing to more folks listing their homes for sale. And that's why you're seeing an increase in supply.

>>Jay Bryson:
Thanks for that. You know, in your answer. You touched on it a few times, didn't really deal with it to directly and that is home prices. Right. You did mention it's one part of the equation of affordability, the other being the mortgage rates. Can you talk a little bit about what our expectation is for home prices going forward? I mean, are we going to see a retreat at all in home prices? Are they going to remain elevated? Are they going to shoot higher from here? I mean, what's your expectation there, Charlie?

>>Charlie Dougherty:
You know, home prices still look like they're rising. So if you looked at the median existing sale price during January, for example, it is up about 5% on a year to year basis. So that trend of rising prices should continue, you know, from a supply and demand perspective. Again, demand is still running pretty slow, but you're likely to see a gradual improvement as mortgage rates tick down over the next few years. And you have that strong underlying source of demand from the millennials. Overall, I think the value proposition of single family homes has changed post-pandemic and that, you know, I think people who work from home might be willing to spend a little bit more money on a larger residence. So I think those demand factors are likely to push up on prices. And in terms of supply, you know, as I mentioned, supply is starting to rise as more inventory comes to market. And I think that puts some downward pressure on prices. But absent a significant rise in the unemployment rate, which would presumably bring about a wave of forced sales, I don't really foresee a huge increase in supply. Besides, now it's pretty easy to become a landlord and rent out your home instead of selling. So sellers increasingly have that as an option. Then there's that lock in effect, which likely stays mostly in place, since rates again are not likely to drop enough, whereas it would really unleash supply in a meaningful way. So at the end of the day, I think demand still outpaces supply and that allows home prices to continue to rise at a modest pace. Now, of course, real estate is all local, so there may be some regions which see faster home price appreciation and some that see weaker. For example, the largest inventory additions that we're seeing right now are happening in the south and the west regions. Generally speaking, I think that mostly reflects sort of low base effect of supply coming off of really low levels. That's also indicating that some regions are slowing down in terms of their economies, which is something to keep in mind. But overall, nationally, home prices should continue to rise so long as the economy continues to expand. So, Jay, that brings us to another question. One thing that we didn't really cover is our expectation for the macro economy and the outlook for the labor market and income growth, which are really important factors that drive the housing market. So what do we think about economic growth over the next few years?

>>Jay Bryson:
Yes. So, you know, right now, the economy as we speak here in March of 2024, the economy is actually holding up pretty well. Right now, we're growing somewhere in terms of real GDP at, you know, roughly 3% or something like that. That's a pretty decent sort of growth number. I mean, many folks would think that don't really think in terms of GDP, they think, more in terms of the unemployment rate. The unemployment rate right now is less than 4%. Generally, the economy is pretty good and we think that's probably going to likely continue. Now, we do think things are going to downshift a little bit. We've talked about interest rates. Interest rates remain elevated. The Fed's probably done at this point raising rates, but they're probably not going to be cutting, you know, in the next month or two either. And when they do, it's probably going to be relatively slowly. And so we think that that continues to add some headwinds on growth in general, we think we're going to downshift to probably something under 2% in terms of real GDP growth in coming quarters. But we're not looking for a recession at this point. It certainly doesn't seem like businesses want to get rid of people at this point. You know, if you look at initial jobless claims, people who are filing for unemployment insurance, for the first time, those claims, we get that data on a weekly basis. They remain low, trendless, at a very, very low level. We talked to most businesses still, they would say that getting good qualified people is one of the most challenging things that they face and they don't want to get rid of people right now. And so in general, you know, we think the labor market's going to continue to hold in there. That leads to halfway decent growth in terms of real income. And so, you know, that's something that would help homebuyers continue as we go forward. And so that should be one thing that would probably keep demand pretty high. So, Charlie, back to you. Just to sum everything up briefly, kind of give us your view on the housing market here in 2024 and going into 2025?

>>Charlie Dougherty:
Yes. So I think lower mortgage rates really should help bring some improvement to the housing market over the next few years. I think, you know, affordability is going to remain as a major constraint. So I don't foresee a really forceful recovery in terms of home sales and things like that. But overall, it looks like 2024 is setting up to be a year of modest improvement for the residential sector.

>>Jay Bryson:
Well, thanks, Charlie, and thank you all for listening to this Ask Our Economists podcast series. Thank you for your questions. Please keep them coming in and we'll be back with more episodes in our series here. Again, thank you very much for joining us today.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>>Disclosures:
This report is produced by the Economics Group of Wells Fargo Bank, N.A. (“WFBNA”). This report is not a product of Wells Fargo Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, Wells Fargo Securities, LLC, Wells Fargo & Company, Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Europe S.A., and Wells Fargo Securities Canada, Ltd. Wells Fargo Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of Wells Fargo & Company. © 2024 Wells Fargo Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, 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 (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by Wells Fargo Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

>>  Intro:
Welcome to the Wells Fargo, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Sarah House:
Hello, I'm Sarah House senior economist with Wells Fargo's Corporate and Investment Bank. You're listening to Ask Our Economists Podcast Series. In recent years to commemorate Women's History Month. We have looked at some of the ways women are stacking up in the US economy. We've looked at the role of childcare and how that's hampering women's labor force participation. Last year we took a look at single women, how they’re a growing segment of the US population and labor force. This year we looked at growing elder care needs and how that’s shaping the US economy and how that need is likely to be disproportionally met by women. Today I'm joined by two of my colleagues, Shannon Grein and Nicole Cervi to discuss the findings of our analysis. Shannon, let's start with you. You start by level setting in terms of the growing need for elder care in the United States?

>> Shannon Grein:
Sure. Thanks, Sarah. So most people, I think are awake to this idea that the US population is getting older, but I think to your point, you know, walking through some of these stats, is probably helpful to level set the conversation. So about 22% of the population today is aged 65 and older and this group is set to reach a quarter of the total US population by 2032. The oldest group of Americans, those age 75 or older, are driving most of the gain in population growth rate, so they're accounting for more than half of the total population being over the next decade. Now, by our estimates this should translate to about 1.7 million more seniors needing elder care in the next decade, which all told is probably more of a conservative estimate. It’s just as the oldest Americans get older and more people generally may require care, but this aging demographic is generally going to shape the economy in many ways, but specifically it'll have large implications for the labor market. So in a direct sense the aging population poses a challenge through diminished labor supply. In other words, there will simply be less people of traditional working age. But there's also an under appreciated indirect challenge here. So as the population ages, unpaid elder care responsibilities rise. I think that could drive working age Americans out of the workforce generally, particularly women. So in other words, the aging of the population and larger need for elder care generally will act as a hurdle for people to participate in the labor market. 

>>Sarah House:
Now, Nicole, a lot of the elder care need is traditionally met by informal or unpaid care, which Shannon just alluded to. About 37 million Americans provided unpaid care last year. Can you walk us through how this is disproportionately shouldered by women and potentially why that's the case?

>> Nicole Cervi:
Yeah, so you're right, Sarah. 59% of all unpaid caregivers were women in 2022. And when we dig deeper, we can see that older women or those ages 55 and older are a major resource of this group. They account for 30% of all informal or unpaid caregivers. If we look into the degree of care provided so in terms of the intensity, there really isn't a discernible difference in the number of hours that men and women dedicate to unpaid elder care. But since women are more likely to be caregivers in the first place, they account for the bulk of the caregiving burden in terms of unpaid hours. And so this, of course, is a challenge for labor force participation generally, because balancing caregiving responsibilities, any type of caregiving responsibilities, whether it be child care or elder care, is difficult when balancing that with employment. And so these family obligations have been found to drive women in particular out of the labor force or into part time work more than men. And so in terms of the elder care case, some of this is partially due to the fact that care needs can arise suddenly, especially when a family member falls ill unexpectedly. And so when we're thinking about these cases, it can make more financial sense for women to step back to care for elderly parents or relatives than men because of the persistent gender pay gap. As we know, the pay gap between full time working men and women has been stuck around 83%. And so since older women account for an outsized share of unpaid elder care providers, these care responsibilities is a prominent factor in their lower labor force participation. So to put some numbers around that, in 2023, 1.9 million women aged 55 and older were not in the labor force due to family obligations. So that is actually seven times the number of men in the comparable group. So not only does this labor force exit dent women's financial well-being, but it also exasperates some of the labor force challenges that we've had in terms of businesses who are struggling to find workers. And if we lowered the number of older women who are out of the labor force due to these family obligations to match that of men in the same situation, it would actually lift the labor force participation rate by 0.6 percentage points. So that's a pretty sizable group that are out of the labor force on the sidelines due to these unpaid elder care responsibilities.

>>Sarah House:
The aging of the population will also likely come with increased need for paid elder care, though which actually relies on women even more than unpaid care. Shannon, can you tell us more about the landscape for paid care. 

>>Shannon Grein:
Sure. So there's likely actually some opportunities here particularly for women. And as you say, Sarah, paid elder care relies even more on women than unpaid care. So about 82% of home health and personal care aides, for example, are women today. And giving the aging of the US population. This occupation is set to increase dramatically over the next decade. So out of more than 800 occupations, the U.S. Department of Labor projects personal care aides to add the most jobs over the next decade, which will result in home health and personal care aides becoming the most widely held occupation in the U.S. by 2032. So notably, this will come at a time when traditionally female dominated jobs are projected to decline due to automation such as financial clerks, secretaries, assistants. So this will provide a necessary offset and support women's employment prospects generally. But these jobs are traditionally lower pay, right? Despite seeing above average pay growth in recent years, which exacerbates that persistent wage gap that Nicole just referenced. And paid care work also disproportionately relies on women ages 55 and older who recall themselves in the midst of their own, you know, tug of war between unpaid carers possibilities and paid employment. So if we think about, you know, some numbers around that specifically, while women ages 55 and older account for nearly 11% of the total labor force, they represent 27% of workers in health care support occupations, which is compared to just 3% of men the same age. So while demand for elder care may translate to increased employment opportunities, it also somewhat dents women's financial position in that the relatively low pay of these growing occupations may exacerbate those financial challenges that we've referenced. 

>>Sarah House:
Thank you both for your insights. I'll add that ultimately growing elder care needs will be felt by all of us as it reshapes our economy, even as these are likely to be disproportionately met by women. For women, this is another challenge or hurdle in their financial well-being. We’ve seen care responsibilities at both end of the age spectrum. So child care and elder care. It can strong arm women into career breaks or entering lower paying positions that offer flexibility in the first place, while also leading to labor market exits that can lower lifetime earnings. So these are one of the many factors that contribute to the pay gap and weighs on the retirement finances and eventually for a lot of women their Social Security payments. So ultimately, we're dealing with, I think, somewhat of a unvirtuous circle here where you have these lower earnings tend to lead women to take on more of the caregiving responsibilities. But that can in turn weigh on their earnings and they need to take breaks, or are put in jobs that need more flexibility, making it harder to save and build wealth and overall prepare for retirement. But the sheer numbers of family impacted by growing elder care needs means that the care crunch will be felt whether through the need to find and afford paid care or juggle employment with unpaid responsibilities. And this is coming at a time when the traditional working age population growth is already set to slow. So the BLS projects that workers ages 16 to 64 will grow just about a quarter of a percent over the next decade versus about 1% in the early 2000s. So employers are facing a picture of anemic labor force growth at a time of these growing care responsibilities, which we think will likely lead to employers needing to provide more flexibility in what could be a structurally tighter labor market. Well, Nicole and Shannon, thank you so much for joining me and discussing this recent research. And thanks to all of our listeners for joining this episode of Ask Our Economists.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>>Disclosures:
This report is produced by the Economics Group of Wells Fargo Bank, N.A. (“WFBNA”). This report is not a product of Wells Fargo Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, Wells Fargo Securities, LLC, Wells Fargo & Company, Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Europe S.A., and Wells Fargo Securities Canada, Ltd. Wells Fargo Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of Wells Fargo & Company. © 2024 Wells Fargo Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, 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 (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by Wells Fargo Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

>>  Intro:
Welcome to the Wells Fargo, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson:
Hello, this is Jay Bryson, chief economist of the Corporate and Investment Bank at Wells Fargo. And you're listening to the second season of Ask Our Economists podcast. Today, I'm joined by senior economist Michael Pugliese. So, Mike, it's 2024 now. Welcome to 2024, and it's an election year. And so we're going to talk a little bit about the elections and its potential effects on the economy, etc.. And so so Mike, let me start out by asking, you know, knowing what you know right now and obviously the election is still months ahead of us, but knowing about what you know right now, what do you make out about the outlook for not only the presidential election but the congressional elections as well? 

>>Mike Pugliese:
Yeah, well, that's exactly right Jay. It's not just an election year, but a presidential election year. So, you know, of course, the natural place to start is control of the White House. So you have an incumbent President, Joe Biden, who's running for reelection and then the Republicans are going through the primary and caucus process right now. So far, we're only through one Iowa, but the frontrunner certainly seems to be Donald Trump, the president before Joe Biden and and this in and of itself is a little bit unusual. You know, it's been a very long time. And there's only been a couple of instances of two main candidates for president, both having either, you know, being the existing president or or a former one. Normally you have an incumbent against a challenger or you have two newcomers. In this case, we've got Joe Biden and likely Donald Trump, both of whom have been president at some point before. And like you said, Jay it’s still many months out and we’ve got a long time to kind of analyze what the race will be there. But so far, I think, you know, fair to say that there's not one clear frontrunner on that front. And that leaves us with. What about the outlook for Congress? On the House of Representatives side, Republicans control that right now, but with a very small majority of just a few seats. And I think in all likelihood, that's going to blow whichever way the president goes. So if Democrats hold on to the White House, I think that conditional on that, they should probably be favorites in the House and vice versa. If Republicans take back the White House, I think they should probably be treated as favorites in the House of Representatives with all 435 seats in the House up every two years. The Senate's a little bit different. You only get one third of the Senate in any one given race. It's six year terms in the Senate, so they rotate every two years, one third each. And the Senate map in this particular election is a little more favorable to the Republicans. So the current makeup of the Senate is 51 Democrats or Independents who caucus with the Democrats and 49 Republicans. So once again, a very small majority there for the Democrats. But there are a lot more pickup opportunities for the Republicans. So there's a retiring Democratic senator, Joe Manchin, in West Virginia, a prime spot for Republicans to pick up a seat. There are incumbents facing challenging reelection cycles in Montana, Ohio, Arizona, Michigan, Nevada, many seats there where Democrats are going to have to play defense. Whereas on the Republican side, you've got Texas, Florida, you know, some states that traditionally lean red, you know, by most political analysts forecasts, but are, I think, going to be a little bit of tougher pickups for Democrats. And again, the math here is just a little challenging because it's not like Republicans need eight seats to take a majority if they can capture just two on a net basis and they could be in a position to take a majority in the Senate. So, again, a long way away, still still going through the primary caucus process for many of these seats and for the White House itself. But when you look at most political forecasters and betting markets, I think it's a little more of a coin flip for the White House and the House, whereas Republicans at this stage are, I think, clearly favored to retake the Senate.

>>Jay Bryson:
Okay. Well, thanks for that. And so let's move on then to we talked about kind of presidents there in Congress, let’s talk about Congress in terms of legislation. I think there's a common perception that during election years, nothing gets done. Is that going to be true in 2024? Are we looking at nothing getting done this year or could potentially some big pieces of legislation get moved?

>>Mike Pugliese:
I think there could be a little bit here and there, but but probably not big legislation. And by big, I think for our purposes, the way I define that is are we going to make major changes to our economic forecast and revising growth up or down a lot or making big changes to our Fed call? The two things sort of lingering out there on the horizon right now: one has been this ongoing concern about a government shutdown. There have been a series of short term continuing resolutions that have averted government shutdowns. It's looking like we'll be coming up on another one here in early March. And I think eventually we get a full year budget that looks something like the spending levels that were agreed to in the Fiscal Responsibility Act passed last year. But that's just really not a huge needle mover. That keeps discretionary spending more or less flat relative to 2023. So you know really not getting a big fiscal tailwind there, but neither are we talking about big draconian cuts on that front. So the shutdown, the lingering out there is a risk, but I think we'll avoid one. And when we do get a full year budget, I wouldn't expect any big changes to our economic forecast. And then the second thing was there was recently announced a bipartisan agreement to make some tax changes between a lead member of the Republican side in the House and a Democratic senator in the Senate on the tax writing committees. And what they're talking about doing is expanding the child tax credit a little bit and revising and extending some expired business tax credits related to investment in R&D and those kinds of things. And it's about an $80 billion package over a two year period. So call it about $40 billion a year. But in the grand scheme of the $28 trillion economy, that's really only about 0.1 percent of GDP. And furthermore, the proposal is is offset in part due to scaling back a COVID era tax credit that's still being utilized. So kind of net net, even if it does become law, which it's not clear at all, it will be there's still some uncertainty there. But even if it does become law, that sort of bipartisan tax proposal, I, I don't envision us making really big changes to our 2024 forecast for the Fed or economic growth or inflation or anything along those lines. Now, maybe taking a step back, Jay, from those specific areas of the shutdown and the tax legislation. Like I said, I really think beyond that, we're probably not going to see big fiscal policy changes this year. What about just the effects of an election on an economy more broadly when thinking about the uncertainty effects? And, you know, I've gotten some questions about will businesses delay hiring or investment plans to the other side of the election? How do you think about that sort of linkage between election years and the economy? 

>>Jay Bryson:
That's a good question, Mike. And, you know, you do often hear, again, I'll call it a common perception that things could weaken in an election year. Right. You know, you could have businesses who decide to hold off on investment spending just for the uncertainty to clear maybe consumers hold off making a big purchase in terms of cars or whatever. Again, because of some uncertainty and we've looked at this before. We've gone back and we've looked at every presidential election year since 1948 and in those 18 presidential elections and I must note we didn't include 2020 in this analysis just because 2020 that was the pandemic year, and it was just so distorted by that. But, you know, if you look at all the other elections between 1948 and 2016, quite frankly, we just can't detect any signs that an election year is different than in non-election years. If anything, it appears in at least those 18 instances that growth actually strengthens a little bit during an election year. Now, I wouldn't put a lot of weight on that. Again, we're only looking at 18 here. That's a relatively small sort of sample. But I think the bigger thing is two things. One would be that businesses and consumers are going to go about doing what they need to do. Yes, maybe they're watching the election out of the corner dry, but for many folks, it doesn't really become a reality for them until like September or so when they really start to focus on it. So they'll continue to do kind of what they need to do. The other thing is there's so many other things that go on. Obviously, it's election year, but there's so many other things that are going on right now, whether it's geopolitical uncertainty, whether it's the Fed, you know, yada, yada, yada, and all these sorts of things in any election year can move the needle much more than any sort of uncertainty as it relates to the election year. So, you know, again, when we think about 2024, we're not making our forecast based on what we think may or may not happen in terms of the election. We're looking at the general macroeconomic backdrop, making forecast, you know, kind of based on that. But Mike, once we get past 2024, I mean, obviously we’ll have another president, whether Mr. Biden gets reelected or Mr. Trump is elected or maybe something completely, you know, none of us know about right now have a new Congress in there. There are some things that need to be done next year. So can you talk a little bit about what needs to be done in terms of legislation in 2025? 

>>Mike Pugliese:
Yeah. So on the other side of the presidential election, there's going to be quite a lot going on on the economic policy front. So there's a couple of things that are relatively standard for a new president. So the debt ceiling is going to be reinstated at the beginning of the year. The actual hard deadline for action on that is probably closer to mid 2025. Well, we'll dial that in when we get closer, but the debt ceiling is going to come back into the news at the beginning of 2025 of course, there's the annual budget process and the appropriations process that's related to government shutdowns. Again, that's a pretty annual thing that we're all used to. But there is something a little more the new front with fiscal policy, and that's the expiration of the 2017 Tax Cuts and Jobs Act. So if you think back to the beginning of President Trump's presidential term, one of the major pieces of legislation that came out of that was a large tax cut and tax reform bill. And in that bill, there were some big changes to both corporate taxes and individual taxes. And on the corporate side and the business side, most of those changes were made permanent. So reducing the corporate tax rate to 21%, as an example, I know, that was a permanent change. But on the individual tax side, the reduction in rates, changes to the standard deduction, the child tax credits, the SALT cap, many, many things on the individual side, those tax changes were made to sunset. And so they're set to expire at the end of 2025, meaning absent any congressional action, the law will revert back to what it was in 2017, which would be a fairly material tax increase. So it would be about 1%, 1.5% percent of GDP. So again, compare and contrast that to the the legislation that was proposed more recently. We were talking about a few minutes ago that was 0.1% of GDP. So we're talking ten acts, at least in terms of the magnitude or the scale here. So that’ll be a very large expiring piece of legislation that the next president has to deal with and the next Congress will have to deal with, regardless of what the makeup is. And then you add in, it's not just on the tax policy side. There are some other provisions that line up with that as well. So, for example, under the American Rescue plan and the Inflation Reduction Act enacted under President Biden, there were some premium subsidies for individuals purchasing health insurance through the Affordable Care Act. And those subsidies that were made more generous under President Biden are also set to expire at the end of 2025. And extending them or keeping them in some form I’m sure will be a Democratic priority, just like Republicans will be striving to protect and extend the Republican tax plan that was enacted in 2017. So this is going to be a big piece of of discussion point around 2025. We'll certainly be talking about it more when it gets a lot closer, the implications for the economy next year and beyond. And then finally, you also have the Fed. Don't forget about the Fed. So you have Chair Powell, whose term will be up in 2026, vice chair of supervision, Michael Barr's term. That will be up in 2026. So the appointments there and of course, you know, standard appointments to the Treasury and other important economic policy positions will be once again changing as we roll over into the 2025 year under a new president or under a continuation of President Joe Biden. So a lot on the policy front that will have implications for the economy in 2025 and beyond. Once we get a little closer to that point. 

>>Jay Bryson:
Well, thanks, Mike. Thanks for your insights today. And, you know, clearly this story isn't going away. We're still 11 months out from the election. So as our thinking continues to evolve on this I mean, we'll all be writing a lot about this this year. I'm sure we're going to follow up with another podcast or two about the election and the economy. So thank you for joining us today and please keep your questions coming that we can address in this podcast series, Ask our Economist podcast. Thank you very much for joining us today.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>>Disclosures:

This report is produced by the Economics Group of Wells Fargo Bank, N.A. (“WFBNA”). This report is not a product of Wells Fargo Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, Wells Fargo Securities, LLC, Wells Fargo & Company, Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Europe S.A., and Wells Fargo Securities Canada, Ltd. Wells Fargo Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

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>>  Intro:

Welcome to the Wells Fargo, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson:

Hello, I'm Jay Bryson, Chief Economist for the Corporate and Investment Bank at Wells Fargo. And you're listening to the Ask Our Economists podcast series. You know, the fiscal deficit of the U.S. government and the debt of the U.S. government has been in the news a lot lately, due in part to some of the debates that, you know, has occurred in Congress over the last few months. And, you know, let's face it, we're entering an election year. These debates really aren't going to go away any time soon. And we've gotten a lot of questions about the deficit and the debt. And so we thought we'd do a podcast today. And I can't really think of any better person to join me today than a senior economist, Mike Pugliese, who is our our real expert when it comes to fiscal policy matters.

>>Mike Pugliese:

So, Mike, let's start just kind of level set for us. You know, where is the deficit of the U.S. federal government today? Where's the debt? And what's kind of happened to that in the last few years? Thanks, Jay. So I think the easiest place to start is where were we before the pandemic and try to compare and contrast that today. So pre-pandemic, the federal government was running a budget deficit of about 4.5% of GDP. And to give some additional context on that, the long run average. So the average over the previous half century is about 3.5%. So the deficit was a little bigger than it had been historically, but, you know, not enormous by any means. And the national debt was about 80% of of GDP. And then the pandemic struck and a couple of things happened. First, we had a very weak economy in 2020 due to the devastation that was wrought by COVID 19. And then you also had a significant amount of federal aid that was enacted in response to the pandemic, trillions of dollars of different kinds of spending to keep the economy afloat. And so the deficit widened very substantially and the national debt went from, again, about 80% of GDP in 2019, all the way up to 100% or so over the course of just that one year period initially when the pandemic struck.

>>Jay Bryson:

Okay. Thanks for that, Mike. And I think it's interesting, you know, you kept talking about as a percent of GDP and, you know, you do hear a lot of headlines about the debt today is at its highest level ever. Well, anything that kind of grows over time, that's what's going to happen. Just like the US economy today is the biggest it's ever been. So, you know, I think it's important to, you know, to keep those things into perspective. Always have to measure as a percent of something in GDP is the way we we typically measure those sorts of things. So what about the situation today? You know, you talked about the devastation by pandemic on the economy. You know, clearly we're back to full employment now. Unemployment rate below 4% of GDP at an all time high here in the United States. What about the deficit today? Is that is that receded, as is the debt going down? What's what's what's going on there?

>>Mike Pugliese:

Yeah. So as the economy has recovered, you seen a debt situation that has at least so far stopped getting worse. So like I said, the national debt as a share of the economy peaked at about 100% of GDP. And that's about where it is today. It’s at about 95%. So it's come down a little bit, but it's still well above where it was pre-pandemic. And in terms of the deficit, which again, the deficit’s the borrowing you do over a period of time, in this case, the annual budget deficit’s, normally what we're talking about you know over a one year period, that's a little bit wider than it was before the pandemic. So again, it was about 4.5% percent of GDP in 2019. Today, I would say it's between about 6% or 7% of GDP. And the natural question you might ask is, well, what's driving that? Right? Well, on the revenue side, you’ve seen tax receipts that are basically just normalized as a share of the economy compared to where they were pre-pandemic. So about 17% or so of GDP is what the federal government collects in tax revenue. And that's about what it was before the pandemic. And it's whipsawed around quite a bit. It weakened in 2020 when the economy was in bad shape. Then actually strengthened quite a bit in 2022. And the economy was booming and tax receipts on capital gains were up a lot because home prices and stocks and everything else had gone up so much. But, you know, today tax receipts as a share of the economy are basically just back to normal. But on the spending side, it's a little bit higher. So, you know, spending which skyrocketed again in 2020 and 2021, it's it's fallen directionally, but it's still a little bit higher than it was in 2019, not just in dollar terms, but even as a share of the economy. Okay. So that's interesting. It sounds like we've normalized in terms of the revenue side, but we certainly haven't normalized in terms of the spending side. What's driving the spending higher, you know, in the last couple of years. Yes, I would say it’s a few things Jay that's driving that. So first, it's there's some just structural budget pressures that were ongoing before the pandemic and have continued over the past several years. So the aging of the population and the upward pressure that puts on entitlement programs, spending for things like Social Security and Medicare, which is, you know, the health insurance program for the elderly, some of its new policy initiatives. So whether that is the infrastructure bill that was passed a couple of years ago or more spending on veterans, which was an initiative that's occurred under the Biden administration or more defense spending, as we've seen, you know, supplemental spending bills to support Ukraine and other national defense priorities. So some of it's been new policy initiatives. And I think the biggest driver has probably been higher interest costs on the national debt as we went from a very low period of interest rates both before and right after the pandemic to rates that have gone up substantially. What is really not at this point is COVID aid and pandemic aid. I mean, there's still a little bit of lingering stuff there, particularly with some tax credits and stuff like that. But, you know, at this point, the unemployment benefits that were expanded have run their course. The direct checks have gone out. The paycheck protection program is over. And so it's really not COVID aid. It's these other factors like higher rates, an aging population and some new policy initiatives related to infrastructure and defense and other things.

>>Mike Pugliese:

Okay. So you just mentioned interest rates. Obviously, interest rates are very high today, at least relative to the last two decades or so. I don't think anyone's expecting them to go back down any time soon. So what sort of effect will that higher interest rates have on on the deficit and then on the debt? Yeah.

>>Jay Bryson:

So the interest spending is an interesting one, Jay, because pre-pandemic the US federal government was only spending about about 1.5% of GDP on interest costs, and that's actually quite low despite the fact that the national debt was on the higher side compared to historical averages in the 2010s, interest spending was still pretty low compared to the 1980s or the 1990s and some of the preceding decades because interest rates are so low.

>>Mike Pugliese:

You had an economy that was growing about 2% in real terms then at about 2% inflation. So 4% nominal GDP growth. You know, interest rates that were were 2% or even less. And today we're in a much different situation. Interest rates are 4% to 5%, even a little bit above 5% at the very front end of the yield curve. And that's put upward spending on those interest costs. So today, net interest spending by the federal government’s about 2.5% GDP. So it's gone up a full percentage point and still rising. It's continued to trend higher over the course of this year.

>>Jay Bryson:

Okay. So 64, we'll call a $64 trillion question. I mean, do you think that's a major risk to the US economy, at least in the, you know, in the foreseeable future here?

>>Mike Pugliese:

Well, I think in the near term, no. And I think that for a few reasons. So first, I think it's important to remember that, believe it or not, we've been at these debt levels before. Now, you made the point earlier, Jay, you know, all variables in the economy go up over time in dollar terms. This is the biggest economy we've ever had, the biggest debt we've ever had, the biggest a lot of things. But as a share of GDP, the national debt is about 100%. And we've seen those those debt burdens once before, during and then the immediate aftermath of World War Two. So, well, that's high. It's not unprecedented. Similarly, interest spending as a share of the economy at 2.5% or so is up compared to the 2010s and the 2000s. But it's actually below still where it was in the 1980s and the 1990s when rates were significantly higher. So at that time, interest spending as a share of the economy was bouncing around 3% or so. So we're still a little bit below that. And then finally, I think it's important to remember that not all debt is refinanced at once in short term debt and things like Treasury bills, you know, that mature every 90 days or 180 days or so two-year notes. You know, some of that low interest rate debt has probably already been refinanced at higher rates. But but not all of it has. So the the weighted average maturity of the Treasury market, it's about six years, so it takes some time for those higher rates to be fully felt. And we are seeing that. But it's it's not a process that happens instantaneously. So, you know, I don't think that there's any reason to panic here. But I do think there are some causes for concern. I mean, if you compare today to that post-World War Two period, the demographics are a lot more challenging on a, you know, ten or 20 or 30 year horizon. And I also think the long term interest rate outlook is uncertain. There's a lot of debate right now about, you know, will interest rates go back to pre-pandemic levels or will they stay high or maybe even go higher from here? And not just that, but, you know, it depends on if long term rates are higher, if they are indeed higher over the next decade for, you know, good or bad reasons. And I'm kind of using air quotes there. But higher long term rates can be driven by a lot of different factors. Some of them good, some of the bad.

>>Jay Bryson:

Okay. So can you define that? I mean, what the heck do you mean by good reasons? And what are some of the bad reasons?

>>Mike Pugliese:

Yeah. So when I say, you know, good reasons, rates might be higher. So when I think about why interest rates were higher in say, the 1990s or the 2000s than they were in the 2010s, there are a lot of reasons and one reason that rates were higher back then is because the economy grew faster. You know, in economic lingo, the potential growth rate of the economy was higher in, say, the 1990s than it was in the 2010s as we had a more favorable demographics, faster labor force growth, faster productivity growth. And that in turn gave you higher interest rates and I don't necessarily think that would be a bad thing if over the next decade the economy is going to grow a little faster than it did in the 2010s. That should mean all else equal higher rates. But I don't necessarily view that in and of itself as a problem for the national debt. I think we would welcome higher rates alongside faster economic growth. But, you know, if the higher rates are say, you know, predominantly for for bad reasons because much bigger deficits or there's a lot more uncertainty in the world than investors might demand an additional premium for locking up their money for an extended period of time, you know, five, ten, 30 years. It's kind of to once again use some econ lingo, it's term premium for those investors. And so I think it's not just about why are rates higher, but also what's driving it. If it's the faster economic growth, I think that'd be a good thing. If it's uncertainty and more debt, more deficits, I think that would be a concerning reason for higher rates and by extension a concern for the fiscal outlook and the economic outlook. So maybe kind of sticking to that, you know, tail risk downside theme, Jay, you know what are some of the downsides of a a high and rising public debt? Okay.

>>Jay Bryson:

Well, I can think of a few just call it downsides or negatives in terms of a large public debt would be one would be and I think this is one of the minor ones. About a third of Treasury debt is held by foreigners. And so we'd have to pay interest on that. That represents an outflow of resources from the economy to foreigners. You know, some of these could be geopolitical adversaries and maybe that's not a good thing. But but I think probably more important is a larger debts can be you were talking about bad interest rate outcomes. You know, one of those things if we if the Treasury does have to pay higher interest rates to borrow, that then feeds into higher corporate bond spreads everything else equal. Corporate bonds are usually priced off a spread on U.S. Treasuries. So if the U.S. Treasury is paying more for its debt, probably means corporations have to invest and crowd out private investment. That's probably as good as a big downside. And the second thing is it just potentially can constrain policymakers in the future. You think about the you know, with the pandemic when it shut down the economy, we had you know, we had the CARES Act, which kind of got the economy across the valley of the of that first few months when the economy was kind of shut down. If we're constrained in our ability to do that, perhaps policymakers can't respond as quickly. You know, in the future to, you know, some sort of crisis that that comes about. So, you know, speaking about policymakers, I mean, what's what's the outlook here, Mike? Do you think we're going to take any corrective action anytime soon?

>>Mike Pugliese:

Yeah, I think as we get ready to turn the calendar to 2020 for meaningful policy change on the federal fiscal front’s pretty unlikely. You know, yes, Congress is still debating a budget for fiscal year 2024. That's why these government shutdown headlines keep coming into the news what feels like every other month. But I think it's important to bear in mind that those government shutdown headlines are really only about the annual discretionary parts of the budget. So, you know, every year Congress does the 12 appropriation bills that set discretionary spending for national defense and, you know, many other government activities. But that only comprises about 25% of total government spending. The remaining 75% is basically on autopilot. That's Social Security, Medicare, Medicaid and programs where, you know, if the spending level is determined by eligibility and it's not Congress sitting down and saying, okay, this year we're going to spend X amount of money on this program, and Y amount of money on this program, and the distance between the two parties is in the grand scheme of things, I don't think going to make a big dent in the $2 trillion or so annual budget deficit. And so unless we were to see changes on the entitlement spending front, which I really don't think is likely in an election year and divided government, you probably won't see big changes on the spending side and the same on the tax side. You know, tax policy is pretty much set in stone for 2024 and I don't think you're going to see any changes there until we get to 2025 on the other side of the election and when the 2017 tax cuts enacted under former President Trump, a big parts of that bill are set to expire. And so, you know, if there is changes coming on the horizon, I don't think it's a 2024 phenomenon. I think it's probably 2025 or 2026 when we'll have a new Congress, a new president, and you'll have some kind of impetus for change. That impetus being, you know, big expirations of the 2020 - 2017 tax bill. So pull it all together for us Jay. You know we've covered a lot of ground here just to kind of summarize it, that the deficit's wider today than it was pre-pandemic. It's gone from, call it 4.5% of GDP to 6% to 7% of GDP. Doesn't seem like there's going to be any fiscal consolidation and in the near future. O bviously, interest rates are a big swing factor, but there's a lot of uncertainty there really in both directions. How do you think about those factors when you think about the outlook for the national debt and also just the economic outlook more broadly in the years to come?

>>Jay Bryson:

That's a good question, Mike. And, you know, I think I share your opinion that, you know, I don't lay awake at night worrying about where we are today. And I don't think the market is overly concerned either. If the market was overly concerned about the fiscal outlook in the United States, I think the yield on the ten year Treasury security, which is kind of the benchmark rate, would be significantly higher than what it is up here today. You know, the U.S. has a lot of factors going on going on for it. It's the world's largest economy in terms of capital markets. It's the capital markets in the United States are the deepest, most liquid, most transparent financial markets in the world. The treasury market is of all the sit down still markets. The market for U.S. treasuries is clearly, you know, the predominant sort of sovereign debt market out there as well. And so I just don't see foreigners dumping U.S. debt any time soon. But, you know, we're also in the long term sense, we're on a on an unsustainable trajectory. And we do have to make a fiscal correction in our view, because we have a relatively low tax base in the United States, because we have a relatively low spending base in the United States, at least relative to many of our competitors, you know, our situation is manageable, but you got to have the political will to to make those corrections. And given what we've seen over the last two decades or so, in terms of some of the paralysis, political paralysis in the country, you know, again, I don't like you just pointed out, nothing's probably going to get done in the next year or two. It's something I'm beyond that. And the question is, do we have the political willingness to do that? You know, we have the the economic ability to make the adjustments. The question is the political one. And that's a that's just of clearly I had a question. I think anyone can really answer that at this point in time. So, again, I don't worry about the deficit today or the debt today, but it's something that we we do need to have a fiscal correction at some point over the next few few years. This listen, this you know, this debate is not going away anytime soon. There'll be a lot more questions coming up. And I will continue to as as we have our thoughts evolve on this. We'll continue to post new podcast, the new reports about the deficit and other social, other economic issues that may be on your mind. So please keep the questions coming, which we enjoy doing these podcasts for you to offer our insights. And thank you very much for for joining us today.

>>Outro:

That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

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>>  Intro:

Welcome to the Wells Fargo, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>> Jay Bryson:

Hello, I'm Jay Bryson, chief economist of the Corporate and Investment Bank at Wells Fargo. And thank you for joining us today for our 2024 Annual Economic Outlook podcast. The title of our annual Economic outlook this year is Weathering the Storm. And what it's allusion to is the outlook for the economy, not only the US economy, but many major foreign economies as well is still stormy. I would say you're still looking at elevated rates of inflation, not only in the United States but in many other economies as well. Now, you know, inflation has come down. It has receded from where it was, say, about a year ago, but it's still not back to where many central banks would like to see it. And because of that, there's been over the last year or a little bit more, there's been a significant tightening of monetary policy. So when you look at the stance of policy today, not only, again, in the United States, but in many major foreign economies, the stance of policy is restrictive and that is putting some headwinds on the economy. Now, this may not develop into a full economic storm, but, you know, at a minimum, as I mentioned earlier, we have headwinds on the economy, on the global economy. And we think at best it will lead to subpar economic growth, at least in the first part of 2024. So joining me today to talk about all of this is the authors of the report. We'll start with Shannon Seery Grein. She wrote the macro U.S. part of this report. We also have Jackie Benson who wrote the regional part for the United States as well as the part that deals with real estate, both commercial and residential. And also, we have Nick Bennenbroek who is the author of the part talking about the major foreign economies, as well as the outlook for dollar exchange rates. So Shannon let me start with you here. Can you tell briefly, you know, where is the U.S. economy right now? And probably more importantly, where do you think it's going in 2024?

>> Shannon Seery Grein:

Yeah, sure, Jay. So the U.S. economy has remained remarkably resilient this year. So growth withstood the initial shock of rapidly higher interest rates, better than we in most analysts had anticipated. And this has to do with the traditional lags associated monetary policy, as well as just a robust amount of spending power in the household sector. So real GDP, for example, expanded close to about a 5% annualized rate in the third quarter alone, which puts growth well above potential, estimated to be closer to somewhere around 2%. But all of that said, we don't think this is the true run rate of growth and still expect things to weaken over the next 12 months or so. So our base case is still for a modest contraction in real GDP next year, but we don't have a super strong conviction whether GDP will actually decline or not. What we're more certain of is growth will be quite slow, if not negative, in the next few quarters. And even if the economy does fall into a recession, it likely won't be too deep. So we're forecasting somewhere about a half a percentage point peak to trough drop in output and only about a full percentage point gain in the unemployment rate from its cycle of 3.5%. So unlike prior to the financial crisis in 2008, the household sector isn’t overly levered at this point and the banking system is still well capitalized today. So I think that ultimately leaves the economy in a much better position, headed into a subpar year of growth in 2024.

>> Nick Bennenbroek:

Okay Shannon that's interesting. So slower growth in the United States, perhaps a recession as well. What does that mean for the outlook for the Federal Reserve policy?

>> Shannon Seery Grein:

Yes, We essentially expect the Fed is done at this point. So we're forecasting FOMC will remain on hold at an upper bound of 550 on the Fed funds rate until the second quarter of next year. As the economy begins to stumble, growth slows, inflation's potentially on a more sustained trajectory lower, we then anticipate the Fed will start to ease policy. So our base case has the Fed cutting rates by about 225 basis points by early 2025. But that's obviously conditional on our forecast for a modest contraction in GDP. So this forecast is more easing than both the market and Fed officials currently project. But even if we avoid recession and just have more of a subpar year of growth, we still anticipate the Fed's going to be easing next year. But probably not as much as our base case forecast implies. So, Jackie, let me let me turn to you. Given the backdrop for the national economy, where we have this subpar year of growth. Are there any regions of the country that might outperform?

>> Jackie Benson:

Yeah, that's absolutely right Shannon. Just because we are expecting the nation to enter a potential economic slowdown does not mean that every region or state or metro in the country would do so. So, if we look at the last recession, the pandemic downturn, what we saw is that the Sunbelt and the Mountain West outperformed the rest of the nation in terms of their labor market recovery and general bounce back in GDP. That was largely driven by migration shifts where Americans left expensive coastal cities in search of more affordable living. Alternatively, we’ve still seen continued migration outflows from the Northeast and Midwest, and those regions contain the plurality of states that to this day, you know, more than three years after the pandemic, are still struggling to regain those job losses. So I would say that those population trends are likely to underpin regional performance during the next slowdown. And on top of that, there are also industry considerations. So on the West Coast, we have several tech hubs like Seattle, San Francisco, that may be disproportionately exposed to these rising real rates. And contrast that with the industry investment that's occurred in the Southeast and in Texas for semiconductor production and electric vehicle production that sort of investment may boost those areas and allow them to better withstand economic headwinds.

>> Jay Bryson:

Okay. Great Jackie. So thanks for that outlook for the regional areas. You know, there's been a lot written about commercial real estate recently, and we had a part of our outlook about commercial real estate. Can you talk about different commercial real estate markets, the outlooks for them and also in terms of the residential real estate market as well?

>> Jackie Benson:

Sure. Yes. So while the broader economy has remained resilient to date, commercial real estate has not. Commercial real estate is arguably already in recession. That's because it's very interest rate sensitive. And also banks have tamped down on CRE lending to a greater degree than they've restricted business or consumer lending. However, the CRE market is pretty nuanced. So if you look at a sector like retail, it's still holding up very well with historically low vacancy rates. 

That's due to strong consumer demand. Contrast that with the office market, which is the weakest segment of CRE driven by postpandemic demand shifts and the rise of remote work gutting the sector essentially. So we do expect the office market to remain perhaps under the most pressure, whereas retail, industrial, they have specific tailwinds working in their favor. A final note on multifamily, which is the last sector. Multifamily isn't suffering from demand decline per se. However, it does remain relatively weaker just due to robust construction that has increased supply and pushed up vacancy rates. So finally, the housing market, similar to CRT, the housing market is very interest rate sensitive, especially when it comes to mortgage rates. And we have seen about as of this reporting 12 consecutive weeks where the average mortgage rate has been above 7%. That's the highest level since 2000. So although the housing market itself is nuanced and builders have been able to buck some of these headwinds by using incentives and price cuts to sell homes, we generally expect the housing market to remain under pressure. That said, we do forecast mortgage rates trending lower next year. So as buyers continually prove to be willing to jump back in on lower rates, that could spark a reinvigoration of demand kind of toward the back half of 2024. So I just spent some time talking about the nuances within the country geographically and within these different segments of the economy. But I can't think of a more nuanced or diverse economy than the global economy. So, Nick, how do you see different major economies faring over the next year?

>> Nick Bennenbroek:

Yes, thanks, Jackie. Well, you know, from an international perspective, looking into next year, we think the temperature is going to be cooler. And by that, I mean in terms of our global GDP growth forecast, we're looking at 2.8% global GDP growth in 2023. But in 2024, we think that is going to slow down to 2.4%. And in addition to that sort of cooling in the global economy, we think the economic climate is going to be quite variable as well. And, you know, we're seeing that slow down occur but at different speeds and different severities in a lot of different regions. So in particular, if one wants to look at Europe, for example, they appear, you know, the United Kingdom and the eurozone are affected significantly with they’re seeing the after effects of the energy price increases that we've seen over the past several quarters and disruptions there. And as well in the United Kingdom, obviously significant pass through of higher interest rates to the economy and to a lesser extent across the eurozone as well. So if all of that, we expect a mild recession to start in the United Kingdom late this year. And for the eurozone, we're looking at, you know, a very slow growth, not recession, but barely being avoided for both of those countries. You know, if you were to take a four-year GDP growth average, we're really seeing growth at between zero to only a half a percent. So mild downturns and even a very slow recovery after that. Those are probably going to be the hardest hit economies right now. And during the early part of 2024, not the only countries or economies around the world that we are seeing a slowing. In China, for example, after a burst of activity from the post-COVID reopening we have seen a slowdown during the course of this year. Now, policymakers or authorities have responded there with easing measures, primarily in terms of monetary policy, and it's helped to stabilize the economy to some extent over the second half of 2023. However, they've still got a lot of issues there and structural difficulties, primarily in terms of demographics are not favorable in terms of helping the consumer sector. And the property sector is under pressure as well. And so although we're seeing some stabilization as we look forward, we still think that we're probably going to see slower growth in China in 2024 and 2025 from 5% GDP growth this year. We're looking at 4,5% next year and slowing down to 4.25% in 2025 as well. Many countries obviously have seen higher interest rates and that's flowing through in terms of interest cost to households. Canada is another country where we do expect a slowdown. And, you know, the consumer is already slowing down. And now we're also starting to see declines in business spending as well as business sentiment also. So for the most part, you know, we're seeing slower growth. Perhaps the one exception may be worth pointing out is, is the Indian economy, which is actually we're looking at 6.1% growth in India in 2023 and a little bit stronger next year in 2024, looking at 6.25%. So just rising slightly and bucking that downtrend. Probably what we're seeing there, essentially the consumer has held up pretty well. The demographics in India are more favorable and investment spending is also firmed a little bit as well. Also, India not as closely tied into the poorly performing Chinese economy as well, and that's helping it to hold up better than most of the other global economies in the context of this slower growth that we see through into next year.

>> Jay Bryson:

Well, thanks, Nick. So, you know, we've talked about, you know, the macro U.S. economy and the Fed. We've talked about foreign economies and all and, you know, one one price that reflects all of that is dollar exchange rates. The dollar has actually been pretty strong through 2023 versus most currencies. How do you see that evolving come 2024? The dollar going to continue to be strong, is going to strengthen from here, or do you think it's going to weaken?

>> Nick Bennenbroek:

Yes, that's a good question, Jay. And, you know, I think for the next several months and, you know, probably through until the first half of 2024, those growth trends that I talked about are going to be very important because that slowdown that that we heard about from the United States is happening, but it's happening relatively slowly, and yet it's happening much more quickly and is with us here now in places like Europe. So and also China underperforming as well. So over the next several months through until the first half of 2024, we think that relative growth performance, US sort of holding in a little bit better and certainly holding them better than Europe and China. We'll see the dollar strengthen against the currencies like the euro, like the British pound and even perhaps against the renminbi to some extent. So those growth factors, I think, are going to be very important. And we could see the dollar maybe appreciate in value by perhaps two, three, 4% on average against those major foreign currencies. As we get into the latter part of next year. I do think the interest rate trends that we've heard about and the monetary policy trains could become much more important. It's taking a while. We heard from Shannon earlier on in terms of that slowdown in the US. But if we do get a slowdown or that mild recession that we're forecasting and that sustained easing from the Federal Reserve at some point, we think that will take away some of the support for the US dollar. And so while we think the strength can continue for several months yet. I believe that from the middle of next year and in particular as we get towards the end of 2024 moving into 2025, we could actually start to see the start of a sustained softening or downtrend in the value of the US currency.

>> Jay Bryson:

Well, thank you, Nick, and thank you, Shannon. And thank you, Jackie, for for your insights here. And thank you all for for listening to this podcast today. Our overall report is posted on our website. WellsFargo.com/economics. You can read the entire report up there. And keep in mind that we update our forecast monthly. All of our forecasts are included in our not only our U.S. monthly economic outlook, but our international economic outlook as well. And those can be found on our website and as the economy continues to evolve, as our forecasts continue to evolve. You can follow along with those different reports on our website. So again, thank you today for listening to this podcast and we wish you a very happy and prosperous 2024. Thank you.

>> Outro:

That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>> Disclosures:

This podcast should not be copied, distributed, published, or reproduced, in whole or in part. 

The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics. 

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

Any indices referenced are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals.

All price references and market forecasts are as of the date of recording. 

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

>>  Intro: 

Welcome to the Wells Fargo, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence. 

>> Jay Bryson: 

Hello, I'm Jay Bryson, Chief Economist for Wells Fargo's Corporate and Investment Bank. And you're listening to the Ask Our Economists podcast series. Joining me today is economist Nicole Cervi to talk about Veterans and Military Families Month. We just recently wrote a report about that. As you probably all know, we celebrate Veterans Day on November the 11th, but the entire month of November is really dedicated to not only veterans but also active-duty military personnel. And so we wrote a special report on that this month. And what we're really doing is we're focusing on military families. Now, we're economists. So, you know, we don't really have the expertise to talk about, you know, all the different issues that military families face. So we're looking at just one thing, and that is household income. And we'll turn to that in just a second. But just to level set, there's about 1.3 million individuals who are on active duty in the nation's armed forces. A little bit north of 80% of those individuals are male. And about half of the people in the active-duty armed forces are married, either to another active-duty member or to, you know, a civilian. And when you look at the entire aggregate number of people who are in military families, all the men, women and children who entail those families, we're talking close to 3 million individuals. So, again, what we looked at is we're focusing on on a financial and economic aspect of military families. So, Nicole, let me turn to you and ask you, you know, what did we find in terms of household income among military families relative to their civilian counterparts? 

>>Nicole Cervi: 

Yeah, Jay, thanks. So one of the first things that comes to mind when we're thinking about military income is just how much does that active duty service member make themselves. So that's where we started. And the military and the Department of Defense, they actually have established pay scales, depending on your rank and your tenure in the military. So just looking at that annual basic pay for service members, that ranges as of this year roughly from $23,000 for your enlisted recruits, the new people who are coming on board, to more than $200,000 for those four star generals or admirals. But obviously basic pay is only one component of household income. Service members, they may actually get some supplements, some bonuses related to expertise or activities that they perform while on duty. So that will also supplement their household income. But we also have to consider spouses as well. So we look at spousal income when we're factoring into military households as well as their civilian counterparts. And so just looking at just households, not looking at marital status quite yet, if you look at your average household income for military families. So that's either one individual who's on active duty. You can see that military family income as well as civilian family income has risen since the 2000s. But more recently, what we've seen is that your civilian household income has risen faster over the past decade or so. So when we were looking at just trying to find what's driving some of that gap, we broke out some data, so we actually use just a level set a little bit here. We use data from the American Community Survey over from the Census Bureau. So when we're looking at household income, we looked at households in both military and nonmilitary sets who is married and not married. So focusing on the not married cohort first here for those singles, we've actually seen that since 2000, military people who are active duty, who are single, they've actually out earned their civilian counterparts. But if you look more recently, that gap has narrowed. So their gains in terms of income have narrowed relative to their single civilian counterparts. I think what's more striking to us that we found was that when you look at the married cohort, that gap is pretty striking. If you see military active-duty households who are married and in the military, they've consistently earned less than their civilian married households. And that gap has actually widened quite a bit over the past decade. And as of 2021, that gap was almost $23,000. So that is a pretty big gap between your married households and for military families versus your civilian counterparts. So Jay, when we’re looking at this gap, can we think about what is driving some of the trends that we're seeing here in terms of your active duty military families versus their civilian counterparts? 

>>Jay Bryson: 

Yeah. So, Nicole, that's you know, that's kind of a good question. So we kind of drilled down a little bit further and then we just focused on married individuals in the military versus married individuals who are civilian. And so if you look at just on a standalone basis, if you're in the military, on average, you tend to earn about $10,000 more per year than somebody who's not in the military. Again, that's just on a standalone basis. Okay. So we're finding this gap between household income. And what it really boils down to is spousal income. You know the spouses of the active-duty military people. That's where the big shortfall is. And it's interesting when you look at, you know, military spouses on average, they earn about $30,000 a year less than their civilian counterparts do. And even when you look at, you know, people who have jobs, who are military, they tend to earn less as well, maybe because of the industries they tend to be in, or maybe they're working a little bit more part time. But, you know, in general, again, it boils down to the spousal income. And what's interesting there, when you when you drill down even further, what you know, so what's some of the reasons behind this and what were the reasons is the amount of labor force participation, you know, the number of people who are either employed or actively looking for a job. So when you look at in terms of military spouses, that's about 64%. When you look at a similar cohort in terms of civilians, that's well north of 75%. So there's a big gap there in terms of people who are participating in the labor force. And then another really interesting finding, we pointed this out in the report we wrote two years ago, the unemployment rate among military spouses, it's just astronomical. It's well over 20%. And this is at a time when it's not like we're in a depression or anything like that. It's always been very, very high relative to civilians. And, you know, today it's roughly 20% at a time when the national unemployment rate is only 4%. And when you stop and you think about it, though, these are kind of symptoms. It's, you know, what's the root cause of this? Why is labor force participation among military spouses so low? Why is the unemployment rate for military spouses so high? And so, you know, Nicole, we kind of looked into that and what did we find there? 

>> Nicole Cervi: 

Yeah. So when we're looking at military spouses and kind of the barriers that they face in terms of employment. A lot of research recently shows that childcare is probably one of the largest factors that's pulling down labor force participation among those military spouses. So, for instance, there was a survey done kind of recently by the National Military Spouse Network where 44% of military spouses, they reported that the childcare that they needed to fit their needs was just too expensive and not accessible for them. And then another survey conducted by a separate agency, more recently in 2022, they found that 43% of active-duty spouses reported that this really high cost of childcare is the top reason behind why they're not participating in the labor force at all. So we can see that child care, especially for military spouses, it's it's a high hurdle and that is true definitely across the nation. But one thing that's kind of unique to military spouses in particular is their location as well. Many military bases are located more than 50 miles away from urban centers. So we're kind of in some rural areas and that aspect alone, kind of weighs on the child care options available to military spouses, which then can also lead to some scarcity factors that make it more expensive on a monetary and opportunity cost basis when you're considering their time constraints. And another part beyond child care, kind of related to some of the location of these military bases as well is like as I said before, they're in rural areas and employment prospects in rural areas tend to be less robust than in metropolitan areas. So if you actually look at the employment to population ratio outside of metro areas, that's been consistently below the comparable ratio inside metro areas by about five or more percentage points over the last few decades. So one, we have limited child care options that can fit my financial needs. And then we also have less robust employment opportunities. And then I would say the third thing that is probably one of the more unique factors in terms of military spouses is just kind of the unsettled way of military life. So in the military, we have permanent change of station or PCS moves. So these happen typically every two years, any two to four years. And a survey conducted by the Department of Defense found that 81% of military spouses have experienced a PCS move. So it's very common. And when these moves take place, they're usually across state borders, sometimes they're even abroad. And that in general just weighs on military spouse employment, because it's really hard to keep a job if you're doing a major relocation. We've seen a rise in remote work and that in particular has helped with some military spouses. A survey called the Military Family Lifestyle Survey, they actually found that 69% of active-duty spouses who were working fully remote, they reported that they could keep their job or that their job is portable if they were able to relocate. So that's a pretty promising sign that while relocation really weighs on employment opportunities. You can see that remote work can address some of those frictions. But as we've seen, demand for fully remote work really has outpaced availability, especially recently with more companies calling their workers back to the office. So we've seen that military spouses in particular continue to turn to more part time work in greater numbers relative to their civilian counterparts to kind of alleviate some of those childcare restraints. So, Jay, we talked a lot about military spouses, how that affects just broader household income for military families. Can you talk a little bit about what this all means and broader context of, you know, the military? And are there any potential consequences of this stagnation in household income? 

>>Jay Bryson: 

So, yeah, Nicole, I think there is potentially is a consequence here to this shortfall in military income relative to civilian income. I mean, what we really want is data on re-enlistments, the number of active-duty military people who, you know, when their time commitment is up, how many of those re-enlist. And so an interesting hypothesis here is, you know, given the fact that military income has not kept pace with civilian income, is that leading to a shortfall in re-enlistment or not? Unfortunately, we don't have data on that. It's not readily available in terms of re-enlistment rates. What we have is maybe a proxy for that. And so the data we have shows this would be people who served in the military at one point they left for a period of time and then they re-enlisted. They came back to the military. About 20 years ago, there was about 10,000 people who did that. You know, again, they were in the military at one point, they left and then they came back. That was about 10,000 per year. Today, that number is about 50% of that. Only about 5,000 people are coming back. Now, you know, we readily acknowledge there could be a number of reasons that's depressing that rate of people coming back. But one reason that potentially could be playing a factor here is, again, opportunities in the civilian world may be better than what they are in the military world in terms of your overall household income. And if that's true in terms of the active duty people who are choosing to re-enlist, then that potentially could have some consequences for the readiness of the armed forces as well. Again, we don't want to necessarily come out and say that because we don't have the data to support that. But we are continuing to try to find that data to see if you know if it's available to us. And it's something that we're going to continue to keep a look at. And when we do have that data, we will report that as well. But again, thank you for listening to this podcast today. Thank you for the questions you continue to submit to this Ask Our Economists podcast series and we'll continue to record more podcasts with topical sort of information. Again, thank you for joining us today.

>>Outro: 

That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo. 

>>Disclosures: 

This podcast should not be copied, distributed, published, or reproduced, in whole or in part. 

The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed. 

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics. 

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts. 

Any indices referenced are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals. 

All price references and market forecasts are as of the date of recording. 

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

>>  Intro: 

Welcome to the Wells Fargo, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence. 

>> Jay Bryson: 

Hello, I'm Jay Bryson, chief economist for Wells Fargo's Corporate and Investment Bank. And you're listening to the Ask Our Economists Podcast series. You know, recently there's been quite a run up in oil prices. Earlier this summer, oil prices, if you're looking at it on a per gallon basis or per barrel basis for West Texas Intermediate was below $70 a barrel. As I speak right now, it's north of $90. And I know most of you listeners probably don't think in terms of oil prices. You probably think in terms of gasoline prices. So national average earlier this summer was below $3.50 a gallon. We're pushing close to $4 a gallon right now. And so, you know, lots of questions about what does this all mean for the economy. So I'm joined today by senior economist Sarah House to kind of walk through, you know, what's been happening here and some of the implications. So, Sarah, let's let's talk about that. You know, what's going on, what's pushing these oil prices up? 

>>Sarah House: 

Hi, Jay. Well, thanks for having me. So I think in terms of the most recent run up, it's mostly been a story of supply. So initially when we started to see oil prices move higher this summer, it came from Saudi Arabia cutting production by about a million barrels per day. Now, typically OPEC+ guides their production by about a month. But what we saw in early September was guidance that those production cuts would actually stay in place through the end of 2023. So it was really a change in the supply outlook that's been driving this most recent run up. And we really haven't seen much of a non-OPEC response. You've seen a little increase in U.S. production here since July, but we're not seeing new investment come into play. So if you look at the rig count here in the US, it's actually at an 18 month low and that has to do with, I think, some of the sustainability in terms of these price cuts in the near term. So could OPEC+ change course? But also I think some questions over the longer term petroleum demand as the US goes through the energy transition and really the whole global economy does. Now, I said it's mostly a supply story when we look at the demand side of things, we haven't really seen that change much. So if you look at, for example, our own forecast for global growth, So we're expecting 2.7% growth this year, same as where we were in June. And this idea that it's mostly supply versus demand has been corroborated by the New York Fed and their oil price dynamics reports, which show that since June, the effect of supply in terms of the run up in oil prices is about five and a half times larger than what we've seen in that demand side. So it really boils down to supply most recently. 

>>Jay Bryson: 

Okay, great. But then let’s talk about consumer spending. I mean, so unless people are going to cut back the number of miles that they drive, which probably is not going to happen, at least not in the short term, people are paying more at the pump. That's got to have an effect on consumer spending. They've got to ramp it back, you know, somewhere else to make it fit their budget. So what do you think this all means for consumer spending? 

>>Sarah House:

Right. So we do think that this will be a headwind to real consumer spending as we move through the next few months and potentially even into 2024. We don't think that this alone is a death knell for the consumer, though, it won't on its own cause a recession. And I think there's a couple important things coming into play in that view. So one is that gasoline prices haven't risen as much as oil prices. So oil prices are up roughly 30% from where they were in June, whereas gasoline prices have only increased about 8%. So that hit to the consumer hasn't been quite as dramatic as what we've seen in terms of markets. And then I think also we have to remember where gasoline prices are in nominal terms. So, Jay, you mentioned at the top that we have seen a pretty noticeable increase in terms of that price per gallon of gas where it's pushing almost $4. But importantly, we've been here before. So just last March through April, we saw gasoline prices over $4. In the summer of 2008, we saw them over $4, and that was even more painful. When you look at where overall household incomes were back in 2008. So what I like to do is look at gasoline relative to how many gallons that average hourly earnings could buy. So give you a sense of how far the typical consumer’s dollar can deal with these prices. And what we've seen now is that in terms of average hourly earnings, that'll get you about 7.6 gallons of gas. So that's actually up from 5.7 last June. And then if you just want to think about that in comparison to the 2008 oil price shock that we saw back then, an hour of work typically could only buy you about four and a half gallons. So while we've certainly seen that purchasing power erode from the increase in gas prices, we're not at unprecedented levels by any means, but it will erode purchasing power at the margins. So gasoline directly accounts for about 4% of consumer spending. And as you said, Jay, you can really only cut back so much. So maybe you're cutting back on vacation. Maybe you're trying to consolidate some trips around town, but you still have to drive to work. You still have to take your kids to school. And so we do think that this will erode some of that spending power, particularly for your lower and middle income households where gasoline does take up a bigger share of those budgets. 

>>Jay Bryson: 

Okay. Let's talk a little bit about inflation. I mean, listeners of a certain age and I won't say how old those folks necessarily are here, but, you know, if you think back to the OPEC oil shocks of the 1970s or more recently, two of the big run up in oil prices we saw back in 2008, which you had mentioned here, you know, oil went up to $150 a barrel and we saw a big, you know, inflation push back then. What sort of effects do you think this is going to have on the inflation rate? 

>>Sarah House: 

Well, it certainly will add to inflation given that oil is such a key component of our economy. So both in terms of its direct use but also indirect use. And so we looked at this to get a sense of just how much the recent run up, but also an idea of, okay, so if, let's say, Brent, oil prices got to $100 a barrel and stayed there for a year or so, not too much more than than where we've seen Brent kind of flirt around here in recent weeks. So that would be about $15 more than our model's baseline scenario. And so what we see in terms of that direct impact on consumer price inflation, so it would raise the year over year rate of consumer prices by about 6/10 of a percentage point over the next four quarters. So that's in a time when inflation is already elevated with the CPI currently at 3.7%. Now, importantly, it wouldn't just affect these headline numbers either, though. So when we think about the overall trend in inflation, that would likely be higher as well. So our simulation added about a 10th or 2/10 of that year over year rate, of core CPI. And that's coming from the fact that, you know, if you're a manufacturer, your production costs are going up with these higher oil prices. Packaging is more expensive. Transportation costs for getting product to consumers is going up as well. And it's not even just all about goods. So if we look at the service sector, particularly areas like airline tickets, so those go up when you do see big jumps in oil prices. So there is some pass through there to the core. Now, importantly, we're not expecting oil to climb and stay at $100 a barrel for that long. But I think near-term, it does look like energy prices are a little bit higher than we had previously expected and are likely to stay somewhat higher. And so we are expecting the improvement in the inflation trend that we've seen over the past year. It is going to be slower going and weigh on disposable income growth. So we're looking at headline CPI being stuck above 3% through early next year and also slower disinflationary pressures coming into the core. So that's going to keep inflation elevated longer had we not seen this run up. And then just one more thing I'll add to is there's a risk here when it comes to confidence and inflation expectations. So consumers take a lot of signal from gasoline prices in addition to grocery store prices. And so there's also this risk that seeing these higher energy prices in these higher gasoline prices keeps those inflation expectations somewhat elevated. And you get these second round effects in terms of higher inflation pressures. So, Jay, maybe if I can throw a question back at you. What does this increase in oil and therefore also this slower improvement that we're expecting in inflation, what does this mean for the Fed? How do you think the Fed is viewing this run up in oil prices? 

>>Jay Bryson: 

Well, Sarah I'm sure the Fed is looking at this, you know, with very seriously this this most recent run up. Now, is this going to, you know, if oil prices are at $90 or $100 a barrel when they next meet on November 1, is that going to cause them to raise rates just in and of themselves? I would say no, probably not. I mean, there's a lot of other things that that they are looking at. So, you know, if we get a lot of strong data between now and then and oil prices remain where they are, that very well could could tip the balance toward more rate hikes here in the near term. But, you know, you mentioned you talked about disinflation and how it causes the core rate to maybe come down slower. You know, I think there it potentially could cause the Fed to keep rates higher for longer. I mean, at the end of the day, what they really want to see is they want to get back to 2%. The headline rates of inflation can be quite volatile as food and energy prices move around, Those so-called core rates are much more stable. And, you know, that's what they put a little bit more weight on as they as they look at those sorts of things. And so if this run up in oil prices has these indirect effects on the core rate and that doesn't come down as fast, that probably means that the Fed probably is not going to be cutting rates maybe as fast as what some economists and or the markets, you know, actually sort of think. So it certainly is, obviously, it's a situation that remains very volatile, very fluid. The Fed's keeping an eye on it, and we'll keep an eye on it as well. And as things develop here, we'll be continuing to send out more reports about these sorts of issues and potentially could even follow it up with a podcast or two if oil prices kind of remain where they are or even go higher from here. So thank you very much for listening today. Thank you for all the questions you continue to submit to us. Please keep those coming and we'll keep reporting on the economic outlook, not only in our written reports, but in this podcast series. Again, thank you very much for joining us today. 

>>Outro: 

That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo. 

>>Disclosures: 

This podcast should not be copied, distributed, published, or reproduced, in whole or in part. 

The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed. 

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics. 

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts. 

Any indices referenced are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals. 

All price references and market forecasts are as of the date of recording. 

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

>>  Intro:

Welcome to the Wells Fargo, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>> Jay Bryson:

Hello, I'm Jay Bryson, chief economist for Wells Fargo's Corporate and Investment Bank. And you're listening to the Ask Our Economists podcast series. Recently, there's been a lot of developments going on in China that seems to have everyone's attention. So in order to talk about this on this podcast today, we've brought in Brendan McKenna, one of our international economists who specializes in China and other emerging sort of economies, to kind of walk us through it. So Brendan, let’s try to level set here. What's going on in China right now, particularly with the property sector? And you know, how serious do you think it all is?

>> Brendan Mckenna:

Thanks, Jay. You're absolutely right. As far as China kind of grasping attention of the financial markets and economists like ourselves. And it really does kind of come back to the property sector. And I should caveat that by saying that the real estate and kind of property sector challenges in China have been somewhat persistent and kind of evident for an extended period of time. Now, these property sector challenges have intensified recently, and that's kind of why we're gathering together to talk about it now. But as a little bit of a back story. You know, in short, China's property sector and the property developers and the real estate firms within China are really just over-leveraged and they carry too much debt. And now that we're starting to see China's economy decelerate and decelerate pretty quickly and the cost of living in China rise, real estate purchases have slowed and slowed pretty dramatically. And a lot of these property developers just aren't generating enough cash flows to actually repay the debt that they've taken on and actually service all of that debt that they've carried over the last couple of years or so. So we haven't really seen a lot of these property developers pay back those debts, and that's led to bond defaults and bankruptcies and some very close calls as far as many property developers on the brink of collapsing or not. And probably a couple of years ago, the biggest property developer in China named Evergrande really through these challenges back into the spotlight. But just recently, we've also seen some other large property developers such as Country Garden. There was a real estate investment trust that missed payments recently. So some of these larger issues are starting to come back onto the forefront and it's certainly been a very big problem that China's economy is facing that's having ripple effects around the global financial markets right now.

>> Jay Bryson:

Okay. So, you know, that's all really interesting. You’ve got a bunch of property developers who have maybe a little bit too much debt. But I guess the question at the end of the day is what sort of effects could this have on the Chinese economy? And, you know, clearly, I would think policymakers in China, obviously are aware of the problems. I mean, is there anything that policymakers there can do?

>> Brendan Mckenna:

That's a great question, Jay. And the answer to that question actually goes back to the global financial crisis in 2008-2009, where Chinese authorities and the Chinese government actually used real estate and infrastructure development to spark and spur economic growth over the course of the global downturn. And what that actually did was make real estate a very important part of China's economy. So by some estimates, close to 30% of China's economy comes from real estate development, property development and kind of the spillover industries as it relates to real estate related activities. So if China’s property sector does decelerate and decelerate sharply, you could actually see a pretty significant impact on China's economy, not only in the short term, but maybe over the longer term as well. But to put some numbers on that, over the course of this year, we've been pretty consistently revising our GDP growth forecasts for China's economy lower. And just recently, we took additional action and we took our 2023 annual GDP forecast down from 5.2% to 4.8%, which is a relatively large downward revision. But it also implies that China's economy is probably not going to achieve the official growth target laid out by the Chinese government at the beginning of this year. And again, just kind of combined with some of the other structural issues that China's economy is facing, like aging demographics, additional debt problems in other sectors of the economy, you know, the real estate sector issues that we're facing now are certainly going to push China's growth prospects over the longer term, much lower than they were or what we saw historically. Now, as far as what can policymakers do about it, there's actually little that can be done at the moment. And I say that because we have a debt problem. If you're going to deploy fiscal stimulus, that's likely going to add to that debt problem. And that's something that the Chinese government and Chinese authorities have been looking to protect against. So on the fiscal stimulus side, there's little that's been done to this point. And then there's also a willingness to not do as much on the fiscal support side, which really places the burden of economic support on the people's Bank of China and monetary policy. And there has been some action taken by the PBOC. We've seen lending rates come down. We've seen policy rate cuts, we've seen reserve requirement ratios for banks also be lowered. But as of right now, those actions from the monetary policy side have probably done little to offset the property sector slowdown and some of the other challenges that China's economy is facing. So the policymakers are certainly aware of the problems, but there's actually little that can be done. And there's also somewhat of a lack of willingness to actually meaningfully address these challenges. So, Jay, I want to turn it back over to you. And you've actually done some work on maybe what a China hard landing crisis would look like for the US economy. You recently wrote a report that kind of focuses on this issue. Can you talk a little bit about your analysis and kind of what you uncovered during that project?

>> Jay Bryson:

Sure, Brendan. So as you mentioned, what we wanted to do is try to figure out what this would mean for not only the US economy, but some other major economies around the world, like the Eurozone and Japan. And so, you know, at the end of the day, nobody really knows how bad this is going to be. So we decided we wanted to mimic or benchmark something that was, you know, pretty significant. And so we went back, we looked at history. And what we did is we looked at the 1989 to 1991 period in China. And so if you go back to the 1980s with the opening of China that started in the early 1980s, the Chinese economy was growing very quickly, robustly over that decade. We got to 1989, and some listeners may remember that's when Tiananmen Square happened. And so there was a lot of sanctions that were put in place after that. And the Chinese economy decelerated rapidly. And so what we did was we said, okay, so let's try to mimic that. And so when we when we did the math, what we found out, if we looked at the trend in the 1980s and we said, so if the Chinese economy would have continued to grow at that trend rate between 1989 and 1991, when that economy really slowed down sharply. If it would have continued to grow at the previous growth rate, it would have been about 12% larger at the end of 1991 than what it actually was. And so then we what we did, we said, okay, we're going to use that now as our benchmark. Not that that's necessarily going to happen, but we're just going to use that as a benchmark. And we have a we have a model, we've got a baseline. And we say, okay, so take this baseline. And now let's say the economy is 12% smaller. Another way to say that is, you know, the economy would be 12% less large three years from now than it otherwise would be. And just to put that into perspective, that's a pretty nasty shock. So it's just, you know, if you think about the US economy back during the financial crisis, if you take the trend growth rate between 2001 and 2007 and project that out for three years, then you look what actually happened. Because of the financial crisis, the US economy was 9% smaller than it otherwise would be. And you know, the financial crisis here in the United States was pretty nasty. And so we're looking at 12% in China. So again, that's a pretty meaningful downturn.

>> Brendan Mckenna:

Yeah, absolutely. Sounds like a really in-depth analysis and it sounds like you did some really great benchmarking work. But can you actually put some numbers to it? How bad would the effect of kind of this China hard landing crises in this type of scenario that you laid out the for the US economy?

>> Jay Bryson:

So going into it, you know, I would have thought, you know, you look at that big shock in the Chinese economy and that would have, I would have thought, maybe some pretty significant effects here in the United States and some other major economies as well. And it turns out and we employ this global macro model to do that and we put these numbers through for China. It turns out in terms of GDP, it slows GDP growth here in the United States but it’s not like it causes a recession. And the same thing in Europe and Japan. You know, on average, it reduces growth in those three economies over the next three years by, you know, in some cases a quarter of a percentage point, in some cases a half a percentage point. But it's relatively, relatively slow. And, you know, that's really interesting. And when you sit back and you think about it a little bit, it does take does make a little bit of sense. If you look at the United States as an example. So last year, we exported $150 billion to China. Okay. That's, that's a big number, right? But in seen in the context of the size of the US economy, which is $26 trillion, it amounts to roughly a half a percent of GDP. It's just not all that much. And then, yes, you know, if you have a big, you know, slowdown in China, it's going to have spillover effects on the rest of the world. But if you know again, looking at the United States, our exports as a percent of our GDP is only a roughly 10% or so. It's a relatively small number. And what else is going on here, we found out through the model is because of this big deceleration in China, causes oil prices to come down about $15 a barrel, roughly 20% from their baseline values. So that brings down inflation in the United States. That gives people more disposable income. So you kind of have these offsets going on as well. Now, you know, again, when I think about it as an economist, sometimes you have to take these numbers you get from models with a little bit of a grain of salt. And, you know, I would say maybe, you know, if we're looking at this big major downturn in China, that the effects on the US economy may be a little bit more than what our, you know, quantitative model would suggest. You know, if you have a big downturn in China, I would think, you know, stock markets around the world would take a little bit of a hit. Corporate bond spreads would probably push out somewhat. Generally, you get some financial tightening going on and that may, you know, increase the effects on the US economy. But at the end of the day, again, even with this real big downturn in China, it's probably not going to cause a recession in the United States. Yes. Does it slow growth? Yeah, for sure. But does it cause a major disaster here in the United States? The answer is probably no. And then just one other sort of thing. You know, when I talked about the financial crisis earlier before, if you go back 15 years ago, U.S. debt was held widely around the world, mortgage-backed securities held widely around the world. You know, lots of bank debt around the world. China just doesn't have the same sort of financial linkages with the rest of the world that the United States does, and did 15 years ago. So a hard landing in China, if one were to occur, would certainly slow the global economy. But it probably wouldn't be another global financial sort of crisis. But, you know, this is something obviously we're going to keep an eye on. Brendan, I think you would agree with me. These developments in the Chinese property sector aren't going away anytime soon and it's something that's out there and we'll continue to keep an eye on. And as our analysis changes, will keep you all updated. But again, thank you very much for joining us today. Thank you for the questions that you continue to submit to us to give us ideas for these podcasts. And we wish you all a good day. Thank you.

>>Outro:

That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>>Disclosures:

This podcast should not be copied, distributed, published, or reproduced, in whole or in part. 

The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics. 

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

Any indices referenced are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals.

All price references and market forecasts are as of the date of recording. 

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

>>  Intro:

Welcome to the Wells Fargo, Ask Our Economists podcast series, where we explore what's on our clients minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>> Jay Bryson:

Hello, I'm Jay Bryson, chief economist of the Corporate and Investment Bank at Wells Fargo. And you're listening to our Ask Our Economists podcast series. And today, I'm joined by senior economist Michael Pugliese to talk about some recent debt downgrades of US sovereign debt. So, Mike, as you well know, recently Fitch, which is one of the three major rating agencies, downgraded U.S. debt to sovereign debt from its highest rating, AAA to a AA+. And as some listeners may recall, this happened back in 2011 at the time of the debt ceiling debate. At that time, when Standard and Poor’s downgraded us. And so now it's been 12 years and just one more rating agency of the major ones. Moody's still has U.S. sovereign debt on AAA status, although it is on a negative watch. So, Mike, let's talk about that downgrade. Why did Fitch do it and was it expected or not? 

>>Michael Pugliese:

Yeah, So I think in order to understand the downgrade, it's important to start a little bit with how we got here on the fiscal front over the course of the pandemic. So pre-pandemic at the end of 2019, the US debt to GDP ratio for the federal government was about 79%. So the national debt was about 79% of the US economy. And then when the pandemic struck, that skyrocketed. As a result of the economic damage from the pandemic and all of the fiscal aid that the federal government adopted to support the economy. So that same ratio went from 79% before the pandemic to a little over 100% in the second quarter of 2020 at the peak of the pandemic. But over the last few years, that's actually declined a little bit. So the federal government's debt to GDP ratio has fallen down to 93% around the start of this year. But more recently, that started to turn. It increased in the second quarter. And I think as we get data for the third quarter and the fourth quarter and into next year, you're going to start to see that increase again. And that was one of the two things that Fitch cited, was a deterioration in the medium-term fiscal outlook. Some of this for known reasons we've already been talking about for years, an aging population, rising health care costs, pressuring entitlement spending, but also some new things in terms of new spending initiatives, higher interest costs, normalizing revenues after they surged during the pandemic. And the second thing Fitch cited as a reason for its downgrade was sort of deteriorating governance as a result of the most recent debt ceiling fight and just the recurrence of these debt ceiling disputes, government shutdowns and some of the other sort of budget challenges the US government has had for really more than a decade now. To your point, Jay, the last downgrade happening in 2011 when that debt ceiling debate was going on. So I think the downgrade was unexpected. There have not been a lot of these over history. So certainly was not something that markets or analysts were looking for. But I think you can kind of see between the governance side and this shift on the fiscal front at least a little bit why it may have happened now and not say, you know, a year ago or three or four years ago.

>> Jay Bryson:

Okay. So you just said something kind of interesting there. You said that markets kind of, you know, were a little bit surprised and taken aback, you know, whatever. You know, I would think that, you know, if you downgrade someone's debt, that they're probably going to see higher interest cost on that. So, I mean, have we seen a major impact, particularly on the Treasury market? Are we looking at higher yields? Does the US government now have to pay more for its debt because of this downgrade?

>>Michael Pugliese:

So I think financial markets reacted a little bit to the downgrade, but certainly nothing major or material. So when you look at risk assets like equities, they were down a bit over the course of the following day or two after the downgrade, but certainly nothing calamitous. And same in the Treasury market where you saw yields in particularly longer-term yields rise a bit over the following couple of days. But one, it wasn't a whole lot. We're talking ten or 20 basis points over those next few days. And two, I'm not even entirely sure that was solely due to the downgrade. So I don't want to say there was no financial market reaction. But you know, we're not talking about a world where the credit downgrade happened on the federal government and yields doubled or something along those lines. It was a fairly small and muted reaction across really all markets, but also definitely the Treasury market as well. 

>> Jay Bryson:

Thanks for that. So I'm going to say something that may sound a little bit controversial at least to some of our listeners here, and it's not the level of debt per se that is potentially problematic. I mean, you think about it, right? You know, a very large corporation can sustain a large amount of debt relative to a smaller sort of one. So it's really, it’s not the level of debt per se, but it's the say, the inability to service that debt to make the interest and the amortization payments on that debt. That's what gets, you know, not only individuals and corporations into problems, but, you know, potentially, you know, a government as well. So, you know, with that in mind, can you talk a little bit on the ability of the US government to service its debt? How much is interest as we pay as a percent either of the federal budget or maybe as a percent of GDP? I mean can you put all that into context for us, what's the ability to service that debt?

>>Michael Pugliese:

Yeah, so what I would say on that front Jay is over the 2010s, what we saw was much higher debt burdens than had been the case in previous decades for the federal government, but actually lower interest spending. So even though the debt to GDP ratio more than doubled between 2007 and 2019, you saw interest spending that as a share of the economy really didn't do a whole lot of anything in terms of rising or falling as a result of much lower rates over the course of the 2010s. So to put it in perspective, interest spending as a share of GDP was about 1.7% at the end of 2019. Now, more recently, that started to shift. So right now, interest spending as a share of the economy for the federal government is about 2.5%. So it's clearly gone up. Now, is that a particularly worrisome level? I would say no right now. We've seen those interest spending as a share of GDP levels before. Throughout the 1980s and much of the 1990s, it was sort of around 3%, you know, 3.25% somewhere around then. So, you know, we're not even at the highs we've seen in relatively recent history. But I do think the trend is concerning because the longer-term fiscal outlook is very sensitive to interest rate assumptions. So if we're going to have a ten year yield that's 4% on a go forward basis like it is right now, over the next 5 to 10 years, that's double what it was roughly on, say in, 2019 or so. And so, you know, I don't think of it so much as what is the interest burden at the moment, but are we looking at a world where interest rates are going to be a lot higher over the next decade than they were in the previous decade? And is that going to have this compounding impact? When you look at the Congressional Budget Office's forecast, so CBO is kind of one of the top fiscal analyst groups in D.C. And when you look at their sort of longer term projections, they've got interest spending as a share of GDP at about 3.6%, 3.7% in a decade from now. And that's assuming a ten year yield of about 3.8% over the longer run, which isn't all that far from where we are today. And that would be a very high share of GDP in terms of interest spending if we actually realized those numbers higher than what we saw in the 1980s and 1990s and certainly higher than we're seeing today. So when I think about can the federal Government carry this interest burden for now, I think the answer is absolutely. It's really not something I'm all that concerned about at the moment. But I think it does certainly open the question of where will we be five, ten years down the road If you see yields at these levels that are sustained not just for the next 12 months, but say, for the next ten years or so, that puts a much bigger sort of fiscal squeeze on the federal government than was the case in much of the 2010s when rates were a lot lower.

>> Jay Bryson:

So to sum that up, Mike, it sounds like you're not overly concerned about the ability of the US government to service its debt right now, but isn't there you know, I'll call it an opportunity cost in some sense, right? If you're, if the government is paying more to service its debt, even though it can service it, if it's paying more to service its debt, isn't that going to potentially squeeze other parts of the budget? Right. Maybe you won't be able to spend as much on, I don't know, the military or you won't be able to spend as much on building roads or something like that. So, you know, can you talk a little bit about where interest as a percent of the budget is right now? And maybe put that into historical context as well?

>>Michael Pugliese:

Yeah. So, you know, pre-pandemic again, just kind of using this pre and post pandemic baseline, interest spending as a share of the federal budget was 8%, maybe a little bit over 8%. And now it's up to 10%, a little over 10% and rising. Right. That's headed higher again, as I already noted, in the coming quarters. And so you're up to about $0.10 on the dollar of federal government spending is going towards just servicing the debt. And exactly to your point Jay, you know, that can crowd out other forms of spending depending on the fiscal policies that Congress and the White House adopt on a go forward basis, whether that's defense spending, as you mentioned, or other investment initiatives or money transfer payment programs that the federal government runs because the deficit is pretty big right now. It's now trending towards somewhere between 6% and 7% as a share of GDP, which is unusually large for an economy that's pretty good. With unemployment at about 3.5%, growth is hanging in okay. And I think this is really where the concern came from for Fitch in terms of if you're running deficits this big in good times, what will that look like a few years down the road? If rates are still pretty high, there's potentially a recession on the horizon in 2024. You know, all these different factors kind of layered on the governance issues. And I think you can see why at least from Fitch's view, the downgrade was warranted. So maybe kicking it over to you then, Jay, we've talked a little bit about the short-term outlook for interest spending and the fiscal outlook more broadly.

We’ve talked about the market reaction. What about longer run, right? I mean, do you have any concerns about sort of a longer run, maybe this downgrade or the fiscal deterioration more broadly plays into the U.S. losing its role as the world's reserve currency? 

>> Jay Bryson:

Yeah. So I guess, like you, Mike, you know, I'm not overly concerned about things here in the short term, you know, maybe in the long run. But, you know, here in the short term, I don't think it really has any major impact. I mean, at the end of the day, the market for U.S. Treasury securities is the deepest, most liquid, most transparent financial market in the world. Treasury securities serves as collateral for trillions and trillions and trillions of dollars of other financial sort of transactions. And the long and the short of it is there's just no substitute for U.S. Treasury securities. You know, people talk about Europe or the Eurozone. Well, if you think about it, the Eurozone is a collection of, you know, 19 or so, you know, sovereign countries. Spanish or Portuguese government bonds are just not the same as German government bonds. And the German government bond market, although it's one of the best in the world in terms of ratings it's just nowhere close in terms of size to the U.S. Treasury market. You know, Japan has its own set of long-term fiscal challenges. And then there's also China. But I’d mention the word transparency in terms of the U.S. That's certainly not really the case when it comes to Chinese financial markets. So, you know, in the near term, I don't worry about a downgrade like this affecting the status of the U.S. dollar in terms of its reserve currency status. You know, maybe if you and I are having this conversation ten, 15, 20 years from now and things have gotten even worse and worse then maybe. But, you know, again, right now, again, there's just no substitute for U.S. Treasury securities. So I'm just not overly concerned about that. Mike, let me let me ask you a follow up question. You know, what's to be done here? Are we just going to have to wallow in continuous downgrades going forward? I mean, is there a way out of all of this? 

>>Michael Pugliese:

You know, what I would say is that if there's good news here, it's that it's not just that the U.S. Treasury market is the world's deepest and most liquid and backing that world’s reserve currency. The United States also has the world's largest and most diversified economy. It produces $27 trillion of annual GDP per year and growing. Household net worth in the United States is more than $140 trillion at present. And Fitch actually noted in its in its credit downgrade that a possible catalyst for an upgrade in the future could be either bringing mandatory spending in line with current revenues as a share of GDP or alternatively bringing revenues in line and up to fund these sort of commitments on the spending front on a go forward basis. So whether policy makers will adopt one of those paths or a mix of the two or neither remains to be seen. But a medium-term fiscal adjustment to kind of meet those fiscal realities would certainly be something that I think could be a positive catalyst on the fiscal front for a future upgrade and to alleviate some of these challenges and concerns we've talked about over the course of our discussion here today.

>> Jay Bryson:

Well, thanks, Mike, and thanks for the discussion today. Obviously, these issues won't get solved here in the near term, but maybe as you mentioned in the medium term, maybe there's a solution there. But thanks, Mike, for joining us today. And thank you all for listening and thank you for the questions that you continue to submit to us for this series. Thank you very much for joining us today.

>>Outro:

That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>>Disclosures:

This podcast should not be copied, distributed, published, or reproduced, in whole or in part. 

The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics. 

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

Any indices referenced are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals.

All price references and market forecasts are as of the date of recording. 

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

>>  Intro:

Welcome to the Wells Fargo, Ask Our Economist podcast series, where we explore what's on our clients minds. Provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>> Jay Bryson:

Hello, I'm Jay Bryson, chief economist for Wells Fargo's Corporate and Investment bank. And you're listening to the Ask Our Economists podcast series. So recently there's been a lot of discussion about commercial real estate and what sort of effects it may have. So we've invited our expert on commercial real estate, Charlie Dougherty, here, to try to kind of make sense of all of this. So, Charlie, let's just start and kind of a level set so people talk about commercial real estate, but that's really a broad category, right? There's lots of different sort of subcategories of CRE. So can you kind of put it in perspective, talk about some of these different subcategories?

>> >> Charlie Dougherty:

Sure thing, Jay. Yes. So the CRE market is a fairly sizable part of the overall U.S. economy. So just to put a number on it, the total commercial real estate market was valued at roughly $24 trillion at the end of 2022. So just to give you some additional perspective there, consider that the value of residential real estate on household balance sheets is roughly $41 trillion. So not quite as big as the residential market, but still big considering nominal GDP in the U.S. economy was about $26 trillion in 2022. So the CRE market is large, but certainly not a monolith. As you mentioned, there's a wide array of different asset classes. So of that $24 trillion, the multifamily market is about 22% of that. So that's everything from garden or low rise, high rise apartment buildings. Then you have industrial buildings and that’s about 12% of the total. That's your warehouses, distribution facilities, assortment centers, manufacturing buildings, etc. Then you have office and retail. That's also about 12% of the total market. And by the way, retail isn't just malls, it's convenience stores, department stores, strip centers, town centers and so forth. Then you have hospitality, which is a smaller slice at about 3%. And that's, of course, hotels and motels. They have a bunch of other property categories like health care, sports, data centers and other specialty buildings that don't really cleanly fit into any of those sectors that I just mentioned, but nevertheless make up a significant chunk of the overall market.

>> Jay Bryson:

Well great. Well thanks for that. In sum, it just sounds like there's lots of different segments here of the CRE market kind of spread out into all those different ones. And again, the office space where I think most of the I guess maybe concerns are because of return to work and things like that, the office space is, I think you said roughly about 12% of that total, which again is roughly $24 trillion or so. So before we get to office, let's talk about some of those other sectors of the CRE market. Are there any there that you may be particularly concerned about?

>> >> Charlie Dougherty:

Yes. Well, I mean, broadly speaking, CRE fundamentals have moderated recently as interest rates have moved higher. So generally across the board you have higher vacancy rates, slower rent growth, but some sectors have outperformed. And I think that is in large part due to this overall resilient pace of consumer spending that we've seen over the past few years. So, for example, if you take a look at the hotel sector, revenge travel coming out of the pandemic has boosted occupancy rates to just about below where they were before COVID. Daily rates asking daily rates on rooms have also moved even higher. So moving forward, if you think about the gradual return of business and international travel is going to continue, that should help keep demand relatively strong. If you look at retail, the strength of the U.S. consumer has been really apparent in the retail market and demand has been really solid over the past few years despite higher e-commerce usage. So, of course, you know, malls remain this area of stress, but new supply in total in the retail market has been really slow over the past decade, and that has led to vacancy rates actually remaining quite low. Now, thinking ahead, consumer spending here, especially for goods, if that slows down, as we currently expect, that could mean further moderation in terms of retail demand is on the horizon. A similar thing can be said for industrial. Industrial is one area where we have seen a lot of new construction. Even so, demand it looks like it's holding up better thanks to things like e-commerce integration, expanding domestic manufacturing capacity. Supply chain fortification. So demand for industrial is downshifting but remaining quite resilient. Then you turn to the multifamily market and apartment demand has certainly softened compared to recent years, but so far in 2023 it’s looking like it's starting to normalize a little bit. So on the supply side, there is a lot of new apartment supply that's on the way. So there are close to 1 million units that are currently under construction, and that's the most since the early 1970s. So that wave of new supply may push up vacancy rates moving forward. That said, on the single family side, inventories remain remarkably low. Mortgage rates are relatively high. And I think those actually could be tailwinds for the apartment market moving forward.

>> Jay Bryson:

Okay. So, you know, maybe some stress here and there, but generally, it doesn't sound like anything really, you know, systemic there in those different parts of the CRE market. But let's focus now on offices. You know, that's again, where I guess a lot of the I'll call it angst may be in terms of the office market. Again, because of return to office, work from home, whatever you want to call it. What are your thoughts there, Charlie, about how is the outlook for the office market in CRE?

>> >> Charlie Dougherty:

Yeah, I think those concerns are certainly warranted. The office market is clearly under a bit of stress at the moment. If you look at the impacts of hybrid work, it's resulted in office vacancy rates that are moving higher. And given the substantial amount of sublease space that's currently on the market, you know, vacancy rates are probably going to move even higher. So we have a marked increase in supply, lower demand following the pandemic. That being said, I mean, it's it's important to not paint with too broad a brush. There's a bit of regional variation, meaning office vacancy rates are pretty much elevated across the nation. But the magnitude of the increase that we've seen recently has differed. So, for example, San Francisco has seen a sharp rise in vacancy rates while South Florida has fared a little bit better. The type of office building actually also matters. So if you look at new office space, new office space, that's a little bit more suitable for culture building, mentorship, virtual activities, space that's environmentally friendly in amenity rich buildings and desirable part of town. That type of office space is actually been a little bit more resilient and should continue to be more resilient to impacts stemming from the rise of remote work. Now, the economic cycle could also impact office demand moving forward. Return to office has been lagging, but more workers are getting called back into the office, and slower economic growth could actually encourage managers to call more workers back more of the time in order to boost productivity. All that being said, there's a lot of office space that's available and that's going to be weighing on the market for the foreseeable future. I will say that the retail market actually experienced a similar disruption with e-commerce. And over time, that market adjusted. So you had supply slowing down until, you know, the next iteration of retail demand emerged. So we can probably expect the same thing to happen in the office market. On that note, there is some potential for redevelopment of office space to things like residential, retail or lab space or warehouses. And while this is certainly intriguing, I think this is, I think, very challenging to accomplish given the differing building codes, zoning limitations and just generally higher costs for things like material labor and especially financing. But overall, in the office market, we have high supply, low demand, and that's likely to weigh on office market fundamentals moving forward, although over time, I think the market should adjust. So, Jay, let me ask you, you know, this moderation that we've seen in CRE fundamentals alongside higher interest rates has resulted in lower property prices. So with that in mind, do we think the CRE market represents a systemic risk to the economy via the banking sector?

>> Jay Bryson:

Yeah, that's a good question, Charlie. Particularly, you know, when you when you think about, you know, 15 years or so ago, you know, with the financial crisis, obviously we had a housing bubble starting 15 or 20 years ago. And then when all the property prices there went south and a lot of those mortgages went bad, banks had to write down trillions of dollars worth of loans. And that led to the financial crisis. And so, you know, the question is and you just mentioned with property prices moving lower, could we see a bunch of bankruptcies in the CRE market, which then has a knock on effect to the banking sector? And just to put things into perspective, so, you know, if you look at commercial mortgages on banks balance sheets, roughly today, it's about 13%. And to put that number in perspective, we've been up to 15% before without undue sort of problems in the banking sector. Back before the financial crisis, when you look at residential loans, mortgages on bank balance sheets, that was 20%. So again, we're at 13% today. So our view is this could cause challenges for, say, individual banks who may have, you know, maybe too much ‘exposure’ to CRE and maybe the wrong types of CRE. Could it have individual stories? And the answer is sure. Do we view this, though, as a systemic risk to the entire banking system, much like the residential real estate before the financial crisis? The answer to that is probably not. You know, again, it looks like when you look at total bank exposure to CRE, it seems to be in a manageable sort of territory. And the last thing that I would note here would be, if you look at the way the banking system is capitalized relative to where it was capitalized before the financial crisis and capitalization is the ability for banks to write down loans that withstand stress. The banking system today is much better capitalized than what it was 15, 20 years ago.  So, again, it could be an individual story, it could be idiosyncratic. But we don't view this as a as systemic. But this issue with CRE probably isn't going away anytime soon, at least not with rates where they are today, at least not with the structural changes we're seeing in the working place environment. So we'll continue to keep an eye on this. And again, thank you for these questions. This question was raised by one of the listeners, and so we decided to address it and we again would invite you to continue to submit questions that we can address in this, Ask Our Economists podcast series. Again, Charlie, thanks for joining us today to give us your expertise and thank you all for joining and listening.

>>Outro:

That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>>Disclosures:

This podcast should not be copied, distributed, published, or reproduced, in whole or in part. 

The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics.

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

Any indices referenced  are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals.

All price references and market forecasts are as of the date of recording. 

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

>>  Intro:

Welcome to the Wells Fargo, Ask Our Economist podcast series, where we explore what's on our clients minds. Provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>> Jay Bryson:

Hello, I'm Jay Bryson, chief economist for the Corporate and Investment Bank at Wells Fargo. And you're listening to the Ask Our Economists Podcast series. So today we're going to talk about student debt, and there's two developments that households face this summer regarding student debt. The first is the Supreme Court is set to rule on the legality of the Biden administration's student loan forgiveness program. Now, I should note, as of this recording, the court has not yet made a ruling on that. And we'll come back. We'll talk about that in a few minutes. Regardless of what the court decides, though, there's a second development that is at the end of August, the moratorium on student debt payments is coming to an end. You may recall back during the pandemic, they put a moratorium on student debt payments during the pandemic. And that's been all that's been suspended now for about three years. And again, at the end of August, that moratorium ends and people start to need to start paying back their student loans. So today to talk about that, we have Tim Quinlan and Shannon Seery here with us. Tim and Shannon cover the household sector for us. And they're very, very well placed to talk about these developments. So, Shannon, let's start with you. Let's level set here. First of all. I mean, how many individuals are we talking about here? How many individuals have student loans? What's the gross amount of student loan debt outstanding today? And talk a little bit about it. You know how much that stuff has grown over the years.

>> Shannon Seery:

Sure, Jay. So there's about 43 million people who hold student loan debt, which is around 13% of the US population. So a decent share of Americans are affected by student loan debt. And collectively, these households hold about $1.6 trillion in student debt as of the first quarter of this year. Now that's up about 6.5% since the start of the pandemic, which is a relatively small increase compared to other loan categories, like mortgages, for example, in recent years. And that potentially could somewhat be related to what you just mentioned in terms of that moratorium that has been in place for the past three years or so. But student debt was growing disproportionately compared to other debt categories prior to the pandemic. So over the past cycle, from 2008 to 2019, for example, student loans rose 160%, which is nearly five times faster than the rise in total household debt over that period. So it's easy to see how this has become a growing burden for many US households over the past decade or so. And why the Biden administration has tried to tackle this issue.

>> Jay Bryson:

Okay, great. So let me ask you this. I mean, you hear all these horror stories in the media of, you know, an individual having you know, $200,000 worth of student loans or something. I mean, you know, how prevalent is that? I mean, can you talk a little bit about the distribution of that debt? You know, what's the average amount of debt out there? And again, you know, what does the distribution look like?

>> Shannon Seery:

Yeah, well, the truth is it's not very common that households have these extremely large debt burdens. And I think that's somewhat of a misconception about this topic. So only about 2% of borrowers or around a million people hold more than $200,000 in student debt. And to provide a bit more context on that, less than 1% of the total U.S. population holds $100,000 or more in student debt outstanding. So we don't mean to diminish that burden for these debt strapped households and dismiss the fact that they are dealing with a high debt burden. But it's a relatively small amount in the context of the entire country. And put this differently. Half of all borrowers have $20,000 or less in outstanding principal and interest, and the median amount owed by all borrowers is between 10,000 and $20,000. So I know we're throwing a lot of stats out there, but essentially most borrowers have a comparatively manageable amount of debt outstanding according to the data. Though, there is a small segment of the population that is overwhelmed by these debt burdens.

>> Jay Bryson:

Well, thanks for that data. I mean, it may be overwhelming, but, you know, again, it's good to have some real hard facts and figures here. And thanks for pointing some of those things out. So, Tim, let me let me turn to you two part question here. You know, in terms of these developments, let's start with the Supreme Court's decision. And again, as of this recording, the court has not yet ruled. But can you talk a little bit about what happens if the Supreme Court upholds the legality of the forgiveness program or if it doesn’t. What happens at that point?

>> Tim Quinlan:

So the way to think about this is if that overall pile of student loan debt that Shannon referenced earlier. You're talking about an estimated share and we say estimated because there's not a real clear hard accounting, because it's categorized of various households that are held Pell Grants as of a certain time. But the best estimates, even rounding to the absolute high end of the range would be round numbers about $600 billion or about a third of that total share. And they've they, like the rest of the holders, have not been making payments. And you kind of think about this in two ways. One is just sort of the flow of these numbers and the other is the total impact on aggregate net worth. When you with the stroke of a pen, eliminate this debt, it effectively lifts household net worth. So if the Supreme Court reverses the ruling, then it would technically bring down the amount of that net worth. And so if you take that $600 billion, it's a pretty big number. But if you factor that into the overall net worth, you're talking about something that is about a half a percentage point of total net worth. So really not terribly significant there.

>> Jay Bryson:

Let's move on now and talk about, you know, again, we don't know what the court is going to rule here, but we do know that the moratorium on debt payments is going to come to an end at the end of August. What does that mean now for, you know, consumer spending as we go forward?

>> Tim Quinlan:

Yeah, that's absolutely right. We know because of the discussions that helped bring the debt ceiling crisis to an end a few weeks ago involved an agreement that those student loan payments would resume at the end of August and beginning of September. And you're arriving at a precise dollar estimate is made a little bit difficult by a lack of a ready system of accounting. You've got to consider things like monthly payments varying by income, debt outstanding and the applicable rate. But we estimate that a typical student loan payment to be somewhere in the neighborhood of $200 to $300 a month, that in terms of income would be about 4 to 5% of annual median salary of around $70,000. And you might think, okay, well, if you multiply that by the round numbers, 40 million people that have student loans, it's still kind of a big number, right? I mean, these households haven't made a payment on these loans in three years. All of a sudden, they've got to go back to making them. Is that going to be disruptive? It absolutely will for those households. I think we can all attest to how inflation is carved up people's income and made it more difficult to spend. And all of a sudden having another bill to pay is not going to be easy. But when you add all those numbers up and roll it into broad categories of spending, the latest personal income and spending report puts the annualized rate of spending for the overall economy at between $18 trillion and $19 trillion. It's it's really not not even a rounding error in terms of the impact there. Now, the timing of this Jay happens to coincide with when we already expect consumers to be retrenching a little bit as the labor market begins to slow later this year. So it could be the straw that broke the camel's back. But, you know, on its own, we don't view this as something that would, you know, on its own stop the growth that we've had in consumer spending. All right.

>> Jay Bryson:

Well, that's that's very interesting. I like the way you said it, potentially the straw that breaks the camel's back, but not in and of itself. It doesn't sound like this by itself would necessarily cause a recession. You know, it's all the other factors. You know, we've talked about before, higher interest rates, real income, kind of stagnating, etc., etc..So this on top of it, perhaps, maybe this is that thing. So let me ask you this, Tim. So Shannon talked about this earlier. You know, at one time the student loan debt was growing very, very rapidly. Kind of reminds me of, say, subprime mortgages back before the financial crisis. And so, you know, seen in that context, is this a potential student loan debt? Is this a potential another mortgage crisis slash great financial crisis?

>> Tim Quinlan:

There I think I can give you a more unequivocal answer. The short answer is no, I don't. I don't think that it is. But let me put some numbers around it to give that some context. If we go back to 2008 and add up mortgage debt, that’s kind of fixed mortgage debt and prime equity lines, home equity lines of credit and things of that category, all of those mortgage debts added up to about $9 trillion. So that was, you know, 15 years ago when the economy was a lot smaller. So $9 trillion was, you know, a really significant sum of money and, yes, $1.7 trillion is a large amount today, but, you know, comparatively much, much smaller. And arguably the more impactful statement around this is that of the mortgage debt that was outstanding. It was owned by it was originated by all sorts of different banks, and some of it was held at those banks. Some of it was held in mortgage backed securities. It was kind of widely spread across the financial system. And and while there are some collateralized packages that hold student loans in them, a key difference today is that the originators of that debt is the federal government. The federal government owns more than 90% of all student loans outstanding today. And in that regard, I think that we can, you know, say that this is a more contained situation than the mortgage crisis was back in 2008.

>> Jay Bryson:

Well, excellent. Well, thank you both, Shannon and Tim for I think this has been a very enlightening conversation. And again, lots of statistics here, but it's it's really good with stories like this that kind of get magnified in the media to actually put some some real numbers behind them. And remember, these questions come from you folks who are listening to this. So we asked you to please keep sending us questions that you have. Would you like us to answer? So again, thank you for joining us today and we'll be out in future weeks with more podcasts. Thank you.

>>Outro:

That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>>Disclosures:

This podcast should not be copied, distributed, published, or reproduced, in whole or in part. 

The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics. 

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

Any indices referenced  are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals.

All price references and market forecasts are as of the date of recording. 

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

>>  Intro: 

Welcome to the Wells Fargo, Ask Our Economist podcast series, where we explore what's on our clients minds. Provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence. 

>> Jay Bryson: 

Hello, I'm Jay Bryson, chief economist for Wells Fargo's Corporate and Investment Bank. And you're listening to the Ask Our Economists podcast series. We've received some questions from you folks recently about mortgage rates and the housing market and all that. And so we thought it'd be a good time to loop in Charlie Dougherty who kind of heads up our analytical efforts in terms of housing to talk about some of these issues. So, Charlie, let’s start by just noting, you know, we've had a pretty significant rise in mortgage rates over the past year or two. The 30 year fixed rate mortgage, which is kind of the benchmark mortgage rate, just kind of closing in on 7% again. And so let’s review, how did we get here? You know, how much have rates risen and what's the catalyst behind all of this? 

>> Charlie Dougherty: 

So mortgage rates have come up quite a bit over the past few years. So let's go back in history a little bit. In 2021, the average mortgage rate was about 3%. Fast forward to October of 2022. The mortgage rate went up to almost 7%. So that is a 400 basis point increase, which we haven't seen since the early 1980s. So what's going on here? Well, we've had significantly tighter monetary policy in response to inflation. So the Fed has been hiking interest rates. The Fed doesn't control mortgage rates directly, but they do have a lot of influence over interest rates. And mortgage rates tend to follow the 10-year Treasury yield. And what we've seen is, as the Fed has raised interest rates, mortgage rates have gone up alongside it. So the thing to remember here is that inflation has been running really hot. The Fed has been tightening monetary policy and as a result, mortgage rates have gone up by quite a bit. Now, there is a technical thing happening here because mortgage rates are loosely benchmarked to the 10-year Treasury yield, there has been a widening of that spread. Now, that tends to happen during periods of economic uncertainty and over the history of that relationship, there's been about 170 basis point spread. That spread has increased to about 300 basis points recently. So there's been a number of things happening. But overall, mortgage rates remain significantly above the averages that we've seen over the past few years. 

>> Jay Bryson: 

Ok. Well, thanks for that review, Charlie. So what does that mean then, for you know, what's the effect on the housing market? What have we seen that's happened in terms of the housing market? And, you know, are there areas of the country that have felt it more than others? 

>> Charlie Dougherty: 

So higher interest rates, higher mortgage rates have worsened, affordability, and that has had a negative impact on really every facet of the housing market. So over the course of 2022, as mortgage rates went up, home sales went down, new residential construction went down, existing single family homes sales ended the year about 20% below where it was in 2021. So higher mortgage rates on top of higher home values. Right. So it's not just mortgage rates that went up. Before that, you know, you had home prices rising really sharply following the pandemic. Just to give you some numbers here, between January 2020 and May 2022, the existing single family median home price went up 40%. So that higher home prices and then now you have higher mortgage rates really pressured affordability for a whole lot of buyers. So, worse, affordability conditions really weighed down housing activity of all sorts. And now you're starting to see activity kind of perk up a little bit. Things are starting to improve a little bit, but overall housing activity is running well below the sort of robust levels that we saw in 2021 and in the early parts of 2022. Now, you asked which regions have been hit the hardest. And, you know, real estate is all local. And of course it varies from market to market and even from neighborhood to neighborhood. But generally speaking, the Western region has been hit disproportionately harder by the increase in mortgage rates and downshift in housing activity. So if you look at what's happening in some of the individual markets out there and what's been happening with home prices, if you look at San Francisco, Seattle, Phoenix, Las Vegas, these areas have seen a really sharp decline in home values, which really reflects a softening in buyer demand in those areas. So there's a few things happening. Western markets tend to be more influenced by the tech industry, and higher interest rates have created some turbulence in tech. So it makes sense that some of these housing markets have turned down a little bit. And the other thing is that home values went up a whole lot in these areas over the course of 2020 and 2021. So those home values were rising faster during that period and now they're coming down a little bit quicker as well. So, aside from the Western region, you know, other parts of the country are holding up a little bit better. So if you look at the northeast, there's really low supply of homes on the market in the northeast and that's helping conditions hold up a little bit better there. The southeast, there's a little bit more supply there. But, you know, the southeast is undergoing really strong population growth and that has helped supporting markets such as Miami and Atlanta and Charlotte, other southeastern markets where housing activity has been a little bit more resilient to the effects of higher rates. So there is a lot of regional variation, but overall activity is still running well below the levels that we saw, you know, in recent years. Okay. So, Charlie, you know, you just mentioned some interesting statistics and names there. You've talked about since the pandemic, house prices up 40% or so. I would note that relative to their high at the housing bubble back in 2006, relative to that, they're up 60%. You mentioned Phoenix and Las Vegas. I mean, I think of those places as kind of poster childs, if you will, for the last housing bust. 

>> Jay Bryson: 

So I think we'd be remiss if we didn't address the question of are we looking at another housing bubble this time? You know, and if the answer is no, then I got a follow up question. And if not, what's different this time? 

>> Charlie Dougherty: 

I do think it's a little bit different this time, and I think there's a few different things happening. One, after the housing bust, you know, lending has been a whole lot more conservative. For example, the share of originations to subprime lenders is much lower compared to the period right before the housing boom. Additionally, if you look at what's happening on the supply side, right, there's not been a whole lot of overbuilding this time around. So, for example, there is about 1.7 million single family units under construction in 2005. You know, we've never gotten back to those levels. So supply is lower. Demand, I would say, is a little bit stronger this time around. Remember, you have a whole lot of younger millennials who are entering the market. And if you actually look at the number of 25 to 35-year-olds right now, they are exceeding the baby boom in terms of this current generation. So you have a really strong underlying demand component. Add in the effects of remote work where people just need a little bit more space. In terms of housing. You have less of a supply and demand imbalance compared to what we saw, you know, in the housing boom and subsequent bust. Another thing is that home values have gone up by a whole lot. Right. We mentioned that home values at one point were up 40%. So that's a whole lot of equity as well for those that own their homes. So that could prevent any of the negative impacts that we saw back then during the housing bust as well. So, Jay, that leads me to this next question. You know, if the run up in mortgage rates was caused by the Fed tightening monetary policy in response to inflation, what are our expectations for monetary policy and interest rates going forward? 

>> Jay Bryson: 

So first of all, let’s just set the field here. So just keep in mind that since March of 2022, the Fed has raised rates by 500 basis points. That's the fastest pace of tightening that we've seen since the early 1980s. You know, our sense is the Fed is not done quite yet. There's another meeting in June and there's one in July. I think it's likely that they will raise by another 25 basis points at either of those meetings. At this point, we think they'll probably on hold in June, lean towards another rate hike in July because the economy is showing some resilience. But we also think that things are starting to slow down in terms of the economy. Inflation has come down somewhat, still has got a ways to go, but we think it will be coming down further. And so we think the Fed is close to being done at this point. But that said, I wouldn't expect rates to come down significantly any time soon. As a matter of fact, we don't expect them to start cutting rates until next year. Now, you mentioned Charlie, the yield on the 10-year Treasury security. That's kind of what the, you know, benchmark mortgage rates are set off of. So that's currently right now around, you know, 3.5 % or so. We think it'll probably hang out these sorts of levels for a while. And as we get in the second half of the year, as expectations of Fed easing start to build, you'll start to see a rally and that you'll start to see long term interest rates come down. But, you know, we're thinking it's going to go back down to roughly 3% or so. We'd be very, very surprised if rates, the 10-year Treasury rate goes back to 1% where it was, you know, two years ago. So, you know, back to you now, Charlie, given that, what does that mean for our outlook for the for the housing market in the next year or two. 

>> Charlie Dougherty: 

Alongside, you know, slightly lower interest rates, you know, mortgage rates are likely to come down a little bit, but we're probably not going back to those 3% rates that we saw a few years ago. So considering that mortgage rates are likely to remain elevated, that's going to pressure affordability and that's going to keep housing activity in general a little bit below where we were in previous years. That said, you know, you have easing inflation, you have sturdy income growth, right? The labor market remains pretty strong right now. So even if mortgage rates do remain elevated, that should help housing activity in general improve a little bit. So, you know, in terms of housing construction, what we're looking for is a modest improvement off of recent activity levels. So we're looking for single family housing construction to increase a little bit this year. We're not looking for a full fledged rebound, however. Right. So new single family construction is probably likely to edge higher, but we're probably not going to go back to the levels that we saw in 2021. In terms of home pricings, the big thing in the single family market right now is there's just such little supply. Right. So right now there's about 900,000 single family units available for sale. That's lower than even the 1.7 million that were available right in June of 2019. So there's really relatively little homes for sale, and that's going to help support prices. Right. So demand is at least looks like it's coming back as affordability conditions improve slightly. So home prices aren't likely to fall. And if you actually look at the month to month changes in home prices so far this year, they've been positive. So bearing all that in mind, we're expecting home prices, you know, not to take off like they did after the pandemic, but to kind of get back to a normal pace of appreciation. So we're looking for, you know, slow home price increases this year and next. So overall, you know, housing activity looks like it's improving slightly. We're still running at a level that's well below where we were in 2021. But things are starting to perk up a little bit. 

>> Jay Bryson: 

Well, thanks, Charlie. Thanks for your insights here today. And we hope you all find these podcasts to be insightful. And again, these are based on questions that you are submitting. So please keep the questions coming. But in the meantime, again, thank you for listening today and we wish you all well until our next podcast. Thank you. 

>>Outro: 

That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo. 

>>Disclosures: 

This podcast should not be copied, distributed, published, or reproduced, in whole or in part.

The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed. 

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics. 

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts. 

Any indices referenced  are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals. 

All price references and market forecasts are as of the date of recording. 

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

>>  Intro:
Welcome to the Wells Fargo, Ask Our Economist podcast series, where we explore what's on our clients minds. Provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>> Jay Bryson:
Hello, I'm Jay Bryson, chief economist for Wells Fargo's Corporate and Investment Bank. And you're listening to the Ask Our Economists Podcast series. So recently we've gotten a number of questions about the Chinese economy. And so we thought we'd loop in international economist Brendan McKenna to talk us through some of these. So, Brendan, before we talk about the outlook for the Chinese economy, let’s kind of talk about where we are now and where we've been more recently, how has the Chinese economy performed let’s say over the last few years or so?

>> Brendan Mckenna:
Yeah, that's a great question, Jay. And I would say the Chinese economy has been very volatile over the last few years, and I'd say the Chinese economy has kind of flipped from being an outperformer maybe early in the pandemic in 2020-2021, and then flipped to being a relative underperformer maybe last year and now over the course of the first couple of months of 2023.
So just to put some numbers to that, in 2020, China was one of the very few economies that actually recorded positive growth during the peak era of the pandemic. And then 2021, we saw a pretty robust rebound by some of the restrictions came off and we saw the Chinese economy grow 8.5%, which was also considered a relative outperformance relative to some of the major emerging market economies and then also relative to the G10 economies. But then last year, as kind of COVID mutated, some new variants came out and Chinese authorities remained committed to the zero COVID policies, we really saw those types of policies have a dampening effect on economic activity across China, and we saw the economy grow only 3%, which was a significant underperformance relative to how we were initially forecasting China's economy to perform. So Jay in summary, I would say the economy has been very volatile. And again, flipping from outperformer earlier in the pandemic and then later in the pandemic to a relative underperformer.

>> Jay Bryson:
Okay, great. Let's talk then about the near-term, just looking forward for the next few years, where do you see the Chinese economy going over the course of 2023 here and into 2024?

>> Brendan Mckenna:
Yeah, I think the prospects have certainly improved, and I'd say the prospects have improved really because some of the zero COVID policies have been lifted and a lot of the pandemic type of restrictions that have come to define China's economy over the last 12 to 24 months or so have gone away. So in that sense, we're looking for China's economy to grow 6% this year, which is a figure China's economy has not been able to grow at that kind of rate for the last couple of years. And I would also say that that growth number has been revised since the start of the year. So it's been a relatively optimistic start to China's economy for this year. However, I would say we're starting to see some of the economic momentum soften a little bit earlier than maybe we would have initially expected. So some of the indicators that are really leading for China's economy, like retail sales, industrial production, the manufacturing and services PMIs, those have all started to soften over the course of the last month or two. And then maybe some of the higher frequency alternative data like subway usage and mobility, those are all starting to trend lower as well. So I would say the risks around our 6% forecast are tilted to the downside for this year. And I think it's more likely that we see a downward revision than an upward revision to our 2023 growth forecast. And then for next year, we're looking for growth to slow below 5%, which again, if you're considering how China's economy has grown historically, that's a relatively slow growth rate. So I would say mixed prospects for this year and then maybe next year, not as robust as we would have liked to expect out of China's economy. So, Jay, I want to flip it over to you. And the Chinese economy has clearly benefited from this theme of globalization. And earlier this year, you wrote a series of reports on the outlook for globalization and how globalization may evolve. How do you expect globalization to affect the Chinese economy in the years to come?

>> Jay Bryson:
Yes, it's a good question, Brendan. And we did write a series of reports a few months ago. And just, you know, for people who want to reference it, it's on our website wellsfargo.com/economics. Now this series reports was largely focused on the U.S. economy. But in general, you know, globalization clearly helped the Chinese economy. It became a member of the World Trade Organization starting in 2001. And, you know, if you look at what happened to foreign direct investment into China, it just poured into the country. At the turn of the century, foreign direct investment in China was running about $40 billion a year. A decade later, that was approaching $300 billion. And so you have all that money pouring into China on top of China's high savings rates to begin with. And that just creates a scenario of just very, very rapid capital investment, which drives GDP growth. And so what we saw was, you know, the Chinese economy in the first decade of the century and throughout much of the second decade, actually grew 10% or more. And Brendan, as you just pointed out, you know, China has slowed down tremendously over the last number of years, no longer growing anywhere close to 10%. Part of it's just law of large numbers just can't grow 10% forever. You go to infinity and that's just not going to happen. But the second thing is some retrenchment at best, a stalling of globalization and probably some retrenchment in globalization that's going on. That's caused by a number of things, really. I mean, one that springs to mind would be COVID experience, you know, with supply chains. Lots of businesses, not only United States, Western Europe, decided they wanted to have supply chains closer to home than in China. And of course, then there's the whole geopolitical angle as well. Do you want to be investing as much into China now that China and at least the United States are, you know, kind of strategic competitor to us at this point?
And so what we've seen is foreign direct investment in China has slowed. Last year, it was only $180 billion versus almost twice that ten years before that. And again, you know, the Chinese economy has continued to slow down. So a reversal of globalization, if that continues, would certainly be a headwind on Chinese GDP growth and it would be certainly one factor that would limit GDP growth kind of as we go forward. But Brendan, that's not the only headwind that China faces. It also has some demographic sort of issues and it has worrying levels of debt, at least in its business sector. So how do you see those things playing out and how does that affect the Chinese economy in years to come?

>> Brendan Mckenna:
Yeah, absolutely, Jay. The Chinese economy certainly has some more structural types of headwinds that can certainly weigh on the economy over the very long term. So to your point about the population decline, we actually saw the Chinese population decline by about 850,000 people last year. That's a relatively significant structural issue within China's economy. And I would say the working age population has probably already peaked in China, and that's also earlier than the United Nations is actually forecast about ten years earlier. So this was an issue that was already on people's radar, but now it's coming a little bit more to the forefront as it's actually materializing earlier than I think we would have initially expected. But as the population shrinks, there are some dynamics that can occur as a result of that. You'll probably see labor costs in China start to rise over time, which can act as a drag on exports. And your point earlier about supply chains potentially moving out of China, higher labor costs could really exacerbate the downtrend in China's export sector. So there's a bit of a compounding effect on a shrinking population. I think there's also a scenario where if the population is shrinking, demand for housing and other types of residential real estate could start to decline. And we know that residential real estate contributes pretty significantly to China's economic growth. So fewer couples starting families could eventually be a rather significant drag on residential real estate purchases. And again, have compounding effects for potential growth rates in China. And then finally, I guess I would say the smaller population could eventually just lead to less tax revenue, and that's less resources that China's government can potentially deploy towards future investment to enhance the potential of China's economy. So the shrinking population is definitely a major structural headwind that China's economy has to compete with over the decades to come. And then to your point, Jay, on the business sector debt especially within the non-financial corporate sector, there's certainly a lot of leverage overhanging the Chinese economy. Well, to put some numbers to it, the non-financial corporate debt is worth about 160% of China's economy. And if you were just to compare that to the United States, the U.S. non-financial corporate sector has debt worth about 55% to 60% of GDP. So you can kind of see on a relative basis that China's economy just has a ton of leverage. But we're starting to see the effects of that. We're starting to see again, to your point earlier, Jay, about FDI into China is slowing. That's something that's really a product of this kind of leveraging, over leverage and debt situation. We're also seeing portfolio flows into the non-financial corporate sector of China also starting to slow as well. So there's also this situation where there's potential government bailouts, which can again divert potential investment funds that China can use to enhance future potential GDP growth. So it's this combination of a population decline and then also business sector debt worries that can really limit the future potential growth rates in China over the very longer term.

>> Jay Bryson:
Well thanks, Brendan. Thanks for coming on today for this Ask Our Economists podcast series and thank you all for the questions that you are submitting. You know, again, these are questions that are coming from you. We're trying to answer as many as we can, so please keep them coming our way. And until next time, we wish you all a good day. Thank you.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask Our Economists is produced by Wells Fargo.

>>Disclosures:
This podcast should not be copied, distributed, published, or reproduced, in whole or in part.
The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics.

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

Any indices referenced  are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals.

All price references and market forecasts are as of the date of recording.

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

>>  Intro:
Welcome to the Wells Fargo, Ask Our Economist podcast series, where we explore what's on our clients minds. Provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence. 

>> Jay Bryson:
Hello, I'm Jay Bryson, chief economist for Wells Fargo's Corporate and Investment bank. And you're listening to the Ask Our Economists Podcast series. We've gotten a lot of questions lately about the crisis in the regional banking system in the United States. So I'm joined here today by senior economist Sarah House to talk about some of the implications of that. So, Sarah, let’s just level set here, First Citizens Bank bought Silicon Valley Bank back in mid-March. Flagstar Bank acquired Signature Bank and JPMorgan Chase took over First Republic Bank. So depositors in these failed banks didn't lose any money. So, you know, should we really care? 

>> Sarah House:
So we absolutely should care. So over the past couple of months, we've seen the three out of four biggest bank failures in the nation's history. And any time you see events like these, it can greatly affect the flow of credit through the economy and send jitters through market. So while depositors didn't lose any money, we did see equity holders lose money, which can make it more difficult or expensive for other strained banks to raise capital later on should they need it. And really, this comes down to a lot of concerns over spillovers and uncertainty about whether the situation would worsen in those early days of March and whether it still may worsen yet. And so we've seen tighter financial conditions. If you look at the Bloomberg Financial Conditions Index, for example, which looks at what's happening in bond equity and money markets. So that tightened in as much as it did in the first really couple of months of the Fed's tightening cycle when the Fed was looking like it was increasingly going to raise rates at a rapid pace over just a single week in March. So we certainly saw tighter financial conditions in the market. We also saw credit markets really come to a standstill. So in the week following the failures of SVB and Signature Bank, you had no investment grade bond issuance. You saw spreads widen in those first few weeks of March. You also saw no high yield issuance for about two weeks. And while we've seen financial conditions ease since those first couple of weeks of March, both in terms of what you're looking at, credit spreads or just broader financial conditions, they're still tighter than what we saw in late February that first few days of March before we saw these events. 

>> Jay Bryson:
Ok great. Well, thanks, Sarah. And, you know, you talked a lot about credit markets there and obviously the corporate bond market plays a very important role in the overall financing of the US economy. And, you know, we can get real time data on credit spreads and on issuance and, you know, etc., etc.. But obviously, let’s don't forget about banks here. Banks also play a very critical role in the financing of the US economy. So do we have any evidence to suggest that banks have become more cautious since some of these regional bank failures? 

>> Sarah House:
We do. Which really isn't surprising, considering banks themselves have been at the heart of these financial strains that we've seen since early March. So if you look at the senior loan officer opinion survey, so we did get that for the first quarter recently. And what we've seen there is credit standards have tightened dramatically across the board. So we've seen tighter standards for businesses, consumer loans, that includes your credit cards and auto loans, as well as real estate loans so tighter standards for both commercial real estate as well as residential real estate. Now, I think it's important to note that this tightening started really in earnest even before the events of March. So in Q4, we saw credit standards tighten really to an extent that we typically haven't seen outside of recessions. So for example, in the first quarter here, you had a net 47% of banks report tighter standards on commercial industrial loans to small businesses. And so that's the most you've ever seen besides 1990, 2001, 2008 and 2009 and 2020. So certainly not exactly a great harbinger of credit growth to come. And similarly, you saw a market tightening in commercial real estate loans. So on that you have 65% or more banks saying that they've tightened standards on multi-family, nonresidential or land development. Now, the reasons for this are multifold. So if you look at the senior loan officer survey, they did a special question on why banks are tightening standards and the most frequent reasons were there is a lot more economic uncertainty in this environment. So both in terms of just what the Fed's been doing as well as just the recent turmoil in the banking sector, but there's also a reduced tolerance for risk. Banks are concerned about deteriorating collateral values of their customers, and there's also concerns about funding costs and liquidity, and notably those concerns about liquidity, as well as deposit outflows and funding costs were higher among your mid-size and smaller banks in this report. So it does seem like those banks are having perhaps still a little bit more more trouble or a little bit more cautious than what we're seeing in the large bank sector. 

>> Jay Bryson:
Okay. So evidence of tighter credit. Is that translating, though, into actual declines in bank lending or slower growth in bank lending? 

>> Sarah House:
We're not seeing actual declines in bank lending, at least on trend, but we have seen bank credit slow. So it's important to note that I think some of the slowdown isn't all just purely from banks tightening standards. Demand has worsened, too. So especially for commercial and industrial loans as well as CRE loans. But when we step back and we look at the actual loan volumes sitting on commercial banks. So those are still up about nine and a half percent over the past year. But that's a bit of a slowdown from roughly the 12% year over year rate we saw at the end of 2022. Now, we've seen a slowdown in consumer loans. We've seen it in commercial real estate loans and to a lesser extent, mortgage loans. But really, the slowdown has been most pronounced in commercial and industrial loans. So those are up just 8% year over year versus closer to about 13% at the start of the year. Now, they've rebounded a little bit here over the past month as we've seen conditions calmed down a little bit. But the pace of the past month, they're growing just about four and a half percent annualized. So still a pretty notable slowdown from the run rate that we're seeing late last year and even through the first few months of this year. Now, Jay, maybe you can take a few minutes and talk to us about what are the macro economic implications of this impact to the bank and what does it potentially mean for the Fed? 

>> Jay Bryson:
Let's start with the macro implications. First, Sarah, I was kind of struck as you were answering those questions, how many times you used the word tight, tighter conditions, and then that translates into slower bank lending and credit issuance in general. And it's just another headwind, you know, on on the economy, right? We have the Fed who's raised rates by 500 basis points so far. So interest rates now are higher and so businesses have to pay more for credit. And then if you layer on top of that, decreased willingness to make loans or stricter standards by which businesses can qualify for loans. That's all just another headwind on the economy. And so it's another reason why we continue to expect the U.S. economy to slip into a modest recession later this year. So what are the implications for the Fed if we do slip into a recession? You would expect that the Fed would be cutting rates. Our sense is they really want to see inflation come down before that happens. And if you do go into recession, that will put some downward pressure on inflation. And so our guess is that the Fed remains on hold through most of the year, that you will have a little recession at the end of this year and put some downward pressure on inflation. And then that allows the Fed to cut early next year. But I guess what I would also say is if for some reason this regional banking issue becomes more out of hand, if it starts to morph more into a 2008 financial crisis sort of thing, then you're looking at a much deeper downturn potentially than what we are anticipating here. And that could actually lead the Fed at some point then to to cut rates. But we are reasonably confident that the Fed and other authorities have the tools available to make sure that this crisis remains relatively contained. So obviously, it's a you know, it's a very fluid sort of situation. And as our thoughts continue to evolve, we'll keep you all up to date with that. So thank you all very much for joining our Ask our Economists podcast series. And we will be keeping you posted with further updates. Thanks for joining us. 

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask our Economists is produced by Wells Fargo.

>>Disclosures: 

This podcast should not be copied, distributed, published, or reproduced, in whole or in part. 

The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed. 

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics. 

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts. 

Any indices referenced  are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals. 

All price references and market forecasts are as of the date of recording. 

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

>>  Intro:
Welcome to the Wells Fargo, Ask Our Economist podcast series, where we explore what's on our clients minds. Provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence. 

>> Jay Bryson:
Hello, I'm Jay Bryson, chief economist for Wells Fargo's Corporate and Investment bank. And you're listening to the Ask Our Economists podcast series. Joining me today is senior economist Michael Pugliese, and we'll be talking about the debt ceiling. So, Mike, let's start at ground zero here. What exactly is the debt ceiling? 

>> Michael Pugliese:
Yeah, so the debt ceiling or the debt limit, you'll also hear it be called sometimes it's a legal limit on how much the federal government can borrow. So right now, the debt ceiling or the debt limit is about $31.4 trillion. So government can borrow up to that amount, but it can't borrow any more than that. And when the federal government is running a budget deficit on an annual basis like it is right now, I mean, sooner or later that debt ceiling is going to need to be increased in order to permit the borrowing that needs to be done to finance that difference between revenues and outlays. 

>> Jay Bryson:
Okay. So what happens when the Department of the Treasury hits the debt ceiling? 

>> Michael Pugliese:
Yeah. So when they hit the debt ceiling, I just like to think about this very simply as they're no longer able to borrow to finance government operations. So you have to rely on three things. One is just don't forget, tax revenue continues to come in the door from individuals, from companies, businesses. And so that tax revenue, one, that cash inflow keeps you going. A second thing is cash on hand. So the Treasury keeps an account at the Federal Reserve that operates kind of like a checking account does to a household. It's called the Treasury General account. And that account has some money in it. And then it allows the Treasury to take deposits and have withdraws and just continue sort of the fiscal agent responsibility of running the federal government. So there's some money there that they can tap. And then finally, you have these extraordinary measures, which are a variety of accounting maneuvers that the U.S. Treasury can pull in order to free up a little more headroom. They're not limitless. They are a finite resource and they're are different sizes depending on what time of year. But, you know, those extraordinary measures can buy additional time above and beyond just the tax revenue and the cash on hand that the Treasury has to pay its bills. 

>> Jay Bryson:
Okay. So let's let's talk a little bit about those extraordinary measures. Now, you just mentioned that they're not infinite, you know, they can only last a little bit of time, it can buy them some headroom, etc., etc.. So what happens if they're all exhausted and the debt ceiling still hasn't been increased? You know, is there a so-called we'll call it break the glass option for policymakers? 

>> Michael Pugliese:
And this is what financial markets and analysts and economists spend so much time thinking about. They say, okay, well, once the tax revenues have run dry, once the Treasury's general account is at zero, once there are no more extraordinary measures, what happens then and this is where you start to enter defaults scenario discussions. If you've ever heard the term the X-date, that's what this is talking about, this idea that there's some date in the future after which Treasury would no longer be able to meet its obligations in full on time because the revenues coming in wouldn't be enough to make the outlay payments in full and these extraordinary measures would be exhausted. And there's been a slew of discussion about policy alternatives in the wake of crossing the X-state. But the problem is all of them are untested. In many cases, they come with their own sets of cons, and no one really knows how financial markets or the economy would react to such a situation. So let me give a few examples of that. You know, one question that comes up is could Treasury prioritize payments on the national debt, with the idea being that they would make payments on the principal and interest on the debt in order to avoid a technical default? Now, this is interesting. It’s certainly something that's been talked a lot about. Treasury's official position is that this is not an option. But regardless of where you land on this, I think it's just important to keep in mind that sure, maybe in that scenario a technical default is avoided, but someone somewhere would still be getting shortchanged because by definition there's not enough money to meet everyone who's owed it by the federal government. And whether that's members of the military or civil service employees or the court system or Social Security beneficiaries, the list goes on. Someone somewhere would still be shortchanged, and that would have economic implications and financial market implications I think that we would talk about in a little bit. Another question is, what about the Fed? Right. Where do they come in in this scenario? But the challenge here for the Fed is a lot of the tools that they might normally lean on in a financial crisis like, say, COVID in 2020 or in 2008. They work at a cross purpose of the inflation fight that the Fed has going on right now. So cutting rates aggressively or going out and doing QE, that creates challenges given where we are in the economic cycle right now. And furthermore, I think the Federal Reserve would have some hesitations about getting involved in what is a very politically charged and fiscally motivated fight. When we look back at the transcripts from the 2011 debt ceiling fight, which we have now that it's been so long since those Fed meetings occurred, you can see policymakers at the central bank really struggled with this topic and they discussed things as simple as just going in to repo markets to try to make sure they operated more smoothly. To much more aggressive operations such as doing QE on defaulted securities. The idea being you would take those defaulted Treasury securities out of the market. But even there, Chair Bernanke at the time said the bar was very, very high to those sorts of activities. And they came back with their own cons and then finally even discussions about could the president act unilaterally on the debt ceiling? You know, we're not legal scholars here. We'll leave it to those folks to analyze what the legal situation is on that front. But again, I just think it's important to think about how precarious the financial and economic outlook could be in a situation where whether or not the debt ceiling has been breached is being decided before the Supreme Court. So there are a lot of different things out there that have been discussed among all the different players at the Fed, at the Treasury and the executive branch. But I think all of them come with a lot of different drawbacks and cons and uncertainty when it comes to the implications for the economy. 

>> Jay Bryson:
Okay. Well, thanks for that, Mike. So here we set in early to mid-May. Many folks will be listening to this in, you know, in mid-May. Do you have an expectation of so when the Treasury hits the so-called X-date, and just to refresh everyone's memory, that's the date in which they no longer have enough cash to pay all their obligations. So what about that, Mike? What's your best guess on when this date, the so-called X-date is? 

>> Michael Pugliese:
Yeah. So right now, I think the two most likely periods to contain the X-date are the first few days of August and the first week or two of June. And you might be saying to yourself, well, how does that make any sense? How could the two dates be so far apart? The U.S. government's cash flows are very lumpy. The cash coming in and the cash going out is not evenly distributed over the course of a month or a week or even within weeks. And so, you know, when you look at the X-date right now in early June, it's clear Treasury is going to hit a very low point on its cash balance and extraordinary measures. And if they can get to June 15, that's a corporate quarterly tax payment deadline. So that'll be another infusion of revenue there. And then on June 30th, one more extraordinary measure gets unlocked. That should buy Treasury at least a few more weeks. So you kind of put that together and you can see how the math becomes. If Treasury can get to June 15th, they can probably get towards the end of July or the beginning of August. So this creates a real challenge for Treasury. And I think we saw this in Treasury Secretary Yellen's communications to Congress recently, where she sent a letter to leaders in Congress saying that you know Treasury may not be able to get through that first half of June period and could run into the X-date. So I think early June is a period that needs to be treated very seriously, although there's still a chance they might be able to get to June 15th and then by extension get towards the end of July. So regardless of if it's in early to mid-June or early August, the X-date’s clearly coming up on us very soon, over the next few months. 

>> Jay Bryson:
Okay. So, you know, at the end of the day, this is kind of a political decision, right? The two main actors here would be President Biden and Speaker McCarthy. And so it's going to be a political decision whether they negotiate here or, you know, pass a debt ceiling increase, whatever. Mike, look into your crystal ball, what's the prospects of the increase in the debt ceiling or, you know, a suspension or those sorts of things? 

>> Michael Pugliese:
The way I look at it right now, over the course of the next month or so, I can envision three possibilities. And there's a lot of uncertainty here, but I'll do my best to unpack it. The first possibility is there's a big sweeping agreement between the two parties, specifically between the President and the speaker of the House, like you just referenced, Jay. And they come to an agreement to increase or suspend the debt ceiling for a meaningful amount of time, you know, 1 to 2 years, maybe even past the 2024 election. I'm a little skeptical that'll happen in the near term, you know, I think that's ultimately what it's going to take eventually. But like we just talked about, there's not that much time, as we record this here in early May, you know, we're talking one month away from a potential June X-date deadline and there are a lot of issues to be hammered out between the two parties that remain very far away from each other on this negotiation. I think a more likely outcome is potentially a punt, a debt ceiling increase or suspension, but rather than one or two years, it's for one or two months. And there are some benefits to that. One, it buys more time for the two parties to get on the same page on this topic. And two, there's another separate fiscal fight still lingering here. So the end of fiscal year 2023 occurs on September 30th, and Congress has still not passed the annual appropriation bills that set annual spending levels and appropriations for the military and other forms of non-defense discretionary spending. And so those decisions have to be made at some point between now and the fall regardless. And so I wouldn't be surprised if there was a short term debt ceiling increase to try to align those two deadlines for later this year and give the two parties and leaderships in both parties time to negotiate it. And then the last possibility, potentially, you know, the most frightening one is we test that early June period and the debt ceiling is not increased or suspended. And Treasury's cash balances dip very low in the first half of June, potentially even breach that X-date deadline. And again, I don't think that's the most likely outcome, but it's it's clearly a possibility out there that that could happen. And so let me ask you the hard question then, Jay, what happens? What are the economic implications if we do indeed default on the debt? And again, just to reiterate, that's not our base case expectation. That's not in our baseline economic forecast. But given that it's at least a tail risk scenario, it's certainly something worth thinking about. Can you walk us through what the economic implications might be of actually crossing the X-date and having a default on the U.S. national debt? 

>> Jay Bryson:
Well, Mike, you know, the honest answer is nobody knows, right? We've never done this before. If you go back and you look at history, so if you go back to August 2011, that's the closest we've come. That thing went kind of right up to the wire. And just if you look at the financial market implications, again, we went right up to the wire there. S&P downgraded US government debt at that point. And then there was a big reaction in financial markets. The S&P 500 went down over the next few weeks, went down by about 15% or so, almost a bear market. Lots of volatility in financial markets if you look at the real effects. In August, consumer confidence nosedived and actually real GDP in the third quarter of 2011 actually contracted modestly during that period of time, and that's without a default. Now, if you have an actual default, again, nobody really knows. But what we do know is the market for U.S. Treasury securities is the deepest, most liquid, most transparent financial market in the world. Treasury securities act as collateral for trillions and trillions and trillions of dollars of other financial instruments. And if you bring the value of that collateral into question, it's going to have a lot of really negative implications in the financial markets. You know, is this a kick off of a great Depression or, you know, a major recession or something like that? Again, nobody really knows here. But, you know, it is something that is obviously very, very serious. And in the past, two parties have come together to raise the debt ceiling. And Michael as you said before, that is, you know, kind of our base case. How exactly we get there, we don't know. But, you know, there is a tail risk of something very, very serious happening economically if we were to actually default on our debt. Obviously, this is something that we're keeping a very, very close eye on. And as our thoughts continue to evolve, we'll continue to keep you all apprised. So thank you for listening to our Ask Our Economists podcast series. Again, we will be coming back with more as the situation evolves. Thank you very much. 

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask our Economists is produced by Wells Fargo.

>>Disclosures:
This podcast should not be copied, distributed, published, or reproduced, in whole or in part.

The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed. 

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics. 

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts. 

Any indices referenced  are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals. 

All price references and market forecasts are as of the date of recording. 

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

>>  Intro:
Welcome to the Wells Fargo, Ask Our Economist podcast series, where we explore what's on our clients minds. Provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>> Jay Bryson:
Hello, I'm Jay Bryson, chief economist for Wells Fargo's Corporate and Investment bank. And you're listening to the Ask Our Economists podcast series. Joining me today is senior economist Sarah House, and we're going to be talking about some issues with the labor market. Let me just start off and kind of level set here. And if you go back to the last expansion, which essentially that went between 2010 and right before the pandemic in early 2020, US economy added an aggregate of 22 million jobs during that period of time. The unemployment rate, which was at 10% in early 2010, fell to 3.5% right before the pandemic. That was essentially a 50 year low. And then the pandemic hit and all that progress essentially got wiped out in two months. We lost 22 million jobs between March and April of 2020, and the unemployment rate spiked to almost 15% in April of 2020. But over the last few years, we've kind of recouped all of that. As a matter of fact, since the low point. We've added a total of 25 million jobs. Now, if we would have kept growing at our pre-pandemic pace of about 190,000, we'd still be about 4 million short. But, you know, nonetheless, we've made some pretty good progress there. And the unemployment rate is back to its all time low. Essentially, it's at a 50 year low of roughly 3.5%. So, Sarah, let's start there. Tell us about where some of those jobs have been added over the last few years, you know, in terms of industry concentration.

>> Sarah House:
Yes. I think early on in the recovery where we saw the job growth being driven, it was really goods related industries. That was areas like transportation and manufacturing. Construction came back pretty quickly as they found ways to work through some of the COVID restrictions. And then it was also, I’d say, services industries that were work from home friendly. So things like information finance, so jobs that you could do from behind a computer in your home.
Now, more recently where we've seen the job growth being driven, it's come from industries that I think lag the overall initial recovery. So that suggests that there's still some catch up going on buoying the overall pace of wage growth. So, for example, we've seen leisure and hospitality jobs. So they've accounted for almost 25% of the 4 million jobs that we've added over the past year, even though they're still down about 2% from their pre-COVID peaks. We've seen similarly strong job gains in terms of percentage terms over the past year in smaller industries like mining and other services. So those are also industries that have yet to recoup all the jobs lost in the COVID recession. And then we're also seeing some catch up, I think, going on in government as well. So we're really seeing that rotation towards more in-person services or just industries that have generally been laggards over the past three years.


>> Jay Bryson:
Okay, great. So we're talking about industries, but let's talk about people here, particularly the labor force participation rate. And just to define that term, that's the percentage of people who are 16 years or older who are actively participating in the labor market. So that means they either have a job or they are actively looking for one. And so if you look right before the pandemic, that was around 63.3%. That nosedived to about 60% in April of 2020. And it slowly has made its way back. But we're back to 62.6% right now. We haven't recouped that pre-pandemic level just yet. So Sarah, who's coming back into the labor force and who's not?

>> Sarah House:
So we have seen the overall recovery in labor force participation lag the cycle that's pretty typical. And I think what we've seen in this cycle has been the fact that it's been less about the availability of jobs, which I think was the big hurdle to getting participation back in the last expansion. So following the 2008-2009 downturn. But it's really been more about, I think, constraints on workers as well as to some extent less financial needs. So things, you know, think health considerations, childcare issues, but also just the fact that consumer finances came out of the COVID recession stronger than they went in. If you think about balance sheet savings, etc.. Now, as you mentioned, Jay, we have seen some progress here over the course of this cycle. And in fact, we've actually seen participation rise for four consecutive months to a fresh cycle high still below 2020, but not terribly far off from its demographic adjusted trend. But it's been very uneven across different demographic groups. So if you look at what we consider prime age workers, so 25 to 54, likely done with their education, but probably too early to retire, even if they've done very well for themselves. Participation among that group is all the way back to where it was before COVID. In fact, if you look at the total share of that group actually working. So factoring in how low unemployment is, it's actually higher than at any point since the spring of 2001. So for that group, we think there's probably some limited scope for further gains, maybe some further gains in areas like prime men's participation, which hasn't recovered. It's been disproportionately driven by prime age women. If you look at younger end of the spectrum so teenagers, participation there is all the way back. But the biggest deficit we've seen is among older workers. So we saw participation there really plummet early on like other groups, but it's been a much more muted recovery. And in fact, still, if you look at 65 and older participation, there is down almost two percentage points. And that reflects, I think in part some of the improved financial conditions among households, but also the fact that these workers were more susceptible to, I think some of the health issues that were were a hallmark of this downturn. But overall, that composition really matters when your older workers have been the fastest growing portion of the population. And this has really been a big difference between what we saw in the pre-COVID participation rate trends where older workers had some of the firmest participation rates that we saw in the past cycle. So by our estimates, if you look at just some of the pre-COVID participation rate trends and factor in just the demographic changes in the US population, so we're probably missing about 2.5 million workers in the workforce. But a little over half of those are workers over 55. So still disproportionately older workers we find are the workers who just haven't come back to the extent that we would have expected or have been laggards in general.

>> Jay Bryson:
Well thanks, Sarah, so what are some of the implications of that slow return of the labor force participation rate? Particularly, what does it mean for, you know, say, wage inflation in the economy?

>> Sarah House:
Well, overall, employers are still struggling to hire and the labor market remains very tight. So we can see that with the unemployment rate at three and a half percent. So just a tick above its 53 year low. At the same time, you have 43% of small businesses saying that they have at least one job hard to fill. So that's come down since where we were earlier this cycle, but it's still above any previous peak in other economic cycles. So still very tight jobs market and overall that suggests that wage pressure is likely to remain elevated. Now, we have seen some slowing in job growth over the past few months. I think that reflects some of the jobs switching frenzy coming out of COVID, beginning to die down and retention and restaffing being less of an issue among businesses. But we're still seeing overall employment costs still well above what it was last cycle. So, for example, the employment cost index in the fourth quarter, the most recent period we have, we're still running about 4% annualized versus a peak year over year rate of just under 3% the last cycle. So with the jobs market, I think still tight overall, we don't expect to see wage growth really mitigate much until we see a lot more slack in the jobs market. And so I think overall, you're still looking at a labor market that's contributing to above target inflation. So, Jay, with inflation still being such an issue and in part being driven from the tight state of labor market, what are the implications of that for monetary policy?

>> Jay Bryson:
Yeah. So Sarah you mentioned if you look at the employment cost index in the fourth quarter, running around 4% at an annualized rate. That's just not consistent with a 2% inflation target. If it continues to run at 4%, you're probably looking at inflation that’s probably closer to three. And that's kind of above where the Fed would like it to be. And so what the Fed would like here is to bring the supply of labor, labor force participation, if you will, back in line with the demand for labor. Unfortunately, the Fed's tools really can't affect that supply side very much. What they can work on is the demand side. So how do you slow down the demand for labor? It's pretty simple. You slow the economy down and that's through higher interest rates. And that's what the Fed has been trying to do here. Now, they're not purposely trying to put the economy into recession or anything, but what they're trying to do is slow the economy enough so that the demand for labor slows, so that wage growth slows to bring down inflation down to 2%. And, you know, we think that the Fed has done a lot of tightening so far, 475 basis points in the course of a year. We think they've got maybe one more rate hike to go and then they'll probably going to leave it where interest rates where they are just to make sure that the economy slows enough again to bring inflation back down to the 2% target where they would like it to be.
But Sarah that's some near-term sort of implications here for the labor market. Let's talk about longer term implications, particularly slow growth in the labor force. If we have the slow growth continue in the labor force, what does that mean for the U.S. economy in coming years?


>> Sarah House:
Right. So I think the supply challenges we’ve seen in the cycle, they have been tied to some pretty unique factors like the health issues and just the sheer policy support we saw. But I think we have to remember that this comes against a backdrop of structurally weaker supply growth. So we see that in terms of the US population trends. So before COVID, the US population was rising about half a percent. So that compares to closer to 1% in the first decade of the 2000’s. And that downshift reflects both lower fertility as well as weaker immigration. So in other words, you have to get higher labor force participation if just the pool of potential labor isn't growing as fast. Now, when we factor in just some of those immigration trends, as well as just the sheer population aging here in the US, the BLS, the Bureau of Labor Statistics, who puts together a lot of these labor market indicators. So they predict that the population aged 16 and over so that total working age population grows about 8/10 of a percent over the rest of the decade. But the what I would consider more of the true working age population. So you're 16 to 64, that's only estimated to grow point 2%. So really just a fraction of the overall growth in your population at age 16 plus is coming from workers who I think are more realistically likely to engage in the labor market and tend to have that higher population growth. So I think we're going to be stuck in this period where there's more upward pressure on labor costs, holding other things like productivity growth equal beyond just this current cycle. And when we think about just overall growth for the economy, we have to remember that labor is an input into production. So yes, you can have capital. Hopefully you're getting more technology that's boosting productivity, but you still need workers to run some of those machines, fix some of those machines, create that that innovation which drives productivity growth. And I think at the end of the day, slower labor force growth, it does act as a brake on total growth. So you still need people to run these businesses. And so I think it's just these slower trends in labor supply growth is something we need to be thinking about just beyond this most recent cycle.

>> Jay Bryson:
Well, thanks, Sarah. And one thing I want to touch on there is you did mention something about productivity growth. There is a potential thing out there that could change productivity growth pretty significantly in coming years, and that's artificial intelligence. That's, in our view, is a productivity game changer that also has profound social and political implications as well. And those implications really are beyond the scope of this podcast here. But potentially it could be a topic for a future podcast. But thank you all for listening. You've been listening to our Ask Our Economists podcast series and we'll be back with more podcast in the coming weeks and months. Thank you very much.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask our Economists is produced by Wells Fargo.

>>Disclosures:
This podcast should not be copied, distributed, published, or reproduced, in whole or in part.
The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics.

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

Any indices referenced  are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals.

All price references and market forecasts are as of the date of recording.

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

>>  Intro: 

Welcome to the Wells Fargo, Ask Our Economist podcast series, where we explore what's on our clients minds. Provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence. 

>> Jay Bryson: 

Hi, I'm Jay Bryson, chief economist for Wells Fargo's Corporate and Investment Bank. And you're listening to the Ask Our Economists Podcast series. Today, I'm joined by senior economist Tim Quinlan and senior economist Michael Pugliese. And we're going to talk about the implications for the recent troubles in the regional banking system here in the United States, and specifically what it means for our economic forecast. Now, we should start out just by saying that any economic forecast is based on a number of underlying assumptions and typically, in call them, quote, ‘normal times,’ we don't bore you with many of these assumptions. Like, for instance, we assume that there won't be a nuclear exchange between the United States and North Korea. Right. I mean, we all know that that potentially could happen. But part of our economic forecast is we assume it won't happen. If it does you change your forecast? That's typically how those things work. But when things become really uncertain, I think it's imperative among us to make some of our forecast explicit. So what we're doing here in our forecast is we are explicitly assuming that authorities will take whatever steps are necessary in coming days, weeks and perhaps months to make sure that what we're seeing in financial markets right now is not another repeat of 2007, 2008, and I think that's a relatively valid sort of assumption. If you go back to 2007, 2008, you know, the authorities, particularly the Federal Reserve, took a lot of steps at that time to make that financial crisis less bad than otherwise would be. And they did the same thing back in 2020. So I don't know exactly what steps will be needed. But, you know, the Fed and other authorities have shown themselves to be very adept to come up with programs to stabilize the financial system and then to try to minimize the impact on the overall economy. But even if they end up doing that, we still think there's going to be some economic ramifications, particularly when you look at credit, you look at what's happening in credit markets right now. Credit spreads have widened. We think they will probably remain wide for coming weeks and months, and that will be a headwind on issuance in the corporate bond market. 

>> Jay Bryson: 

We wouldn't be surprised to see lending standards at banks also tightened going forward, and that will also be a headwind on the macro economy. So, Tim, let me turn to you and ask you, you know, given that, what's the implications here for the U.S. macroeconomy and forecast? 

>> Tim Quinlan: 

Yeah, Jay, the funny thing is the strength of hiring and consumer spending so far in 2023 have been more robust than we or really anyone else expected. We've had this recession call in place for a while and fundamentals were strong enough at the start of this year that that recession call was almost in jeopardy at times with this path toward soft landing becoming a little bit easier to find, even as it kind of makes the Fed's job a little bit harder because they'll have to raise rates even more to get inflation under wraps. So how does the banking crisis over the past couple of weeks change things? Well, as you sort of described in the wake of a banking crisis, it stands to reason that access to credit will be diminished. And our sense is that a tightening in borrowing conditions will have a more material impact on businesses, but it will have some impact on the consumer and household sector as well. You know, the staying power of personal spending has already been kind of propped up for the last year or so by a three legged stool. Those three legs are a drawdown in excess savings, credit card borrowing and real income growth. And two out of the three of those haven't really been impacted by this banking crisis, or at least not yet. You know, savings is still there and the job market so far is okay. It’s the credit piece that we do start to worry about. But later this year, as excess savings dry up and as the labor market begins to soften, we suspect that the lack of credit will really start to become a lot more evident in spending, particularly as those other legs of the stool kind of get kicked out. We've got real spending slowing in the second quarter of the year before it starts to post actual outright declines in the second half of the year. And those declines are now larger than what we had previously. And while consumers may carry some of their momentum into the second quarter, there's less momentum in key categories of business spending. In fact, equipment spending kind of a key barometer of CapEx already declined in two out of the past three quarters. And we now have equipment spending declining pretty much every quarter all the way out until the middle part of next year. Now, intellectual property spending will see some carryover in the first part of the year. It’s been pretty strong so far. But even that could succumb to tightening as the credit backdrop deteriorates a little bit later on this year. You know, industrial production has been flat or down slightly in eight of the last 11 months. You kind of point to this idea that manufacturing to some extent is already in recession. Bottom line, we estimate real GDP will contract 1.2% on a peak to trough basis, and the unemployment rate will rise to a peak of just over 5% in the first quarter of next year. So, you know, as downturns go, Jay, that makes this kind of a fairly mild one. The financial crisis, for example, saw peak to trough decline of closer to 4%. This is obviously kind of a far cry from that. You know, this crisis that we find ourselves in stems from rising rates. That itself was sort of a response to high inflation. So Mike, I'll turn it to you now and maybe you could give us some indication on what the outlook for inflation is in the context of all this. 

>> Michael Pugliese: 

Yeah, well, when I think about the inflation side of things, it's also moved quite a bit relative to where the Federal Reserve was just a month and a half ago when they last met. So, at their previous meeting in February, I think about the situation on inflation for the Fed is improving, you know, still a ways to go, but moving in the right direction. You had seen progress on falling headline inflation largely due to much lower energy prices of oil and natural gas and some other categories like that had eased relative to their peaks in 2022. And we'd also seen much slower goods inflation, particularly as some of the hardest hit supply chain challenge sectors had seen price growth slowed quite a bit or even enter deflationary territory, whether it was used cars or appliances, furniture, many physical items like that. And when you looked at the second half of 2022 inflation data, it marked a clear deceleration, again, not all the way back to 2%, but moving in the right direction. And a couple of things have happened since then. So, the first was a lot of that Q4 and second half of last year's inflation data got revised up where just, you know, as an example, core CPI inflation, which previously we thought was running at about a 3% three month annualized rate to finish last year, got revised up into the mid four. So, a pretty substantial revision. And then on top of that, we've gotten two more CPI readings since the Fed's last meeting and both of those have been pretty strong. They're not as high as they were last year, but more of a plateauing around core inflation in that 4.5%, 5% range. In terms of the underlying run rate. And so in the background of this pretty strong economic data on the real side of the economy that Tim just laid out and through a lot of the very uncertain and volatile developments of the past couple of weeks, you've continued to see inflation data remain quite hot. Whether it's where we finished last year in terms of just a momentum into 2023, and also the first few reports that we've gotten this year and I think in the near term that's probably set to continue for many of the exact reasons that Tim just laid out. There continues to be pretty positive forward momentum in the real economy. And I think that's very much true on the inflation side as well. But as we get later into this year and you start to see some of the cracks emerge, whether it's from tighter financial conditions as a result of the financial system, stress as we've seen in the past couple of weeks, or even just the lagged impact from tighter monetary policy, it's easy to forget that, you know, the Federal Reserve just began tightening policy a year ago when they did their first 25 basis point rate hike off the zero lower bound in March 2022. So as those cumulative effects build, as you start to see the pass through to real spending, real investment, to hiring, to all those factors, I do think you'll see inflation moving down further over the remainder of this year, probably not all the way back to 2%. So just to put some numbers around it, we've got core PCE inflation, which is kind of the Fed's preferred measure of inflation still at 3.4% on a year over year basis in the final quarter of this year. And if you look at it on a length quarter basis, it's close to 3%. So not all the way back to the Fed's target, but continuing to move a lot closer to what the Federal Reserve, I think, would tolerate and potentially might let them ease policy as we get into next year. And it's a similar side on the labor market. I know you touched on this a little bit already, Tim, but when you think about where the labor market is right now, still quite strong, finished the fourth quarter last year averaging almost 300,000 jobs per month, averaging 400,000 jobs per month through the first two months of this year. I think you can continue to see some more near-term strength over the March, April, May, very near-term employment reports. But those too, I think, will roll over as we get later in the year. And there are already signs of this despite the strong headline labor market data. If you look at the breadth of hiring, it's not nearly as strong as it was a couple of quarters ago. Wage growth has started to soften When you look at three and six month trends, quit rates are falling, job openings rolling over. So, you pull all those factors together. And I do think there are some signs that despite the near-term strength, if we forward project this nine, 12, 15 months, we're going to be looking at a very different labor market picture. And as you've already outlined, Tim, a peak unemployment rate of five and a quarter or something in that ballpark. So pulling that together, Jay, maybe a still pretty strong near term inflation outlook, strong labor market outlook, potentially weakening quite a bit as we get to later this year. Where does that leave the Fed both in terms of near-term monetary policy and also looking a bit further down the forecast horizon into next year? 

>>Jay Bryson: 

You know, near-term Mike, what I would say is we think that the Fed at their FOMC meeting on March 22, we think that they will pause just to see what's going on in, you know, in financial markets at that point. Now, many of you who are going to listen to this podcast are probably going to listen to this after March 22. And what I would say is if they do raise rates on March 22, by say 25 basis points, we wouldn't be completely surprised about that. But whether or not they pause here on March 22 or not, we think by May, if our underlying assumption about, you know, they've done enough to stabilize the financial system is correct, they get back to watching the data. You know, the economy is not completely falling apart at that point. We think they would probably go ahead and raise rates again. We think the peak Fed funds rate, which is right now at 475 as I speak, we think that will probably peak out around 525. So, let's call it another 50 basis points of tightening. And then over the summer, we think that they pause kind of for good at that point because by that point we think they'll start to be seeing signs of more slowing in the economy. And I think that, you know, at that point, pausing is the best course of action. We think they'll remain on hold through most of this year. And then towards the end of the year, maybe at the December FOMC meeting, maybe they start cutting at that point. But in general, as we look into 2024, if our forecast, you know, as Tim was talking about a mild recession, mild to modest sort of recession comes to pass, we would think you're looking at a significant amount of easing next year, let's call it 275 basis points or so of easing. We don't think they're going back to 0% like they were back between 2010 and 2016  or so. And then again right after the pandemic. But, you know, if we do have a recession, we think that we'll see some significant easing next year. But again, that's for next year. In sum, I would wrap up by saying, we thought coming into these problems that there was going to be a modest recession in the United States. Remain of that view. We think it'll be a little bit deeper than what we were thinking before these problems started to arise. We think the probability of recession is probably higher than what it was two or three weeks ago. But again, we think it's relatively more modest, but obviously it's a very, very fluid situation right now. We are keeping a very close eye on it, monitoring it.  And as changes are needed to our forecast, we will definitely keep you all apprised of that. So again, thank you all for joining us today for our Ask Our Economist podcast series. This is Jay Bryson, the chief economist for Wells Fargo. Again, thanking you very much. 

>>Outro: 

That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask our Economists is produced by Wells Fargo. 

>>Disclosures: 

This podcast should not be copied, distributed, published, or reproduced, in whole or in part. 

The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed. 

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics. 

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts. 

Any indices referenced  are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals. 

All price references and market forecasts are as of the date of recording.

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.

>>  Intro:

Welcome to the Wells Fargo, Ask Our Economist podcast series, where we explore what's on our clients minds. Provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>> Jay Bryson:

Hi, I'm Jay Bryson, chief economist for Wells Fargo Corporate and Investment Bank. And you're listening to the Ask Our Economists podcast series. Joining us today is senior economist Sarah House and Shannon Seery, also an economist with our group. And we're going to be talking about a report they just published entitled Party of One: How Single Women Stack Up in the US Economy.

>> Jay Bryson:

So, Sarah, let me ask you first, what motivated you to focus here on single women?

>> Sarah House:

Well, it was really two-fold. So first, we like to take Women's History Month to take a moment to kind of maybe step back from sort of the shorter-term cyclical fluctuations in the economy we're looking at. And just a little bit deeper dive on certain segments of the population. And last year, we focused on the childcare industry. So why it was struggling so much to bring back workers and how the lack of childcare workers was amplifying the labor shortage, particularly for women and just why the industry challenges were a persistent headwind to women's labor supply. But childcare is disproportionately, although not entirely, a married women's issue. So this year we thought it would be nice to take a deeper look at some of the economic trends amongst single women. So, it's a rapidly growing group and we wanted to better understand how single women are interacting with the labor market and what that means for their financial well-being and their economic prowess ahead.

>> Jay Bryson:

Okay, great. So, Shannon, Sarah just mentioned it's a rapidly growing group. So can you tell us about kind of the growth rate of single women and what's really driving it as it divorces are going up or married men are dying earlier or what's going on here?

>> Shannon Seery:

Sure. So we've seen the share of single women really only grow. Over half of women in the US are now single, which is equivalent to just over a quarter of the total US population. So, it’s a decent chunk of the country. Now we're thinking about single women. You have those who are previously married and are now separated, divorced or widowed, and those who have simply never married. And it's this never married segment that has accounted for all of the growth in single women over the past decade. So, this population has grown about 20%, which outpaces the increase in never married men and is about two times faster than total population growth in the United States. So, the reason we're seeing this group rise so quickly, is because women are marrying later, but also more women are simply not marrying at all. So, there is a larger portion of older women today that have never married compared to historically. And we haven't seen much growth in the previously married single segment. But as you can imagine, the largest share of older single women are still those who are widowed.

>> Jay Bryson:

Thanks Shannon. So, Sarah, let's talk a little bit about labor force participation. So historically, men have had a higher labor force participation rate than women. And right now, the rate among men is about 68%. It's roughly 11 percentage points higher than the comparable rate for women. And historically, the lower rate for women reflected the fact that many married women they took on unpaid work at home and didn't go into a, you know, a full time job. So, does this increase in single women, does it have implications for the overall labor force participation rate?

>> Sarah House:

Yes. So, and I think that's one of the most exciting implications of the report, is that the rise in single women is helping the economy grow faster by boosting the overall labor supply. So, except for widows, the vast majority of which are beyond their working years, never married, women, divorced, separated. They have higher participation rates than married women. Now, participation among previously married women has declined over the past decade. But a lot of that has to do with just this group getting older and moving to years that are more likely to be retired. But if you look at the total contribution of single women to the labor force over the past decade, they've added about a percentage point to women's total participation rate. So, in contrast, single men have actually detracted from the male participation rate, and that increase can be entirely traced to never married women. So, it's not just that this group is growing faster, but they also have the highest participation rate out of any marital group of women. And in addition, just getting bigger in size, they've actually seen the biggest increase in their participation rates over the past decade. And a lot of this can be tied to just the behavioral changes of this group growing labor force attachment even more than what we've seen between never married men. So overall, this group is contributing to growing labor supply.

>> Jay Bryson:

Okay. Well, thank you, Sarah. So, Shannon, let's turn to you and talk about the so-called quote, ‘mommy penalty.’ And what that refers to is women generally get paid less than many men, even for the same jobs. A number of reasons behind that. But one of the reasons may be because women with children may not be able to gain as much job experience as men, because, let's face it, women are still the primary caregivers in our society. And many women may decide to stay home to raise their children and can't get that job experience. But, you know, this increase in single women, many who are probably childless, means that they're able to stay in the workforce continuously. So, what does that mean for the wage gap? Are we seeing the wage gap between men and women narrow?

>> Shannon Seery:

Well, not exactly Jay, which was also a fairly interesting finding. So never married women still earn just about 92% of what never married men earn. And while the wage gap is narrower for single women than married women, it's been little changed over the past decade. So, in other words, it's moved within a narrow range. And there hasn't been much improvement since. This group, as you said, tends to be more likely to be childless. I think this therefore suggests there is much more to this argument than just this ‘mommy penalty’ that you mentioned. Right. So, there's also things like the tendency of women dominated jobs to pay less and the continuation of unconscious biases that cause this gap to persist.

>> Jay Bryson:

All right. Shannon. So Sarah, let’s take that we just talked about in terms of lower income among women than men, So does that also translate into lower wealth among women than men?

>> Sarah House:

Yes. So, it's really an uphill battle for single women to build wealth considering that they have lower income to the start. So, their expenses are largely the same. You still need a place to live, food, eat, health care. And we look at singles as a population as a whole. So, their median wealth is about $51,000, versus couples have a median wealth of $230,000. This is back in 2019. And couple's wealth is so much larger, in part because you have the benefits of married men's income. So, they have the highest income out of any marital group. And then also just the economies of scale of the two-person household. But if you look at single men versus single women, so single women in 2019, their median wealth was about 18% or $10,000 less than single men. And so, they're not really a huge factor here. So, women are about four times more likely to be single parents and those childcare costs and obligations can limit what jobs they can take, the hours they can work. And when you look at single mothers, their median wealth in 2019 was $7,000 versus about $65,000 for women with no dependent children. Now, that group skews a little bit older because they define children as financially dependent children. But even when we control for characteristics significant for wealth, like age, education, for example, the presence of children. So, the St. Louis Fed found that never married women's wealth is lower than never married men by about 29%. So, it’s the biggest wealth penalty amongst any marital group. So still pretty striking that you do have this lower wealth amongst these single women, particularly never married.

>> Jay Bryson:

Okay, so, in summary, single women have lower income than their male counterparts as well as lower wealth. So, Shannon, what sort of implications does that have for spending among unmarried women?

>> Shannon Seery:

Right. Jay. Well, with these lower dynamics for income and wealth, I think it's little surprise that single women also tend to spend less compared to single men or even the average U.S. household. So, they have seen comparable growth in spending over the past decade. So, the rate of single women spending growth has kept pace with broader spending trends. But I'd say that women tend to devote a higher share of spending towards necessities like housing and health care than their male counterparts. So, we've also seen an increase in terms of single women spending on education and food away from home specifically. So, we've seen their spending there grow even faster than men over the past decade. So, I think overall, while the higher share of single women in the United States isn't necessarily yet translating to outsized growth in spending, I still think that, you know, single women are a growing consumer segment, and we may see specific spending categories like education, food away from home, health care, potentially benefit from the continued rise in this population going forward.

>> Jay Bryson:

So, Sarah, let's end with thinking about the long term here. You know, up to this point, it's been more or less short-term, near-term sorts of things. What some of the longer-term effects of a growing share of single women in the economy.

>> Sarah House:

So, I think right now in terms of that greater propensity for single women to work, and particularly that growth in never married women. So that's great for labor force growth now, but the delay of marriage or forgoing it altogether, that's also associated with eventually having fewer children or lower fertility. And so, while we might be getting a near-term boost to labor force growth from single women, it does create challenges down the road in terms of that future labor supply growth. And perhaps on a more positive note, well, it hasn't translated to a narrower earnings gap yet. I think there's still the prospect that maybe we can see that gap narrower ahead as women's work experience more closely mirrors that of men. So, we've seen a gradual rise in the never married share of labor force through about 2010, but it's been more explosive since then. So, it might just be that it's still taking perhaps just a few years to see the payoff. So, you do have women's educational attainment growing faster. Corporations, I think are doing a lot to address what unconscious bias or unintended pay gaps exist. So, I think that could take time to show up in the data. But I think it will also depend on what happens to the relative earnings of women versus men dominated industries, which Shannon eluded to, is part of the reason that we're still seeing a pay gap between women and men of the same marital status. I think for now we have to bear in mind that the growing share of the population is generally in a more precarious financial position, though, so that can limit their spending. And even as this group is growing, it makes it hard to outpace other groups, even as they are getting more labor market experiences. And, that's going to have implications for businesses that have a large customer base of single women. It's great for their growing population, but it could be even a more powerful consumer segment if we did see some relative inroads in terms of income and wealth gaps.

>> Jay Bryson:

Well, thank you, sir, and thank you, Shannon. And thank you all for joining us today for our first installment of our Ask Our Economists podcast series, I'm Jay Bryson, and thank you very much.

>>Outro:

That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@wellsfargo.com. Ask our Economists is produced by Wells Fargo.

>>Disclosures:

This podcast should not be copied, distributed, published, or reproduced, in whole or in part.

The views expressed on this podcast represent the opinions of the authors on prospective trends in the domestic markets and the financial institutions industry and is intended for global financial institutions partners and customers, and other market participants who are customers of Wells Fargo. The views expressed within are not intended as a recommendation offer or solicitation with respect to the purchase or sale of any security or other financial product nor does it constitute professional advice. The views and opinions expressed are also not necessarily those of Wells Fargo and may differ from the views and opinions of other departments or divisions of Wells Fargo. Wells Fargo does not make any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information expressed within this podcast and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.

We do not guarantee this information but have obtained it from sources we believe to be reliable. Opinions expressed are based on our experience and judgment as of this recording and are subject to change without notice. For the latest views of the Wells Fargo Economics team, please visit www.wellsfargo.com/cib/insights/economics.

This is not an offer to sell or to buy any security or foreign currency. Any past performance discussed during this podcast is no guarantee of future results. Any forward-looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

Any indices referenced  are for performance comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from your licensed professionals.

All price references and market forecasts are as of the date of recording.

Wells Fargo Corporate & Investment Banking (CIB) and Wells Fargo Securities (WFS) are the trade names used for the corporate banking, capital markets, and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, member of NYSE, FINRA, NFA, and SIPC, Wells Fargo Prime Services, LLC, member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A., member NFA and swap dealer registered with the CFTC and security-based swap dealer registered with the SEC, member FDIC.  Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC, are distinct entities from affiliated banks and thrifts.