Notes from Wells Fargo 2012 Outlook Call

Highlights from today’s 2012 Outlook Conference Call hosted by Wells Fargo Economics Group:

Click here for the presentation slides/graphs

Click here for outlook report

US Economy

  • Anticipate 2% GDP growth in 2012
  • Anticipate modest inflation (less than 3%), though CPI is currently near 4% (and under reported)
  • Household assets starting to recover, at same time household debt declining to levels last seen in early-90s
  • State budget gaps shrinking
  • Possible decline in state tax revenues anticipated in 2012
  • Housing: Anticipate housing starts having bottomed out, returning to “normal” levels to 2015 (some growth in ‘11 compared to ‘10)
  • Existing home inventory still around 2.86 million
  • Do not anticipate foreclosure issue going away prior to 2012 elections, “cloud” will continue over the market
  • Distressed sales are a heavy weight on prices
  • Greater consumer focus on home improvement (opposed to home sales)
  • Personal consumption growth below 2% for 2012, restricted by limited income growth and personal deleveraging
  • Savings rate starting to decline a little
  • Consumers think incomes more likely to decrease than increase

Comparison to Japan’s “Lost Decade”

  • Housing collapse was far more significant than Japan, but recovery (correction of prices) taking place at faster rate
  • “Asset bubble” exposure in US less
  • Drop in nominal interest following start of recession is consistent with what happened in Japan, contrary to economic theory
  • Overall, US economy is underperforming Japan (GDP and unemployment)
  • US monetary base growth far outpaced Japan’s downturn response in 90’s

US Retail

  • “Black Friday” looked good, though November overall was flat
  • Project modest growth for the year as a whole
  • Expect energy prices to “moderate” in order to keep inflation under control
  • Consumer confidence shrinking


  • Modest recession expected in 2012
  • Italy is “too big to bail out” with respect to its soverign debt, would leads to “wiping out” of hundreds of billion Euros, similar to Lehman Brothers collapse
  • Anticipate solutions will be found; collapse of Italy “in nobody’s self interest”: structural reforms (painful) will be necessary to resume growth, especially in Italy


  • Growth will slow to 7.5% by mid-2012, then pick up
  • Do not anticipate “housing bubble” to collapse Chinese economy, primarily because consumers are not heavily leveraged
  • Export growth dependent on growth in developed countries
  • Growth of “middle class” in developing countries is small, but can have a significant impact on commodity prices
  • Yuan appreciation could help significantly improve household income value


  • Long-term interest rates should remain low, “Operation Twist” will cotinue
  • Profit growth will continue, probably 6% for 2012
  • Linkage between Europe & US (trade & financial)? 15-20% of exports (1.5-2% of US GDP) go to the Eurozone; effects of potential Eurozone recession are relatively “muted”; potential of blow up of Eurozone financials would be similar to Lehman Brothers collapse, significant LIBOR spike (up 30 basis points right now) that will facilitate global financial crisis and recession
  • “Modest recession” for Eurozone is built into most economic forecasts right now
  • Is student loan debt preventing entry for many into housing market? Right now, loans are requiring high FICO scores.
  • Slowdown in China is impacting neighboring economies (South Korea, Japan, Taiwan, Singapore) and even US Pacific exports (California)
  • Part of housing mess resolution is dependent on banks getting healthy enough to take more significant write-downs on inventory they own (mortgage default properties); anticipate “new normal” on housing starts less than pre-recession levels; also remember that housing market normalcy will take place at different times in different locations
  • What’s to keep the US from blowing up? Economy would have to stall out, and interest rates would have to increase without any fiscal tightening. We have the structural flexibility that leads to enhanced productivity. Need “political resolve” to address spending issues.
  • Multi-family rent growth? Declining in multi-family starts; demand strong, but cooled off in the fall; anticipate lower growth in rental rates (2-2.5%); still difficult for families to absorb increases; adaptation by “doubling up” within families; lack of significant financing for development
  • Who’s most dependent on Europe? What is the US exposure to them? ECB is the only group that has the resources to “back-up” soverign debt issues, will require more support/reform from member nations. Structural reforms are critical in Eurozone to restore potential for long-term growth (free up labor markets). Eastern Europe is most exposed to Western Europe (40% of export market), and our exposure to Eastern Europe is “muted.” China trade (export) exposure has grown. Financial effects far more important than trade effects.

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