Economics Group 2021 Annual Economic Outlook Aftershocks and divergence in the post-pandemic economy
December 2020 Table of contents
Introduction and Summary 2
U.S. Economic Outlook 4
U.S. Real Estate and Regional Outlook 8
U.S. Political Uncertainties 14
Global Economic Outlook & Uncertainties 19
Forecasts 24
Disclosure 26
1 December 10, 2020 | 2021 Annual Outlook the election have not led us to change that assumption. As Introduction and Summary of this writing, lawmakers are negotiating the details of another stimulus package, and more fiscal stimulus could The Pandemic Has Been the Economic Equivalent of a be forthcoming. That said, we have seen other Magnitude 9 Earthquake negotiations collapse in the past, so we will continue to assume that no more meaningful fiscal support will be The longest U.S. economic expansion since the end of the introduced in the new year. We would make some modest Second World War came to an abrupt end earlier this year upward adjustments to our forecast for next year if indeed as the COVID pandemic essentially shut down the another fiscal package is signed into law. economy. Following an unprecedented plunge in Q2-2020—real GDP nosedived at an annualized rate of The Federal Open Market Committee (FOMC) responded 31.4%—economic activity rebounded sharply in the to the shock that the pandemic imparted on the economy third quarter. But the shocks of the pandemic continue to by slashing its target range for its main policy rate back to reverberate throughout the economy as renewed surges in 0.00% to 0.25%, where it remains today. The FOMC also COVID case counts have led some local officials to re- reinstated its quantitative easing (QE) purchases of impose some restrictions. Furthermore, voluntary Treasury securities and mortgage-backed securities, and it decisions by individuals and businesses to follow guidelines rolled out a plethora of lending programs to stabilize credit regarding socially-distanced behavior have led to markets. Looking forward, we suspect that the FOMC will weakness in some sectors of the economy. Most foreign maintain its current target range for its main policy rate economies, which have experienced their own outbreaks of through at least the end of 2022. In addition, the COVID cases, have also been rocked by the pandemic. committee may eventually sanction further monetary accommodation if inflation struggles to reach 2% or higher Most economies will register sharp rates of contraction in on a sustained basis. Although the likelihood of a negative 2020. We estimate that global GDP will shrink 3.7% this policy rate seems to be rather low at this point, the FOMC year, the most severe global downturn since at least 1980. could potentially provide further monetary Although we forecast that real GDP growth in most major accommodation by concentrating its QE purchases at the economies will bounce back significantly in 2021, we long end of the yield curve in an effort to push long-term readily acknowledge that the economic outlook remains rates lower and/or by increasing its QE purchases. If the dependent on the evolution of the pandemic in coming FOMC errs, it will provide “too much” monetary months and quarters. accommodation rather than too little, in our view.
In that regard, COVID cases in the United States have risen As noted previously, the economic effects of COVID have significantly over the past few weeks, and some U.S. states reverberated around the world. The Chinese economy, and municipalities have tightened restrictions in an effort where the pandemic originated around the turn of the to slow the spread of the virus. Accordingly, we have year, contracted 10% (not annualized) on a sequential downgraded our U.S. GDP forecast for Q1-2021, which a basis in Q1-2020. But China has largely been successful in month ago we had projected to be 4.0%, to only 1.2%. But subsequent months in combatting the spread of the virus, we have also upgraded our forecasts for the second and and the country has reported negligible numbers of new third quarters of next year due to the recent news that cases since March. We forecast that real GDP in China will scientists have developed a few vaccines that should help grow 9.6% in 2021 following its pandemic-induced life return to some semblance of “normal” by the middle slowdown to 2.2% this year. part of next year. We look for real GDP to grow at a robust rate of 4.5% in both 2021 and 2022. Real GDP in the Eurozone plunged roughly 12% (not annualized) in the second quarter as most governments in We have not made major changes to our U.S. economic the euro area locked down their economies to slow the outlook at this time that are based on the outcome of the spread of the virus. Although economic activity rebounded elections that were held in the United States on sharply in the third quarter as case counts receded over November 3. Our pre-election outlook was predicated in the summer, the reimposition of restrictions by most part on the assumption that lawmakers would not provide European governments that followed a renewed surge in further fiscal support to the economy, and the results of COVID cases means that GDP growth in the Eurozone
2 December 10, 2020 | 2021 Annual Outlook likely will turn negative again in Q4-2020. We forecast severely tested by lower oil prices and disarray in the that real GDP in the euro area will fall 7.4% this year before energy industry. growing 3.6% in 2021. Center city areas have been particularly affected. The near Cracks Have Opened Up Across Sectors, Regions and extinction of daily office commuters has deprived Countries downtown restaurants, bars, coffee shops, hotels, gyms, dry-cleaners, barber shops, doctors, dentists and drug Not only did the pandemic impart a significantly negative stores from a vital source of revenue, and many have shock to the global economy, but it has had asymmetrical permanently closed. Cities with expansive downtown economic effects on different sectors, regions and areas, such as New York City, Los Angeles and Miami, have countries. For example, the residential housing market in felt the repercussions even more acutely as a result. The the United States has been robust since the economy eventual return of office workers, business travelers and started to re-open in the spring. Extraordinarily low tourists should help these hard-hit areas bounce back, but mortgage rates and the desire more space from which to it may be some while until life returns to “normal.” work from home have led to the highest number of home sales and single-family housing starts since the housing The divergence in economic performance across countries bubble imploded more than a decade ago. On the other has also been marked. China, and Asia more broadly, hand, however, multifamily starts, which rose to a 31-year experienced the economic shock of the pandemic first. But high in 2019 as an increasing number of individuals opted those countries also have been largely successful in for the experience of urban living, have been trending combatting the spread of the virus in recent months, and lower in recent months. Although demand for multifamily the economic outlook in those economies is reasonably housing in urban areas likely will continue to struggle, at solid. Economic activity in the Eurozone and the United least for the foreseeable future, suburban demand may Kingdom is likely to relapse in the near term, and growth in hold up relatively better. We expect single-family housing the U.S. economy also appears to be downshifting starts to climb further in 2021. markedly. Many developing economies experienced steep declines in economic activity earlier this year, and COVID The pandemic has accelerated trends that were under way cases in many of these economies remain elevated, which in commercial real estate (CRE). Construction of retail will dampen near-term economic prospects. For other establishments has been under pressure over the past few countries beset by weaker fundamentals or political years as more retail spending moves online. But, the boom uncertainties, such as Turkey, South Africa and Brazil, the in online sales in recent years has helped to push recovery phase will likely be more challenging. construction of warehouse space to all-time highs. These trends likely will continue for some time. Similarly, In sum, the COVID pandemic has been the economic industries that are dependent on travel (e.g., airlines, equivalent of a magnitude 9 earthquake on the global hotels, convention centers, etc.) have been economy in 2020. Just as the aftershocks of a major disproportionately affected by the pandemic, and activity earthquake usually are not as devastating as the initial in those sectors likely will continue to struggle until event, the shocks that are being imparted by the pandemic vaccines are widely deployed and life returns to “normal” do not appear to be as economically catastrophic as the again. initial shock. Still, the economic outlook remains very dependent on the evolution of the pandemic in the coming Although every state in the country has been adversely months, and different sectors and economies will continue affected by the pandemic, several are lagging behind. New to feel its effects in varying degrees for quite some time. York and California have been cautious in their re-opening efforts, and hiring has been slow to regain momentum. The collapse in travel has devastated the Nevada and Hawaii economies, not to mention a myriad of local economies such as Orlando and New Orleans, which also are driven by tourism spending. Energy-driven areas such as North Dakota, West Texas and Alaska have been
3 December 10, 2020 | 2021 Annual Outlook but the potency of the tools currently at the Fed’s disposal are weaker today than the tools the central bank was able U.S. Economic Outlook to draw on back in March. While about two-thirds of the economy’s lost output has been recovered, reclaiming the Slow Out of the Gate, but Off to the Races in H2-2020 remaining ground will be slower going and less V-like (Figure 1). Real GDP growth is likely to sputter during the The longest U.S. expansion came to an abrupt halt in early part of 2021 before taking off when widespread March as the novel coronavirus swept across the country. vaccination greatly reduces the need to social distance While the economic recovery is under way, the effects of (Figure 2). the COVID pandemic will continue to reverberate across the U.S. economy in 2021. Recent news reinforces our Figure 2 assumption that vaccinations will be widely available in the second half of 2021, which should help life and business U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change return to some semblance of “normal.” Yet the pandemic’s 40% 40% Forecast effects on spending, the labor market and monetary policy are unlikely to fully dissipate. We project the recovery, 30% 30% measured by the level of real GDP, will be complete in the 20% 20% third quarter of 2021, but the economy will still be smaller than it would have been in the absence of the pandemic. 10% 10%
Furthermore, not all businesses or households will be back 0% 0% to where they were at the end of 2019. -10% -10%
Figure 1 -20% -20% U.S. Real GDP -30% -30% Trillions of Dollars GDP - CAGR: Q3 @ 33.1% $21 $21 GDP - Yr/Yr Percent Change: Q3 @ -2.9% Real GDP: Q3 @ $18.6T -40% -40% $20 $20 00 02 04 06 08 10 12 14 16 18 20 22
Thousands Thousands Source: U.S. Department of Commerce and Wells Fargo Securities $19 $19
Forecast $18 $18 Despite the rocky starting point, however, the U.S.
$17 $17 economy should continue to heal over the course of 2021. An untenable surge in COVID cases continues to be a $16 $16 major downside risk to our outlook, but the relationship
$15 $15 between virus cases and the economy has weakened since the onset of the pandemic. Businesses, households and the $14 $14 public sector are adapting activity as more information $13 $13 about the spread and treatment of COVID comes to light.
$12 $12 Households appear to have a higher risk tolerance of 00 02 04 06 08 10 12 14 16 18 20 22 possibly contracting the virus and general fatigue over Source: U.S. Department of Commerce and Wells Fargo Securities mitigation efforts. Restrictions on activity to curtail cases are also more targeted and are expected to inflict less The upcoming year looks set to start off on tenuous damage on the economy than the blanket stay-at-home footing. Growth is slowing as we head into 2021 amid a orders and business closings of last spring. Furthermore, resurgence in COVID cases, increased restrictions in some additional fiscal stimulus could counter the negative localities and tougher base comparisons after initial economic effects of another surge in COVID. On balance, re-openings this summer. No additional fiscal support economic activity is likely to remain depressed in the early appears immediately on the horizon, and any deal that part of the year, but we believe the prospect for continued does pass is likely to be significantly smaller than the growth is greater than the chance of a double-dip $2 trillion CARES Act, as we discuss in more detail on recession. page 14. Monetary policy may provide additional support,
4 December 10, 2020 | 2021 Annual Outlook Consumption: Excess Saving and Services to Fuel Growth The stronger picture of aggregate spending over the course of the year is expected to be driven by growth in Less stringent restrictions, “COVID-fatigue” and the the service sector. The need to physically distance has hit growing likelihood of at least one vaccine becoming widely service industries that rely on in-person interactions, like available should lead to consumer spending growing faster hospitality, recreational activities and personal care, in 2021 than its pre-pandemic trend. Households continue particularly hard. Unusual for a downturn, goods spending to stash away income at a higher rate than before has made a full recovery ahead of services (Figure 4). COVID—an outgrowth of the “forced thrift” due to business closures and personal safety efforts, as well as Figure 4 the substantial fiscal support authorized in the spring. Real Personal Consumption Expenditures Compared to the saving rate at the end of 2019, Change from February through October 2020 consumers have tucked away an additional $1.4 trillion in 20% 20% savings through October (Figure 3). 15% 15% 14%
10% 10% Figure 3 Forced Thrift 5% 5% 5% Personal Saving Exceeding Pre-COVID Level Based on Dec-2019 Saving Rate & Total Excess Savings, Billions of Dollars 0% 0% $1,600 $1,600 -2% Personal Saving Exceeding Pre-COVID Level -5% -5% Personal Saving (Pre-COVID Level) $1,394 $1,400 $1,400 -7% -10% -10% $1,200 Cumulative Excess Savings $1,200 -15% -15% PCE $1,000 $1,000 Durable Goods -20% -20% Nondurable Goods Services $800 $800 -25% -25% Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 $600 $600 Source: U.S. Department of Commerce and Wells Fargo Securities
$400 $400 We expect goods spending to remain relatively strong in $200 $200 2021, but for wallet share to shift back toward services. Spending on goods like cars, home furnishings and $0 $0 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 recreational items has been pulled forward by the initial Source: U.S. Department of Commerce and Wells Fargo Securities adjustment to more time at home and the desire to avoid crowded public transportation, including air travel. That We expect savings to be drawn down over the course of pull-forward should keep the level of goods spending little 2021, which will help to fuel the recovery in consumption. changed over the upcoming year. Services, on the other But households’ financial health and ability to spend will hand, should show discernable improvement. All the meals vary across the income spectrum. Lower-income out, concerts and travel skipped since the emergence of households have been hit disproportionately hard by job COVID cannot be made up, but eagerness to get out and losses, and the fiscal support that helped many of these about and engage with people outside one’s immediate households stay afloat early on in the pandemic has been household should fuel above-trend growth in services in pared back since the summer. Last spring’s stimulus 2021. checks were one-off payments, while supplemental unemployment benefits have ended and the emergency Investment: Less Pent-Up Demand than in Prior unemployment insurance programs are set to expire at Recoveries year-end, cutting off benefits for about 13.4 million workers. But, excess savings and some normalization in Despite our expectations for above-trend growth in day-to-day life should allow more affluent households to consumption next year, the pace of overall business fixed step up spending as the year progresses, more than investment (BFI) spending is poised to look fairly ordinary offsetting the very real spending constraints on many (Figure 5). Equipment spending held up unusually well lower-income households. throughout the COVID recession, as the need for remote
5 December 10, 2020 | 2021 Annual Outlook work generated a surge in investment on computers and over the course of 2021 as the improvement in global communication equipment. We expect to see some growth, which we discuss on page 19, leads to more payback in spending on information equipment—which marked strengthening in export demand. accounts for about 20% of total BFI—early in 2021. However, weakness in information equipment should be Figure 6 offset by a strengthening in more traditional capital Real Business Inventories expenditures, like industrial and transportation equipment. For All Manufacturing, Wholesale and Retail Businesses 1.70 1.70 Real Inventory-to-Sales Ratio: Sep @ 1.36 Figure 5 1.65 1.65
Real Business Fixed Investment 1.60 1.60 Bars = CAGR Line = Yr/Yr Percent Change 40% 40% Non-Res Fixed Invest - CAGR: Q3 @ 21.9% 1.55 1.55 Non-Res Fixed Invest - Yr/Yr Percent Change: Q3 @ -4.7% 30% 30% 1.50 1.50 Forecast 20% 20% 1.45 1.45
10% 10% 1.40 1.40
0% 0% 1.35 1.35
1.30 1.30 -10% -10% 97 99 01 03 05 07 09 11 13 15 17 19 Source: U.S. Department of Commerce and Wells Fargo Securities -20% -20% Investment in nonresidential structures looks set to be -30% -30% 00 02 04 06 08 10 12 14 16 18 20 22 weak, however. Completions of projects under way when Source: U.S. Department of Commerce and Wells Fargo Securities COVID struck should help outlays inch upward the next few months, but the pipeline of commercial construction The fundamental drivers of investment spending appear has dwindled over the course of the pandemic. We expect favorable in 2021. Credit is inexpensive, and for the most structures investment to turn negative as the year part, firms of all sizes report little trouble obtaining it. At progresses, even as there have been some modestly the same time, corporate profits are recovering amid the positive signs in energy investment recently. better sales environment. More stability on the trade front under a Biden administration should also offer some In contrast to nonresidential construction, the pandemic modest support to investment spending after a sharp has lit a spark under the housing market, which is expected escalation in trade-related uncertainty in 2019.1 to lead to a strong year for residential investment. Low Transportation equipment spending is also expected to mortgage rates, working from home and favorable get a boost as Boeing’s 737 MAX has been authorized by demographics (Millennials will start to turn 40 next year) the FAA to fly again and shipments resume. are all supportive of home buying. However, inventories of unsold houses are extraordinarily low and will limit existing Inventory investment should also be supportive of overall home sales. Yet, the dearth of inventory has boosted GDP growth in 2021. The swift rebound in goods home prices and is apt to spur new construction. We purchases has left business inventories exceptionally lean discuss the divergent fates of commercial and residential (Figure 6). Rebuilding early in the year is expected to real estate markets in more depth on page 8. flatter top-line growth—real final sales should grow at a slower pace. Some of the inventory rebuilding will be met by imports, but trade is also set to be modestly supportive of growth next year. We expect the trade deficit to narrow
1 See “Biden Trade Policy: A Status Quo Ante?” for further reading on our views of trade policy in a Biden administration.
6 December 10, 2020 | 2021 Annual Outlook Labor Market: More Progress than Headlines Will Figure 8 Suggest, but Still Reeling in 2021 Job Losers On Temporary Layoff vs. Permanent Job Losers and Persons Completing Temp Jobs, Millions Fewer job losses among higher-income households, who 20 20 Temporary Layoff: Nov @ 2.8M are more likely to purchase a home, have also been a key 18 Not On Temporary Layoff: Nov @ 4.7M 18 support of the housing market this past year. But, the 16 16 diminishing risks around COVID in the middle of next year 14 14 and the return of more face-to-face interaction should help hiring across hard-hit sectors like leisure & hospitality, 12 12 which continue to account for an outsized share of job 10 10 losses. The sharp disparities between low- and high- 8 8 income job losses should narrow as a result (Figure 7). 6 6 While nonfarm payroll growth is likely in for a fitful few months, given recent virus cases and restrictions, we 4 4 expect to see job gains average 427K per month in 2021. 2 2
0 0 Figure 7 00 02 04 06 08 10 12 14 16 18 20 Source: U.S. Department of Labor and Wells Fargo Securities Employment Across the Pay Spectrum Jobs Ranked by 2019 Average Weekly Earnings, Percent Change in Employment from Feb. 2020 5% 5% The unemployment rate has declined rapidly to 6.7% in
0% 0% November from 14.7% in April, but we expect a
-5% -5% significantly slower descent in 2021. The health risks posed by in-person work, a dearth of jobs and remote -10% -10% schooling have fueled an exodus from the labor force and -15% -15% reduced the number of workers officially counted as -20% -20% unemployed. Yet, as the health risks abate, demand for -25% -25% workers increases and in-person schooling resumes, we -30% -30% expect to see more individuals return to the labor force,
-35% -35% which should lead to a more modest decline in the Highest-Paying Quintile: Nov @ -2.9% -40% Second Quintile: Nov @ -3.8% -40% unemployment rate. However, a full rebound in Middle Quintile: Nov @ -3.1% participation is unlikely, and even as the unemployment -45% Fourth Quintile: Nov @ -10.5% -45% Lowest-Paying Quintile: Nov @ -12.5% rate falls below 6% by the end of the year, a substantial -50% -50% Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 amount of slack in the labor market is likely to remain. Source: U.S. Department of Labor and Wells Fargo Securities Wage growth should remain subdued as a result. We forecast that employment costs, including benefits, will That is not to say all will be well in the jobs market. A rising increase only 1.8% in 2021, compared to 2.7% in 2019. share of job losses are considered permanent, leading to long spells of unemployment (Figure 8). Overall, Inflation and the Fed: No Need to Hurry employment will be slower to recover than GDP due to the profit pressures and restructuring needs that come with While slack is not everything when it comes to inflation, any downturn, but also by the disproportionately harsh the weak labor market and lingering output gap should effect COVID has had on labor-intensive service industries. keep overall price pressures muted. Despite the Despite a full recovery in GDP by the third quarter, we unprecedented increase in the money supply this past expect employment to still be 3.1% below its previous year, widespread price increases that jolt inflation out of peak at the end of 2021. its decade-long slumber look unlikely. Consumer inflation expectations remain near historic lows and businesses’ plans to increase prices are well within their pre-pandemic range. Although favorable base comparisons should push the 12-month change in the PCE deflator to 2% in the
second quarter of next year, inflation is likely to struggle to
7 December 10, 2020 | 2021 Annual Outlook meet 2% on an ongoing basis. We project that core PCE not move substantially higher in 2021, even as the inflation will average 1.7% in 2021 (Figure 9). economy continues to heal and the outlook for inflation strengthens (Figure 10). Figure 9 PCE Deflator & "Core" PCE Deflator Figure 10 Year-over-Year Percent Change 5% 5% Wells Fargo Rates Forecast Through 2021 3.5% 3.5% 4% 4% 3.0% 3.0% 3% 3% Forecast 2.5% 2.5%
2% 2% 2.0% 2.0%
1% 1% 1.5% 1.5%
0% 0% 1.0% 1.0%
-1% -1% Q4-2021 PCE Deflator: Q3 @ 1.2% 0.5% 0.5% Q4-2020 "Core" PCE Deflator: Q3 @ 1.4% -2% -2% Q4-2019 00 02 04 06 08 10 12 14 16 18 20 22 0.0% 0.0% Source: U.S. Department of Commerce and Wells Fargo Securities Source: Federal Reserve Board and Wells Fargo Securities FOMC members appear in widespread agreement that inflation will struggle to reach the committee’s goal of 2% in 2021. But the quest for inflation to reach 2%, let U.S. Real Estate and Regional alone average 2% over time as outlined by the Fed’s Outlook updated Longer-Run Goals and Monetary Policy Strategy, is likely to take much longer. In the September Summary Divergences in Residential and Non-Residential Real of Economic Projections, the bulk of the FOMC did not Estate Markets expect core PCE inflation to return to 2.0% until 2023. The expectation of a slow return to 2% comes under what Few areas of the economy have felt the seismic effects of members projected to be the most appropriate monetary the COVID crisis as directly as real estate. The need to policy and, for many, the assumption of additional fiscal socially distance has wreaked havoc on office buildings, support, which remains in question. retail stores, hotels and other types of commercial real
estate where close-contact engagement is intrinsic to the As a result, the chance of the FOMC raising the fed funds property’s value proposition. The reverberations so far, rate in 2021 is for all intents and purposes nil. Rather, we however, have not been universally negative. The suspect the FOMC may at some point feel compelled to new-found aversion to public spaces and more time at provide some form of additional policy support to lend home has broadened the appeal of online shopping, which credibility to its inflation goal. Officials have consistently has reinforced already strong demand for warehouses and downplayed the use of negative interest rates and do not distribution centers, making the industrial market one of seem eager to attempt yield curve control, in which the the most resilient sectors of the economy in 2020. Fed would target some specific point on the yield curve.
That said, some Fed officials seem open to the idea of a renewed “Operation Twist,” in which the Federal Reserve would concentrate its purchases of Treasury securities across the long end of the yield curve. Whether additional policy support takes the form of an outright increase in the pace of asset purchases or a shift in the maturity composition, we forecast that long-term interest rates will
8 December 10, 2020 | 2021 Annual Outlook Figure 11 Figure 12 CRE Vacancy Rates Single-Family Housing Starts vs. New Home Sales SAAR, Millions 14% 14% 2.0 2.0 Single-Family Housing Starts: Oct @ 1,179K 1.8 New Home Sales: Oct @ 999K 1.8 12% 12% 1.6 1.6
10% 10% 1.4 1.4
1.2 1.2 8% 8% 1.0 1.0
6% 6% 0.8 0.8
0.6 0.6 4% Apartment Vacancy Rate: Q3 @ 6.8% 4% Office Vacancy Rate: Q3 @ 10.7% 0.4 0.4 Retail Vacancy Rate: Q3 @ 5.0% Industrial Vacancy Rate: Q3 @ 5.7% 2% 2% 0.2 0.2 07 08 09 10 11 12 13 14 15 16 17 18 19 20 04 06 08 10 12 14 16 18 20 Source: CoStar Inc. and Wells Fargo Securities Source: U.S. Department of Commerce and Wells Fargo Securities
Moreover, the experience over the past several months That is not to say that the road ahead is completely clear has left those who preferred the vibrancy of city living of hazards. For one, some of the structural trends, which yearning for greener pastures. There now appears to be an predate the pandemic, are likely to remain in place, namely exodus of urban renters moving to the suburbs or beyond a lingering shortfall of affordable homes for sale. for single-family homes, a trend that has surely been Regulatory controls make it difficult to build affordable supported by record-low mortgage rates and the desire housing in many parts of the country, so constraints on for more space to accommodate home offices, home new supply will likely persist. Inventories of homes for gyms and virtual learning. The need for more livable space resale also remain near historic lows, which has helped has translated to rising apartment vacancies (Figure 11) reignite home price appreciation as buyer demand has and soaring home sales (Figure 12), which has cascaded heated up. Currently, home prices are now back to rising into record high builder confidence and a rapid increase in much faster than income growth, meaning affordability new single-family construction. issues will remain a limitation.
There are several reasons why we believe housing’s Still, the lack of supply and robust buyer demand sets the momentum will extend well into 2021. Even as Treasury stage for new home construction to continue to climb yields have ticked higher following brighter economic higher in 2021. One of the more lasting residual effects of growth prospects on the back of positive vaccine news, the pandemic likely will be an increased preference for less mortgage rates are likely to remain low compared to dense markets to abide by social distancing and more historical averages. Furthermore, the recent strength has useable square footage to accommodate virtual activities. fundamental underpinnings, which will make the COVID- For those reasons, we expect single-family development induced race for space more than just a fleeting trend. to remain strongest in the land-abundant South and more Through all of the turbulence of 2020, it is easy to forget affordable parts of the West. Along those same lines, new that there is a wave of millennials who are now reaching an home construction tends to follow population growth. age when family-forming and home buying tend to occur. Thus, new construction should continue to be More broadly, the pandemic appears to have sparked a concentrated in high-growth metros such as Dallas, nesting instinct, which has prompted a shift toward Austin, Phoenix, Tampa and Charlotte, which have seen an homeownership across most age cohorts. Together, these accelerated influx of residents from higher cost major factors should bolster buyer demand for years to come. metro areas in the Northeast and along the West Coast.
By contrast, multifamily construction appears set to downshift somewhat. A more subdued pace of
9 December 10, 2020 | 2021 Annual Outlook development makes sense, given the apartment market major property types, vacancy rates have turned higher continues to work through a number of substantial and rent growth has either slowed to a crawl or declined headwinds. In response to the exodus of remote workers outright. Likewise, property price appreciation has fleeing to the suburbs, landlords in many of the largest flat-lined, and cap rates have shown signs of pressing apartment markets have been slashing rents and offering higher (Figure 14). This has occurred even as the number generous concessions and lease adjustments. The trend is of commercial real estate sales have plummeted alongside most evident in the relatively high-cost markets of San a growing distance between buyers’ and sellers’ Francisco, New York City and Los Angeles (Figure 13). perceptions of property values. Broadly speaking, rents appear to be falling fastest in central business districts (CBDs), while suburban property Figure 14 rents have been more buoyant. Commercial Property Price Index Year-over-Year Percent Change Figure 13 20% 20% Daily Asking Apartment Rents per SF Indexed, Jan. 2020=100 10% 10% 104 104
Charlotte 102 102 Dallas-Fort Worth 0% 0%
100 100 Los Angeles 98 98 -10% -10% National NYC Emergency 96 96 Declared National All-Property: Oct @ 3.6% -20% Apartment: Oct @ 7.2% -20% 94 94 Retail: Oct @ -5.2% Industrial: Oct @ 8.5% Office: Oct @ -0.9% 92 92 -30% -30% 05 07 09 11 13 15 17 19 90 San Francisco 90 Source: Real Capital Analytics and Wells Fargo Securities
88 88 Jan Feb Mar Apr May Jun Jul Sep Oct Nov With a vaccine in sight, the office market should begin to Source: CoStar Inc. and Wells Fargo Securities see some improvement in 2021. Currently, the surprising success of work-from-home (WFH) policies has led many Compounding the issue is that rental demand has been businesses to reassess their longer-term space needs. The slow to return amid generally weak labor market prospect of lower occupancy costs amid mounting conditions. Many large service-sector employers, who financial pressures has made paring back their office have thus far been absorbing the negative COVID footprints even more enticing. Still, we remain of the belief economic impacts, have announced plans to reduce that the office will continue as the predominant workspace headcounts. The supply side looks equally as concerning. for office-using industries in a post-COVID environment. Even though multifamily development may move to a Office space plays a key role in fostering collaboration, lower gear in 2021, there is still a deluge of under- innovation, culture and productivity—all of which are construction apartment units that will be delivered next essential to maintaining a comparative advantage over year. Although overall rental demand should hold up competitors. Despite all of the recent turmoil, many office relatively well, the mix likely will change because more tenants appear to still be paying rent and holding on to demand appears to be shifting to the suburbs. Most leases. Workers have also started to trickle back into the multifamily development has occurred in urban areas in office, although occupancy remains at only a fraction of its recent years, which means that apartment vacancies in pre-COVID levels. Some of the large marquee tech firms those areas likely will continue to rise with rents who made headlines by offering employees permanent maintaining a downward trajectory over the short term. WFH options, even appear to be leasing new space.
Similarly, it may be some time until commercial property While we see a return to the office as imminent once fundamentals return to pre-pandemic levels. Across all vaccines are widely available, there is also the question of
10 December 10, 2020 | 2021 Annual Outlook how much space businesses even need once the pandemic Figure 16 is fully contained. The experience of the past few months E-commerce Sales has revealed that there are merits to having a certain mix Nonstore Sales as a Share of Total Retail Sales of employees work remotely. Transitioning to a hybrid 20% 20% Sales: Oct @ 15.9% workforce, where some workers remain remote and still 18% 18% periodically meet in the office, might reduce occupancy 16% 16% costs without a significant drop off in productivity. Even under this model, firms may need to maintain their current 14% 14% footprint to abide by social distancing requirements, which 12% 12% are likely to remain in place well after the pandemic has ended. Putting this all together, demand for office space 10% 10% should begin to improve next year as employers bring 8% 8% more of their workforce back and space needs are more 6% 6% certain. Encouragingly, office development has been mostly restrained for the past decade, which puts many 4% 4% office markets in a favorable position once a recovery 2% 2% gains steam. 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 Source: U.S. Department of Commerce and Wells Fargo Securities Figure 15 Unfortunately, the sharp upturn in online sales and surging Private Warehouse & Retail Construction demand for industrial buildings has come at the expense of Billions of USD, SAAR $35 $35 retail stores. The demise of traditional brick-and-mortar retail is well-documented, and the decline has only been $30 $30 hastened by social distancing and an aversion to spending meaningful time undertaking in-store shopping. Retail $25 $25 vacancy rates have recently risen to 5.0%, the highest since 2016. Considering that large numbers of retailers were $20 $20 struggling even before the pandemic, it may be some time until the retail market as a whole fully right-sizes. $15 $15 We continue to emphasize, however, that not every $10 $10 Warehouse: Oct @ $33.0B segment of retail is in dire straits. Retailers that offer Retail: Oct @ $10.7B curbside service and provide products that augment or $5 $5 enhance home living spaces, including furniture, appliance 15 16 17 18 19 20 Source: U.S. Department of Commerce and Wells Fargo Securities and home electronics, have generally outperformed. Building material stores and big-box stores with robust The widening split between retail and industrial property e-commerce platforms are holding up well and appear performance was another prominent theme during 2020 poised for stronger growth in the years ahead as more (Figure 15). The reason for the divergence is clear. Online time is spent at home. The same goes for grocery stores retail sales have surged since the spring (Figure 16), which and pharmacies, especially those providing online- has made industrial buildings such as warehouses and ordering, delivery, drive-thru and pick-up services. Town- distribution centers even more vital. Considering that the center properties, which are mostly outdoor and walkable, high cost of social interactions has forced many to also stand to benefit in a world of social distancing and discover the benefits of online shopping more quickly than preference for open-air activities. A vaccine will clearly help they otherwise would have, we expect this higher share of bring back all forms of in-store shopping, but many of e-commerce sales to be long-lasting, which should bolster these COVID-related trends that have emerged this year the need for industrial properties well into the future. will likely prove to be durable.
11 December 10, 2020 | 2021 Annual Outlook Figure 17 about 20% of all travel in 2019, will likely remain depressed as employers continue to be abundantly cautious in lifting International Arrivals to the U.S. Millions, 12-Month Moving Average travel restrictions until vaccines are widely implemented. 7.0 7.0 Similarly, international travel will be restricted until the Arrivals: Aug @ 3.54M 6.5 6.5 world is fully in control of the virus. We are slightly more Millions Millions 6.0 6.0 optimistic about the timetable for a return of leisure 5.5 5.5 travel. Assuming a vaccine is successful, there will likely be 5.0 5.0 an explosion of pent-up travel demand as consumers use 4.5 4.5 some of the excess savings accumulated over the past 4.0 4.0 year to make up for 2020’s canceled trips, sojourns and 3.5 3.5 vacations. Still, without business and international travel, it
3.0 3.0 will be some time until demand for hotel rooms returns to
2.5 2.5 the exceptionally high levels hit in the years leading up to
2.0 2.0 the coronavirus crisis.
1.5 1.5
1.0 1.0 With 2020 coming to a close, many are likely wondering 96 98 00 02 04 06 08 10 12 14 16 18 how prevalent these trends will be in 2021 and beyond. Of Source: National Travel and Tourism Office and Wells Fargo Securities course, the path forward is still highly dependent on the trajectory of the pandemic itself, even with a vaccine. That A highly effective vaccine will likewise come as welcome said, the housing market was gathering momentum in the news to the hotel industry. For most of the year, hotels months leading into the pandemic, and the quick bounce have had to grapple with travel moratoriums, canceled back in activity only reinforces our belief that home sales, conferences and trade shows as well as international travel single-family construction and home improvement grinding to a halt (Figure 17). Operating fundamentals spending will continue to be a bright spot in the years have slowly improved since the spring, but occupancy rates ahead. After what we suspect will be a 5.1% gain in 2020, (Figure 18), revenue per available room (RevPAR) and we expect residential investment to rise an even stronger average daily rates (ADR) remain well off pre-pandemic 12.5% in 2021. levels. Conversely, nonresidential spending appears set to Figure 18 weaken next year. The collapse in global energy demand Daily Hotel Occupancy has brought oil prices markedly lower, which has wreaked 2020; 7-Day Moving Avgerage havoc on virtually every facet of the energy industry, 75% 75% Nov-28: 36.2% leading to deep cutbacks in production, drilling activity and pipeline construction. More recently, brighter prospects 65% 65% for stronger energy demand next year has allowed oil prices to stabilize around the $40/barrel (WTI) mark. With 55% 55% firmer prices, the oil and gas rig count, which fell to the lowest on record in August, has slowly begun to climb 45% 45% higher, meaning energy-related structures investment should improve further in 2021. 35% 35% But, that likely will not be enough to lift overall 25% 25% nonresidential structures spending. Lingering uncertainties with regard to demand for real estate has led 15% 15% many new commercial and institutional projects to be Feb Mar Apr May Jun Jul Aug Sep Oct Nov postponed or canceled. Nonresidential building starts were Source: STR and Wells Fargo Securities down 24% through October, according to Dodge Data &
Analytics. With a previously robust pipeline of new work But even with a vaccine, a full return to pre-COVID levels is now thinned out, the drop-off in new starts means the likely some ways away. Business travel, which made up weakness in nonresidential structures spending will extend
12 December 10, 2020 | 2021 Annual Outlook well into next year. Overall, we anticipate nonresidential re-opening efforts, and hiring has been slow to regain structures investment to decline 4.5% in 2021. momentum. The collapse in travel has devastated the Nevada and Hawaii economies, not to mention the myriad Regional Economic Divergences of local economies such as Orlando and New Orleans, which also are driven by tourism spending. Energy-driven From a regional perspective, no state, metro area or areas such as North Dakota, West Texas and Alaska have municipality has been left untouched by the pandemic. The been severely tested by lower oil prices and disarray in the first wave of COVID cases, while primarily impacting the energy industry. Northeast, led to nationwide suppression efforts that necessitated stay-at-home orders and business closures. Within these regions, center city areas have been As a result, employment cratered in every state during particularly affected. The near extinction of daily office March and April. Most states soon began to re-open their commuters has deprived downtown restaurants, bars, economies, but those efforts were met by a second spike coffee shops, hotels, gyms, dry-cleaners, barber shops, of cases in early summer. This time, however, cases surged doctors, dentists and drug stores from a vital source of in the Sun Belt region, with severe outbreaks occurring in revenue, and many have permanently closed. Not Texas, Florida and Arizona. The summer Sun Belt surge has surprisingly, markets with expansive downtown areas such subsided, but now new cases and hospitalizations are back as New York City, Los Angeles and Miami have felt the on the rise throughout the country. With this latest negative repercussions even more acutely as a result. The iteration of COVID, the sharpest increases appear to be in eventual return of office workers, business travelers and the Midwest and Mountain regions. tourists should reinvigorate these hard-hit areas, which have seen unemployment rates ascend much higher than As displayed in Figure 19, no state in the country has been in the surrounding areas. left unscathed by the dire economic consequences of the public health crisis. Payrolls in every state remain well- While most states are on the path to recovery, the latest below prior peak levels, although many areas appear well COVID outbreaks are sure to bring some turbulence in the on their way to recovery. Still, several are lagging behind. months ahead. Some large cities such as New York, New York and California have been cautious in their Chicago and Philadelphia have imposed some new, targeted restrictions on businesses in order to contend
Figure 19: Percent of March and April Job Losses Recovered – October 2020
Source: U.S. Department of Labor and Wells Fargo Securities
13 December 10, 2020 | 2021 Annual Outlook with rising case counts. Considering the enormous fiscal hand, areas of the country that were seeing strong job and strain many state and local areas have endured this year, population growth before the onset of the COVID crisis there appears to be little appetite for widespread will likely be at the forefront of the recovery. The shutdowns. That noted, as we saw this past summer, pandemic has put a premium on space, and an abundance consumers and businesses tend to pull back on economic of affordable real estate in the South and Inner West engagement as infections increase. stands to be the driving factor that kicks fast-growing areas such as North Carolina, Florida, Texas, Arizona, Idaho, While the next several months will be challenging, Nevada and Utah back into a high gear. Still, while the pace economic conditions in most parts of the country should of recovery will likely be somewhat uneven, we expect nevertheless continue to gradually improve. Economic economic conditions in the vast majority of the country to growth should be even stronger in the second half of the substantially improve in 2021. year, as vaccines unlock many of the indoor and in-person activities that have not yet been able to fully resume normal operations. Of course, there are several potential U.S. Political Uncertainties roadblocks ahead. Virtually every state budget has been severely strained by the drop-off in tax revenues Divided Government Makes Sweeping Economic Policy stemming from efforts to contain the pandemic. Absent Changes Unlikely federal relief, many state governments will not be able to ramp up hiring as quickly as the private sector, meaning The highly-anticipated 2020 U.S. presidential election has the recovery in many fiscally-stressed states will likely be come and gone, with mixed electoral results for both more drawn out. parties. It appears that Democratic candidate Joe Biden defeated President Donald Trump by an Electoral College In a similar vein, many dense coastal areas, such as New margin of 306-232 (The Electoral College will formally York and California, have seen an accelerated outflow of vote on December 14). Coincidentally, this margin of residents and businesses seeking lower rents and fewer victory was the same by which Trump beat Hillary Clinton regulations. Slower employment and population growth in four years ago. Biden flipped five states that Donald these areas means economic growth may have a more Trump won in 2016: Arizona, Wisconsin, Michigan, difficult time getting fully back on track. On the other Pennsylvania and Georgia (Figure 20). Biden won the popular vote by 4.4%, an increase from Clinton’s 2.1%
Figure 20
Source: State Election Websites and Wells Fargo Securities
14 December 10, 2020 | 2021 Annual Outlook margin of victory in 2016. When viewed solely through this risks to the near-term economic outlook. But, additional lens, Democrats appear to have had a successful election fiscal stimulus presents a source of near-term upside risk night. for the economy. The U.S. federal government still has plenty of capacity to borrow in the near term, as nominal However, Democrats also dreamed of retaking the Senate, interest rates are low, real interest rates are negative and which has been in Republican hands since 2014. As of this the federal budget deficit has begun to recede amid fading writing, Democrats gained just one net seat in the Senate, fiscal stimulus and stronger economic activity relative to two short of what was needed to take a narrow majority. earlier in the year. Furthermore, as a share of GDP, the Not all hope is lost yet for the Democrats on this front; the federal budget deficit in FY 2020 was only half the peak final two Senate seats will both be decided in a special experienced during World War II (Figure 21). We believe election runoff in Georgia on January 5, 2021. If that this period provides some historical evidence that Democrats win both seats, the Senate would be split very high budget deficits can be sustained for short 50-50, with Vice President Kamala Harris casting the periods of time during national emergencies. deciding vote that would give Democrats a razor-thin majority. Figure 21
Federal Budget Deficit: 1938 to 1948 Certainly anything can happen, but the Democratic Percent of GDP 10% 10% candidates likely go into the Georgia races as underdogs. Annual Budget Deficit FY 2020 Deficit: 2020 @ -14.8% Even though Joe Biden narrowly carried the state in 2020, 5% 5% WFS Projected FY 2021 Deficit: 2021 @ -8.2% the Republican Senate candidate David Perdue “won” the 0% 0% state by about two points and just missed the 50% threshold needed to avoid a runoff. The last time a Georgia -5% -5%
Senate race went to a runoff, in 2008, Republican Saxby -10% -10% Chambliss beat Democrat Jim Martin by 15 percentage points a month after only beating Martin by -15% -15% three percentage points on what was a strong Election Day -20% -20% for Democrats. At present, betting markets give -25% -25% Democrats roughly a 30% chance of winning both Senate seats and taking a narrow majority in the Senate. Should -30% -30%
Republicans capture at least one of the Georgia seats, they -35% -35% will cement their Senate majority and ensure that Joe 38 39 40 41 42 43 44 45 46 47 48 Biden faces a divided government for at least his first two Source: Office of Management and Budget and Wells Fargo Securities years in office. We were repeatedly skeptical that the pre-election In the House of Representatives, the election results more negotiations between Treasury Secretary Steven Mnuchin clearly favored Republicans. Many analysts had expected and Speaker Pelosi would yield a deal of roughly $2 trillion Democrats to gain roughly 5-10 seats in the House and in additional COVID relief. Senate Republicans frequently add to their majority. Instead, Republicans have gained a expressed reservations about both the total size of such a net 10 seats in the House of Representatives, with a package and some of its individual provisions. Our view has handful of races still undecided. As a result, Speaker of the been that, to get a COVID-relief deal in light of the recent House Nancy Pelosi will have a very narrow majority in the election results, Democrats would need to come down House of Representatives for the next two years. The materially from their more than $2 trillion pre-election combination of a Republican Senate and a small House proposal. majority for Democrats would create major obstacles for Joe Biden when it comes time to push his legislative This important first step occurred the week of priorities. November 30, as House Speaker Pelosi and Senate Minority Leader Chuck Schumer said that a $908 billion We expect COVID relief/fiscal stimulus to be a top priority bipartisan Senate plan should “be used as the basis for of the Biden administration. As discussed in the previous immediate bipartisan, bicameral negotiations.” Around the sections, COVID continues to present serious downside same time, Senate Republican leaders released a plan that
15 December 10, 2020 | 2021 Annual Outlook is in the ballpark of $500 billion and similar to their proposal from mid-September. Another avenue available to the Biden administration if a near term deal is reached would be to shift gears from an So what happens next? As of this writing, members of income bridge strategy to a more traditional fiscal Congress are negotiating over whether there is enough stimulus plan. If vaccines are steadily administered across agreement between to two sides to attach a COVID relief the nation over H1-2021, perhaps Biden could focus on a bill in the range of $500 billion-$1 trillion to a government stimulus plan that looks more like the one from 2009, with funding bill that must be passed by December 11. tax cuts, infrastructure spending, and other policies meant to spur economic activity, as opposed to the current forms Could a deal in that range come to fruition? Absolutely. of income support primarily designed to aid those who But, the clock is ticking on the lame duck session, and cannot return to work due to the virus. Regardless, even if there remain outstanding issues that have proven thorny a deal is cut in the near term, we suspect that discussions for months, most notably on state & local aid and liability around how to boost the economy in the aftermath of the reform. Further, having watched several other forecasters COVID shock is unlikely to go away anytime soon. assume additional fiscal stimulus only to have it yanked away like Lucy holding the football for Charlie Brown, we Figure 22 would prefer to see Congress much closer to the finish line Real State & Local Government Purchases before making such a large change to our forecast. For Bars = CAGR Line = Yr/Yr Percent Change now, our baseline macroeconomic forecast assumes no 6% 6% additional fiscal stimulus. Thus, should a package along 4% 4% those lines come to pass, it would generate some modest Forecast upside risk to our forecasts for real GDP growth, job 2% 2% growth, etc.
0% 0% However, even if a COVID relief deal does not come together in the lame duck session, we believe the odds of -2% -2% an eventual deal have risen as the two sides have now closed a sizable chunk of the huge gap between their -4% -4% proposals. If Biden faces a Republican-held Senate upon -6% -6% taking office, he and House Democrats could face the State and Local Government Purchases-CAGR: Q3 @ -4.0% State and Local Government Purchases-Yr/Yr: Q3 @ -1.8% prospect of either no COVID relief bill or passing a smaller -8% -8% bill, like the one currently under discussion. Negotiating 03 05 07 09 11 13 15 17 19 21 down to a smaller bill would allow Democrats to achieve at Source: U.S. Department of Commerce and Wells Fargo Securities least a watered-down version of some of their key goals from the recent negotiations, such as more money for Beyond COVID relief, what about the other numerous state & local governments that are cutting employment economic policy proposals on which Joe Biden ran in 2020 and capital expenditures (Figure 22). (Figure 23)? We are skeptical much other major economic policy legislation will become law. Divided government Furthermore, if a deal is reached before year end, it does makes sweeping legislation inherently difficult, and it is not necessarily mean that all COVID-relief talks are behind not immediately obvious to us what legislation both Biden us. Current negotiations have again included many and Republican senators would support. We doubt Senate economic policies that strive to create a “bridge” to the Republicans would support expanding the Affordable Care spring, when hopefully better weather and a vaccine will Act, for example, and we also doubt they would be eager to allow a steady resumption of “normal” life. But, as we have unwind the marquee tax legislation passed under learned many times in 2020, the virus can surprise to the President Trump in 2017. If a large, bipartisan downside, timelines can change and the economy/ infrastructure bill never became law under Trump, is it financial markets can swing on a dime. Perhaps another likely that the Biden administration would have more luck “phase” of COVID relief talks could take place in Q1-2021 coaxing Republicans along? We suspect the answer is no. even if a lame duck agreement is reached, and particularly if Democrats take both Georgia Senate seats.
16 December 10, 2020 | 2021 Annual Outlook Figure 23 Joe Biden Economic Policy Platform Tax Policy Spending Proposals Individual Corporate • Restore top individual tax rate to 39.6% • Raise the corporate tax rate to 28% • Tuition-free public college for families with incomes from 37% for individuals earning over from 21% <$125,000 $400K • Double the tax rate on Global • Two years of tuition-free community college • Tax capital gains as ordinary income for Intangible Low Tax Income (GILTI) • Federally-funded universal Pre-K those earning over $1 million earned by foreign subsidiaries of US • Triple Title I school funding • Subject earnings above $400K to 12.4% firms to 21% from 10.5% • Roughly $2T public investment plan to promote clean Social Security payroll tax • 15% minimum tax on book income for energy, support infrastructure projects and residential • Limit tax benefit of itemized deductions corporations with at least $100 million in housing spending Biden at 28% of value for those earning over annual income • Increase Social Security's minimum benefit & boost $400K • Establish "financial risk fee" on certain payments for those receiving benefits for >20 yrs • Repeal step-up in basis for capital gains liabilities of financial institutions with • Increase the size of ACA subsidies tax• Re-establish First Time Homebuyer tax over $50B in assets • Implement a public health insurance option credit • Forgive a minimum of $10,000 of federal student • Expansion of Child Tax Credit to $3,000 loan debt per person & increase the generosity of per child 6-17 yrs. & $3,600 per child income-based student loan payments >6 yrs
Source: Biden’s Campaign Website and Wells Fargo Securities
When examining the divided government period of 2011- by. With the filibuster gone, Democrats could focus on 2016 under Barack Obama or the divided government writing bills that would just need to pass muster in their period under Donald Trump from 2019-2020, major own party. But, Democrats could risk political blowback for economic policy legislation was relatively scarce other than this route, and they would need to consider what it might the emergency, pandemic-driven CARES Act that became mean for them the next time they are in the minority as law in March 2020. For the most part, both presidents the move would fundamentally alter the way the Senate focused on policy areas where the executive branch has functions. Furthermore, every Senate Democrat would some unilateral power, such as court nominations, federal need to agree to nix the filibuster, given that their majority regulations, immigration and trade policy. would only be a single vote.
Even if Democrats win both Georgia Senate seats and Perhaps the best hope for movement on the legislation assume unified control, their razor thin majorities would front would be for some type of “trade” between the still make passing major legislation difficult. As two parties. One area we identify as a possible trade Republicans illustrated in 2017 when they had unified opportunity is the pending partial expiration of portions of control of Congress and the White House but failed to fully the 2017 Tax Cuts and Jobs Act (TCJA) passed under repeal the Affordable Care Act, the party does not always President Trump. In order to meet budget reconciliation vote in perfect lockstep. Furthermore, the threat of a requirements related to the budget deficit, Republicans filibuster looms large. The CARES Act passed unanimously, set some portions of the TCJA to expire at the end of as neither side chose to block that legislation at a critical calendar year 2025 (Figure 24). Most of these expiring juncture early in the pandemic. But, if Republicans in the measures are related to the individual side of the tax code, Senate are opposed to much of the Biden agenda, they can such as the cuts to marginal income tax rates, the doubling potentially filibuster huge chunks of it, which would push of the standard deduction and the doubling of the Child the threshold for Senate passage up to 60 votes. Tax Credit.
If Democrats gain a majority in the Senate (Vice President
Harris casting the deciding vote), they could potentially go the route of eliminating the filibuster in the Senate. This would require just a simple majority to do and is an idea to which Joe Biden appears to have warmed as time has gone
17 December 10, 2020 | 2021 Annual Outlook Figure 24 Figure 25 Projected Federal Revenues Average U.S. Tariff Rate on Imports Percent of GDP, CBO Baseline Scenario Projections 19.0% 19.0% 6% 6% Revenues: 2030 @ 17.8% Avg. Tariff Rate on Imports: Q3 @ 2.4% 18.5% Average Revenues 1970-2019 18.5% 5% 5%
18.0% 18.0%
4% 4% 17.5% 17.5%
17.0% 17.0% 3% 3%
16.5% 16.5% 2% 2%
16.0% 16.0%
1% 1% 15.5% 15.5%
15.0% 15.0% 0% 0% 19 20 21 22 23 24 25 26 27 28 29 30 69 73 77 81 85 89 93 97 01 05 09 13 17 Source: Congressional Budget Office and Wells Fargo Securities Source: U.S. Department of Commerce, U.S. Department of the Treasury and Wells Fargo Securities
Given these expiring tax cuts, perhaps Biden could offer If we are in fact correct about this, then Biden may be some form of trade: Make some or all of these expiring tax forced to focus his economic policy changes on areas cuts permanent in exchange for some Democratic policy where he has some unilateral power, such as regulatory priority, such as an infrastructure deal, investments in changes, federal court and cabinet appointments and green energy, higher taxes on the wealthy/ corporations or trade policy. However, even in these policy areas the a moderate expansion/strengthening of the Affordable changes will likely take place gradually over time. Take the Care Act. A somewhat similar deal was cut during the fiscal Federal Reserve Board as an example. There is currently cliff negotiations in late 2012 in what was one of the few just one vacancy on the Fed’s board of governors, and pieces of economic policy legislation that passed in the there is a chance that this position may be filled in the divided government Obama years. In that instance, the lame duck session of Congress by a Trump nominee, Judy “Bush tax cuts” were made permanent for most taxpayers Shelton. Jerome Powell’s term as chair is not up until but were allowed to expire for high earners. These tax February 2022, Vice Chair Clarida’s term runs until increases were then paired with spending cuts, particularly January 2022 and Randal Quarles’ term for vice chair for for discretionary spending, via budget sequestration. Supervision ends in October 2021. Thus, it could be the Interestingly, Joe Biden played a key role in those end of Biden’s first year in office before he appoints a negotiations as vice president, and his Republican single new member to the Federal Reserve board of counterpart in the negotiations was current Senate governors. And even then, proposing and implementing Majority Leader Mitch McConnell. Since the Trump tax cut regulatory changes can be a lengthy process. expirations are still a ways off, we doubt this would be a
Day One move by the Biden administration. But, we On trade policy, the Biden administration may make some highlight it as a possible risk in what we suspect will changes, but even here a wholesale reversal of Trump’s otherwise mostly be a dull two years for economic policy policies may not occur.2 Throughout his political career, legislation. Joe Biden has generally been more pro-free trade than
Donald Trump. Biden voted for NAFTA when he was a U.S.
Senator from Delaware, and he supported the Trans-
Pacific Partnership (TPP) while vice president. At present,
2 For further reading, see the report that was referenced in footnote #1 on page 6.
18 December 10, 2020 | 2021 Annual Outlook average U.S. tariff rates are at levels not seen since NAFTA largest peak-to-tough decline during the past few was signed (Figure 25). Initially, Biden may remove some decades, and more than three times the decline seen of the tariffs that President Trump put in place on during the global financial crisis. The drop in activity was traditional economic allies like the European Union and particularly severe in the service sector, with travel and Japan. This, in turn, could be part of a broader strategy tourism, restaurants and bars, and other forms of activity where the Biden administration abandons the “go it alone” all significantly affected. That said, global manufacturing approach to China, instead attempting to incorporate also suffered a steep decline. American allies into the China trade policy agenda of the United States. That said, we doubt Biden will immediately Almost as quickly as global growth turned south in early revoke the tariffs currently in place on nearly three- 2020, most major economies staged a bounce back in Q3 quarters of everything the United States buys from China. as COVID-related restrictions were eased and economies The politics of U.S.-China trade relations appear to have re-opened (Figure 26). Although the Q3 rebound was fundamentally changed, and Biden can leave the tariffs in impressive, it was not quite as marked as the downturn place, while he attempts to extract concessions from seen earlier this year and, moreover, comes with some China, whether economic or something else, such as open questions regarding growth so far. Official figures for environmental protections. G20 GDP growth for Q3 are not yet available. But based on the countries that have released data, we estimate growth of around 9% quarter-over-quarter, recovering Global Economic Outlook & much—but certainly not all—of the losses seen earlier this Uncertainties year (Figure 27).
The dramatic gyrations in economic activity in 2020 has Volatility in Global Growth off the Economic Richter Scale created some divergences and aftershocks among the key
global economies. China, which was the first economy to The global economy suffered the equivalent of an feel the full effect of COVID with a large Q1 GDP decline, economic earthquake as it felt the initial hit from the has subsequently enjoyed solid expansions in both Q2 and COVID pandemic earlier in 2020, with governments Q3. The United States and Canada have both shown implementing widespread economic lockdown measures. encouraging initial rebounds in economic activity in Q3 In the first half of 2020, the aggregate level of real GDP in following sharp declines in the first half of 2020, while the the G20 economies shrank by 10%. That is easily the
Figure 26 Figure 27 G20 GDP Growth G20 GDP Growth vs. Global PMIs Percent Change 12% 48% 6% 60 Note: Q3-2020 GDP is Wells Fargo Estimate 4% 55 Q3-2020 GDP is 8% Wells Fargo 32% estimate 2% 50
0% 45 4% 16%
-2% 40
0% 0% -4% 35
-6% 30 -4% -16%
-8% G20 GDP (YoY % Change): Q3 @ -1.8% (Left Axis) 25 QoQ: Q3 @ 8.7% (Left Axis) Manufacturing PMI: Nov @ 53.7 (Right Axis) YoY: Q3 @ -1.8% (Right Axis) Services PMI: Nov @ 52.2 (Right Axis) -8% -32% -10% 20 00 02 04 06 08 10 12 14 16 18 20 2017 2018 2019 2020 Source: Datastream and Wells Fargo Securities Source: Datastream and Wells Fargo Securities
19 December 10, 2020 | 2021 Annual Outlook economic trends across the Eurozone and the policy meeting. While no new measures have been United Kingdom have been somewhat shakier. In fact, one announced by the Federal Reserve, an increase in the pace of the aftershocks for the global economy, and for the of asset purchases cannot be ruled out. Altogether, the developed economies in particular, is a resurgence in new major central banks’ balance sheets have expanded at a COVID cases in the Northern Hemisphere rapid pace during 2020 (Figure 29), an indication of the (Figure 28). significance on the economic shock stemming from COVID. Figure 28
Global COVID Cases Figure 29 Daily New Confirmed Cases, 7-Day Average 420,000 420,000 Major Central Bank Balance Sheets G10 Economies: Dec-07 @ 283,620 Percentage of GDP Other Economies: Dec-07 @ 318,056 70% 70% 350,000 350,000 60% 60%
280,000 280,000 50% 50%
210,000 210,000 40% 40%
140,000 140,000 30% 30%
20% 20% 70,000 70,000
10% European Central Bank: Dec-04 @ 60% 10% 0 0 Federal Reserve: Dec-04 @ 35% Bank of England: Dec-04 @ 43% Mar-20 May-20 Jul-20 Sep-20 Nov-20 0% 0% Source: Datastream and Wells Fargo Securities 2008 2011 2014 2017 2020 Source: Datastream and Wells Fargo Securities As of this writing, during the past week the average daily increase in new cases for the G10 economies has been Reverberations can be felt across the emerging markets as around 284,000 per day, narrowing the gap to emerging well. A lack of tourism, the collapse in commodity prices economies where the spread had previously been much and large stimulus programs have widened fiscal deficits more rapid. While the surge was initially seen in European significantly, while debt burdens have risen across the countries, which has since receded somewhat, the case emerging markets complex. The deterioration in public count has also picked up in the United States. In response finances will likely not be unwound for years and elevated several European governments have reimposed debt levels could lead to future credit rating downgrades, restrictions, albeit not as stringent as those earlier in 2020. and possible debt repayment issues in countries such as As a result we anticipate a growth aftershock, and forecast Brazil and South Africa. In addition, political disruption Eurozone Q4 GDP to fall 3% quarter-over-quarter, while could spread across the emerging markets as we expect Q4 GDP in the United Kingdom to shrink by 2% unemployment rates remain elevated, wealth inequality quarter-over-quarter. builds and populations become upset with how certain governments have handled the pandemic. These dynamics Another and related aftershock has been renewed unfolded recently in Peru with the impeachment of the monetary easing from several G10 central banks, given the president and it is possible similar events materialize more uncertain outlook. In recent months, the Reserve across Latin America. Bank of Australia lowered its policy interest rate and announced A$100 billion of additional government bond Global Economy Moving in the Right Direction, but at purchases. In the United Kingdom, the Bank of England Differing Speeds increased its asset purchase target by £150 billion to £895 billion, and market participants widely expect the Despite the challenges of 2020, all is not lost with respect European Central Bank to increase the size of its Pandemic to the economic rebound. Indeed, we still believe a global Emergency Purchase Program at its December monetary
20 December 10, 2020 | 2021 Annual Outlook economic recovery is under way, although it is uneven in The fiscal policy response has also been forceful, especially nature with the pace of recovery varying across countries. from countries like the United States, Japan and Canada, In terms of some of the important fundamental drivers of but even to some extent from the United Kingdom and the global economic recovery, there has been a forceful countries across the Eurozone as well. For the G20 response from monetary and fiscal policymakers in the economies, the International Monetary Fund projects a form of additional stimulus. In addition to central bank general government budget deficit of 13.9% of GDP in bond purchases to which we alluded previously, liquidity 2020, much wider than the 4.5% of GDP in 2019 and programs and rapid rate cuts from major central banks nearly 8% during the Great Financial Crisis (Figure 31). have contributed to very accommodative monetary These monetary and fiscal policy measures may be an conditions, with real short-term interest rates for the G20 important bridge to a more lasting economic recovery. economies well-below zero at present (Figure 30). Recent news on progress toward effective COVID treatments and vaccines have been encouraging, and it is Figure 30 plausible that an effective vaccine may be quite widely available by the middle of 2021. Should government G20 Real Short-Term Interest Rate GDP-Weighted, Nominal Rate Less Core CPI stimulus efforts be enough to support activity over the 4% 4% next 6-9 months, the global economy will be better placed G20 Real Rate: Oct @ -0.49% for a sustained recovery through 2021 and 2022. 3% note: Wells Fargo Securities 3% calculations China’s apparent success in controlling the spread of 2% 2% COVID suggests it is well-placed to lead the economic rebound. Indeed, China is the only major economy for 1% 1% which we forecast positive GDP growth for full-year 2020, of 2.2%, while in 2021, we expect China’s GDP growth to
0% 0% surge to 9.6% before falling back to less than 6% in 2022.
-1% -1% At the other end of the spectrum, the renewed restrictions across Europe means the outlook for the Eurozone and
-2% -2% United Kingdom is more uncertain than previously 02 04 06 08 10 12 14 16 18 20 expected. In addition, the long and winding road toward an Source: Datastream and Wells Fargo Securities eventual post-Brexit trade deal in the United Kingdom is also likely to have temporarily restrained the pace of
Figure 31 Figure 32 G20 General Government Budget Balance International GDP Growth % of GDP Wells Fargo Forecasts 0% 0% 12% 12%
8% 8% -3% -3%
4% 4% -6% -6%
0% 0%
-9% -9% -4% -4%
China -12% -12% Canada IMF -8% Japan -8% Forecast Eurozone United Kingdom -15% -15% -12% -12% 00 02 04 06 08 10 12 14 16 18 20 2020 2021 2022 Source: International Monetary Fund and Wells Fargo Securities Source: Wells Fargo Securities
21 December 10, 2020 | 2021 Annual Outlook economic growth. As a result, we expect moderate 2021 GDP growth for the Eurozone and United Kingdom of 3.6% and 3.1%, respectively, still far short of recovering Figure 34 their respective 2020 losses. Growth in the United States and Canada should be somewhat stronger and in the G20 GDP Growth Contribution to Year-over-Year Percent Change Growth “middle of the pack,” although for the United States, in 15% 15% Fcst. particular, the evolution of COVID cases still poses some risk to the outlook as we discussed in preceding sections of 10% 10% this report.
Figure 33 5% 5% OECD Retail Sales and Industrial Output Year-over-Year Percent Change 0% 0% 6% 11%
-5% -5% 0% 0% G7 Economies G8 to G20 Economies G20 Economies -10% -10% 2000 2005 2010 2015 2020 -6% -11% Source: Datastream, IMF and Wells Fargo Securities
As for currency markets, the overall direction of recovery is -12% -22% important. The U.S. dollar has shown a strong inverse relationship with equity markets this year (i.e., a falling Retail Sales: Aug @ 2.8% (Left Axis) Industrial Output: Sep @ -4.8% (Right Axis) dollar has been associated with rising equity markets and -18% -33% vice versa). This inverse relationship may reflect the 07 09 11 13 15 17 19 greenback’s safe-haven status, even though that has been Source: OECD, Datastream and Wells Fargo Securities less consistent in recent years. It also may reflect the significant provision of U.S. dollar liquidity by the Federal There are also divergences in growth outside of the major Reserve both domestically and internationally, though as developed market economies, with India, Mexico and Brazil we noted above other major central banks have also all recovering from deep declines this year. For countries engineered substantial balance sheet expansion. That said, such as South Korea, with its trade links to China, and as long as the economic and market environment Singapore, which should benefit from a global upswing, the continues to improve, we see potential for more U.S. dollar outlook appears reasonably solid in emerging Asia. For softness and more strength in most foreign currencies. other countries beset by weaker fundamentals or political uncertainties, such as Turkey, South Africa and Brazil, the However, the speed and extent of that foreign currency recovery phase will likely be more challenging. That said, strength will likely differ. Currencies that have historically when the global economy is able to fully recover from the been growth sensitive (and for countries that have been COVID shock—still admittedly many quarters away—we relatively less affected by COVID) will likely outperform, expect emerging economies to eventually resume their including the Australian dollar, Canadian dollar and New role as the key driver of global economic growth, a role Zealand dollar. In contrast, the euro and British pound will they have occupied during much of the past decade. For likely be laggards among the G10, given the renewed the 10 quarters between mid-2020 and the end of 2022, imposition of restrictions in those regions and the we broadly project the G20 economies to grow by 20%, uncertain interim economic outlook. Among emerging with the G7 economies forecast to contribute around 6.5 currencies, the Chinese renminbi should continue its solid percentage points of that GDP growth, and the G8-G20 appreciation over the medium term, while regional forecast to contribute around the other 13.5 percentage currencies such as the Korean won and Singapore dollar points of that GDP growth. will also likely benefit. Some other emerging currencies will
22 December 10, 2020 | 2021 Annual Outlook likely continue to face local economic or political challenges however, and we expect the Brazilian real, Argentine peso and Turkish lira to depreciate over the longer term.
Figure 35 Advanced Foreign Economies U.S. Dollar Index Index = January 2006 140 140 AFE U.S. Dollar Index: Dec-04 @ 103.4
130 130
120 120
110 110
100 100
90 90
80 80 90 93 96 99 02 05 08 11 14 17 20 Source: Bloomberg LP and Wells Fargo Securities
23 December 10, 2020 | 2021 Annual Outlook Forecasts Wells Fargo U.S. Economic Forecast
Actual Forecast Actual Forecast 2019 2020 2021 2022 2019 2020 2021 2022 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Real Gross Domestic Product (a) 2.9 1.5 2.6 2.4 -5.0 -31.4 33.1 5.3 1.2 3.3 8.2 6.1 3.6 3.4 3.1 2.9 2.2 -3.5 4.5 4.5 Personal Consumption 1.8 3.7 2.7 1.6 -6.9 -33.2 40.6 4.9 -1.0 3.7 10.8 7.6 4.1 3.9 3.7 3.5 2.4 -3.8 4.9 5.4 Business Fixed Investment 4.2 0.0 1.9 -0.3 -6.7 -27.2 21.8 13.9 1.9 2.2 3.9 5.2 5.3 4.8 4.6 4.3 2.9 -4.1 4.7 4.7 Equipment 2.0 -3.8 -1.7 -1.7 -15.2 -35.9 66.6 18.0 0.5 1.3 3.9 7.1 6.9 5.3 5.0 4.4 2.1 -5.5 8.1 5.5 Intellectual Property Products 4.5 4.1 5.3 4.6 2.4 -11.4 6.0 8.5 4.0 5.2 6.9 6.3 6.0 5.6 5.1 4.9 6.4 1.3 4.8 5.8 Structures 8.2 1.6 3.6 -5.3 -3.7 -33.6 -15.8 3.5 1.5 -1.5 -2.2 -2.4 -0.8 1.7 2.3 2.8 -0.6 -10.3 -4.5 -0.3 Residential Investment -1.7 -2.1 4.6 5.8 19.0 -35.6 62.3 21.0 6.5 11.0 9.0 8.0 7.0 6.5 6.5 6.0 -1.7 5.1 12.5 7.4 Government Purchases 2.5 5.0 2.1 2.4 1.3 2.5 -4.9 -3.5 -0.5 0.0 1.6 1.4 0.2 0.2 0.5 0.5 2.3 1.0 -1.0 0.6 Net Exports -907.4 -951.4 -950.2 -861.5 -788.0 -775.1 -1016.4 -1046.9 -1014.0 -1002.3 -1011.5 -1026.4 -1040.5 -1054.7 -1077.5 -1100.8 -917.6 -906.6 -1013.5 -1068.4 Pct. Point Contribution to GDP 0.6 -0.8 0.0 1.5 1.1 0.6 -3.2 -0.7 0.7 0.2 -0.2 -0.3 -0.3 -0.3 -0.5 -0.5 -0.2 0.1 -0.6 -0.3 Inventory Change 101.7 49.4 44.0 -1.1 -80.9 -287.0 -4.3 60.0 95.0 85.0 75.0 70.0 70.0 70.0 70.0 70.0 48.5 -78.1 81.3 70.0 Pct. Point Contribution to GDP 0.2 -1.0 -0.1 -0.8 -1.3 -3.5 6.6 1.4 0.7 -0.2 -0.2 -0.1 0.0 0.0 0.0 0.0 0.0 -0.7 0.9 -0.1 Nominal GDP (a) 4.0 4.1 4.0 3.9 -3.4 -32.8 38.0 6.7 2.7 4.9 10.2 8.1 5.4 5.2 5.0 4.7 4.0 -2.3 6.1 6.3 Real Final Sales 2.7 2.5 2.7 3.2 -3.6 -28.1 25.6 4.3 0.4 3.6 8.5 6.3 3.6 3.4 3.2 2.9 2.2 -2.8 3.8 4.5 Retail Sales (b) 2.7 3.4 3.9 4.0 1.2 -7.7 4.1 5.2 6.3 14.9 1.2 0.4 2.7 3.6 4.3 4.8 3.5 0.7 5.4 3.9 Inflation Indicators (b) PCE Deflator 1.4 1.5 1.5 1.5 1.7 0.6 1.2 1.2 1.2 2.0 1.5 1.7 1.8 1.8 1.8 1.8 1.5 1.2 1.6 1.8 "Core" PCE Deflator 1.7 1.7 1.8 1.6 1.8 1.0 1.4 1.4 1.5 2.0 1.6 1.6 1.7 1.7 1.7 1.7 1.7 1.4 1.7 1.7 Consumer Price Index 1.6 1.8 1.8 2.0 2.1 0.4 1.3 1.1 1.2 2.5 1.7 1.9 2.0 2.1 2.1 2.1 1.8 1.2 1.8 2.1 "Core" Consumer Price Index 2.1 2.1 2.3 2.3 2.2 1.3 1.7 1.6 1.6 2.4 1.7 1.8 1.9 2.0 2.0 2.0 2.2 1.7 1.9 2.0 Producer Price Index (Final Demand) 1.9 2.0 1.6 1.1 1.1 -1.0 0.0 0.7 1.3 3.1 2.5 2.1 2.1 2.1 2.2 2.2 1.7 0.2 2.3 2.1 Employment Cost Index 2.8 2.7 2.8 2.7 2.8 2.7 2.4 2.2 1.8 1.7 1.7 1.8 2.0 2.1 2.2 2.2 2.7 2.5 1.8 2.1 Real Disposable Income (b) 3.2 2.1 1.8 1.6 1.4 12.2 6.9 5.2 4.2 -5.4 -1.0 0.8 1.8 2.4 2.9 2.8 2.2 6.4 -0.5 2.5 Nominal Personal Income (b) 4.7 4.1 3.5 3.5 3.2 10.7 7.1 5.5 4.5 -2.6 0.6 2.4 3.6 4.2 4.8 4.7 3.9 6.6 1.1 4.3 Industrial Production (a) -1.9 -2.3 1.1 0.4 -6.8 -42.8 41.4 7.7 6.1 4.7 5.3 5.5 5.1 4.6 4.4 4.1 0.9 -7.0 5.6 4.9 Capacity Utilization 78.6 77.8 77.6 77.2 75.8 65.9 71.9 73.3 74.4 75.2 76.2 77.2 78.1 79.0 79.8 80.6 77.8 71.7 75.8 79.4 Corporate Profits Before Taxes (b) -1.1 1.7 -0.5 1.3 -6.7 -19.3 3.3 2.0 12.0 25.0 5.0 2.5 6.0 6.0 2.0 3.0 0.3 -5.1 10.3 4.2 Corporate Profits After Taxes -3.3 0.5 -0.3 1.3 -5.7 -18.8 3.2 2.9 11.7 25.3 4.9 2.5 6.1 6.0 2.0 3.0 -0.4 -4.5 10.2 4.2 Federal Budget Balance (c) -372 -56 -237 -357 -387 -2001 -388 -603 -575 -234 -388 -404 -527 -142 -327 -336 -984 -3132 -1800 -1400 Trade Weighted Dollar Index (d) 109.8 109.7 111.0 109.8 112.7 110.3 106.6 104.0 103.3 102.5 102.0 101.5 101.0 100.5 100.0 100.0 110.1 108.4 102.3 100.4 Nonfarm Payroll Change (e) 139 159 203 210 -303 -4427 1322 285 133 550 650 375 300 247 230 215 178 -781 427 248 Unemployment Rate 3.9 3.6 3.6 3.5 3.8 13.0 8.8 6.8 6.7 6.5 6.2 5.9 5.6 5.3 5.0 4.7 3.7 8.1 6.3 5.2 Housing Starts (f) 1.20 1.26 1.29 1.43 1.48 1.08 1.44 1.56 1.40 1.42 1.47 1.48 1.48 1.49 1.50 1.51 1.29 1.39 1.44 1.49 Light Vehicle Sales (g) 16.9 17.0 17.0 16.8 15.0 11.3 15.3 15.8 15.6 15.7 15.7 16.1 16.1 16.8 16.7 17.1 17.0 14.4 15.8 16.7 Crude Oil - Brent - Front Contract (h) 63.8 67.6 61.5 61.7 51.0 34.7 43.8 45.0 47.0 49.0 47.0 50.0 53.0 55.0 57.0 55.0 63.6 43.6 48.3 55.0 Quarter-End Interest Rates (i) Federal Funds Target Rate 2.50 2.50 2.00 1.75 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 2.25 0.25 0.25 0.25 Secured Overnight Financing Rate (h) 2.43 2.43 2.28 1.67 1.23 0.05 0.09 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 2.20 0.37 0.10 0.10 3 Month LIBOR 2.60 2.32 2.09 1.91 1.45 0.30 0.23 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 2.33 0.56 0.25 0.25 Prime Rate 5.50 5.50 5.00 4.75 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 5.25 3.25 3.25 3.25 Conventional Mortgage Rate 4.28 3.80 3.61 3.72 3.45 3.16 2.89 2.70 2.80 2.95 3.00 3.10 3.20 3.25 3.30 3.35 3.94 3.05 2.96 3.28 3 Month Bill 2.40 2.12 1.88 1.55 0.11 0.16 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 2.11 0.12 0.10 0.10 6 Month Bill 2.44 2.09 1.83 1.60 0.15 0.18 0.11 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 2.11 0.14 0.10 0.10 1 Year Bill 2.40 1.92 1.75 1.59 0.17 0.16 0.12 0.15 0.15 0.15 0.20 0.20 0.20 0.20 0.25 0.25 2.05 0.15 0.18 0.23 2 Year Note 2.27 1.75 1.63 1.58 0.23 0.16 0.13 0.15 0.15 0.20 0.20 0.25 0.25 0.30 0.40 0.50 1.97 0.17 0.20 0.36 5 Year Note 2.23 1.76 1.55 1.69 0.37 0.29 0.28 0.40 0.50 0.60 0.65 0.70 0.75 0.85 0.90 1.00 1.95 0.34 0.61 0.88 10 Year Note 2.41 2.00 1.68 1.92 0.70 0.66 0.69 0.90 1.05 1.20 1.30 1.40 1.50 1.55 1.60 1.65 2.14 0.74 1.24 1.58 30 Year Bond 2.81 2.52 2.12 2.39 1.35 1.41 1.46 1.70 1.85 2.00 2.15 2.25 2.30 2.30 2.35 2.40 2.58 1.48 2.06 2.34 Forecast as of: December 10, 2020 Notes: (a) Compound Annual Growth Rate Quarter-over-Quarter (d) Fed.Reserve Adv. Foreign Economies Index, 2006=100 – Quarter End (g) Quarterly Data – Average Monthly SAAR, Annual Data – Actual Total Vehicles Sold (b) Year-over-Year Percentage Change (e) Average Monthly Change (h) Quarterly Average of Daily Close (c) Quarterly Sum – Billions USD; Annual Data Represents Fiscal Yr. (f) Millions of Units – Annual Data – Not Seasonally Adjusted (i) Annual Numbers Represent Averages
Source: Federal Reserve Board, IHS Markit, U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities
24 December 10, 2020 | 2021 Annual Outlook Wells Fargo International Economic Forecast (Year-over-Year Percent Change) GDP CPI 2019 2020 2021 2022 2019 2020 2021 2022
Global (PPP Weights) 2.8% -3.7% 5.9% 3.8% 3.5% 3.2% 3.0% 3.3%
Advanced Economies1 1.7% -5.2% 4.1% 3.7% 1.4% 0.8% 1.3% 1.7% United States 2.2% -3.5% 4.5% 4.5% 1.8% 1.2% 1.8% 2.1% Eurozone 1.3% -7.4% 3.6% 2.9% 1.2% 0.2% 0.8% 1.2% United Kingdom 1.5% -11.2% 3.1% 3.1% 1.8% 0.9% 1.4% 1.6% Japan 0.7% -5.3% 3.0% 2.0% 0.5% 0.0% 0.1% 0.7% Canada 1.7% -5.6% 4.1% 3.1% 1.9% 0.7% 1.8% 2.0% Switzerland 1.2% -3.1% 3.5% 2.0% 0.4% -0.7% 0.1% 0.5% Australia 1.8% -3.0% 3.3% 3.4% 1.6% 0.7% 1.6% 1.8% New Zealand 2.2% -4.3% 5.8% 3.3% 1.6% 1.5% 1.4% 1.6% Sweden 1.3% -3.0% 3.3% 3.0% 1.6% 0.6% 1.2% 1.4% Norway 1.2% -3.4% 3.5% 2.5% 2.2% 1.4% 2.3% 2.0%
Developing 3.7% -2.5% 7.3% 3.8% 5.1% 5.1% 4.4% 4.6% Economies1 China 6.1% 2.2% 9.6% 5.7% 2.9% 2.8% 2.0% 2.3% India 4.2% -7.5% 10.9% 5.0% 4.8% 6.5% 4.4% 4.5% Mexico -0.3% -9.1% 3.4% 2.8% 3.6% 3.5% 3.8% 3.5% Brazil 1.1% -4.5% 4.8% 2.7% 3.7% 2.6% 3.0% 3.4% Forecast as of: December 10, 2020 1Aggregated Using PPP Weights Wells Fargo International Economic Forecast Wells Fargo International Interest Rate Forecast (End of Quarter Rates) Central Bank Key Policy Rates 2020 2021 2022 Q4 Q1 Q2 Q3 Q4 Q1 United States 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% Eurozone1 -0.50% -0.50% -0.50% -0.50% -0.50% -0.50% United Kingdom 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% Japan -0.10% -0.10% -0.10% -0.10% -0.10% -0.10% Canada 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 2-Year Note 2020 2021 2022 Q4 Q1 Q2 Q3 Q4 Q1 United States 0.15% 0.15% 0.20% 0.20% 0.25% 0.25% Eurozone2 -0.70% -0.70% -0.65% -0.60% -0.50% -0.45% United Kingdom -0.05% 0.00% 0.05% 0.10% 0.15% 0.15% Japan -0.10% -0.05% 0.00% 0.05% 0.05% 0.05% Canada 0.30% 0.35% 0.35% 0.35% 0.40% 0.40% 10-Year Note 2020 2021 2022 Q4 Q1 Q2 Q3 Q4 Q1 United States 0.90% 1.05% 1.20% 1.30% 1.40% 1.50% Eurozone2 -0.55% -0.40% -0.30% -0.20% -0.15% -0.10% United Kingdom 0.30% 0.40% 0.45% 0.50% 0.55% 0.60% Japan 0.05% 0.10% 0.10% 0.15% 0.15% 0.15% Canada 0.75% 0.90% 1.00% 1.05% 1.15% 1.20% Forecast as of: December 10, 2020
Source: International Monetary Fund and Wells Fargo Securities
25 December 10, 2020 | 2021 Annual Outlook Disclosure Wells Fargo Securities Economics Group Jay H. Bryson, Ph.D. Chief Economist (704) 410-3274 [email protected] Mark Vitner Senior Economist (704) 410-3277 [email protected] Sam Bullard Senior Economist (704) 410-3280 [email protected] Nick Bennenbroek International Economist (212) 214-5636 [email protected] Tim Quinlan Senior Economist (704) 410-3283 [email protected] Azhar Iqbal Econometrician (212) 214-2029 [email protected] Sarah House Senior Economist (704) 410-3282 [email protected] Charlie Dougherty Economist (704) 410-6542 [email protected] Michael Pugliese Economist (212) 214-5058 [email protected] Brendan McKenna International Economist (212) 214-5637 [email protected] Shannon Seery Economist (704) 410-1681 [email protected] Jen Licis Economic Analyst (704) 410-1309 [email protected] Hop Mathews Economic Analyst (704) 383-5312 [email protected] Nicole Cervi Economic Analyst (704) 410-3059 [email protected] Sara Cotsakis Economic Analyst (704) 410-1437 [email protected] Coren Burton Administrative Assistant (704) 410-6010 [email protected]
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26 December 10, 2020 | 2021 Annual Outlook