[PPT] - U.S. Economic Outlook Charlie Dougherty, Vice President & PowerPoint Presentation

SLIDE 1

U.S. Economic Outlook

Charlie Dougherty, Vice President & Economist September 18, 2018

SLIDE 2

Economic Outlook

2

10%
8%
6%
4%
2%

0% 2% 4% 6% 8% 10%

10%
8%
6%
4%
2%

0% 2% 4% 6% 8% 10% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

U.S. Real GDP

Bars = CAGR Line = Yr/ Yr Percent Change GDP - CAGR: Q2 @ 4.2% GDP - Yr/Yr Percent Change: Q2 @ 2.9% Forecast

Economic Growth Expected to Accelerate in 2018 After a slow start, real GDP rebounded strongly in the second quarter. We expect the economy to continue to expand and grow nearly 3 percent for the year.

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

SLIDE 3

Economic Outlook

3

1,200
1,000
800
600
400
200

200 400 600

1,200
1,000
800
600
400
200

200 400 600 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

U.S. Nonfarm Employment Change

Change in Employment, In Thousands Monthly Change: Aug @ 201K 12-Month Average Change: Aug @ 194K

Employment Situation: Employment Growth Strong Hiring has had a strong start to the year, continuing the steak of 90+ months of positive gains.

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

SLIDE 4

Economic Outlook

4

59% 60% 61% 62% 63% 64% 65% 66% 67% 68% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Unemployment v. Labor Force Participation

16 Years and Over, Seasonally Adjusted Unem ploym ent Rate: Aug @ 3.9% (Left Axis) Labor Force Participation Rate: Aug @ 62.7% (Right Axis)

Employment Situation: Tightening Labor Market The unemployment rate has fallen considerably over the course of the recovery. Strong employment growth has also helped counter the downward pressure on labor force participation from an aging population.

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

SLIDE 5

Economic Outlook

5 0% 1% 2% 3% 4% 5% 6% 0% 1% 2% 3% 4% 5% 6% 97 99 01 03 05 07 09 11 13 15 17

Average Hourly Earnings

vs. Atlanta Fed Wage Growth Tracker; 3-MMA of YoY % Chg.

Atlant a Fed Wage Growth Tracker: Jul @ 3.3% Average Hourly Earnings (Prod. & Supervisory): Jul @ 2.7% Average Hourly Earnings (Total Private): Jul @ 2.7%

Workers’ Earnings Drift Upward Wage growth has picked up modestly but remains a missing piece to the recovery thus far. Earnings have been limited by lower-skilled workers entering the workforce and Baby Boomers beginning to retire.

Source: U.S. Department of Labor, Federal Reserve Bank of Atlanta and Wells Fargo Securities

SLIDE 6

Economic Outlook

6

6%
4%
2%

0% 2% 4% 6% 8%

6%
4%
2%

0% 2% 4% 6% 8% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Real PCE vs. Real Disposable I ncome

Year-over-Year Percent Change Real PCE: Jul @ 2.8% Real Disposable Incom e: Jul @ 2.9%

Income Growth Stronger employment and wage growth has boosted incomes and supported consumer spending.

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

SLIDE 7

Economic Outlook

7

Consumers The recovery in household wealth has helped to fuel consumer confidence and spending

Source: Federal Reserve Board, Conference Board and Wells Fargo Securities

20 40 60 80 100 120 140 160 $50 $100 $150 $200 $250 $300 90 93 96 99 02 05 08 11 14 17

Household Net Worth vs. Consumer Confidence

Thousands of 2009 Dollars, Index Real Per Capita Net Worth: Q1 @ $270,797.6 (Left Axis) Consum er Confidence: Q2 @ 126.9 (Right Axis)

SLIDE 8

Economic Outlook

8

2%
1%

0% 1% 2% 3% 4% 5%

2%
1%

0% 1% 2% 3% 4% 5% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

PCE Deflator & "Core" PCE Deflator

Year-over-Year Percent Change PCE Deflator : Q2 @ 2.2% "Core" PCE Deflator: Q2 @ 1.9% Forecast

Inflation Inflationary pressures have increased recently and are now at the Fed’s 2 percent benchmark.

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

SLIDE 9

Economic Outlook

9

Interest Rates The Fed is expected to hike rates two more times this year, bringing the fed funds rate closer to a more “normal” level and flattening the yield curve.

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Federal Funds Target Rate

Upper Bound, Percent Federal Funds: Q2 @ 2.00% Forecast

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

Interest Rates Monetary Policy

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

Wells Fargo Rates Forecast

Through 2020 Q4 2020 Q4 2019 Q4 2018

SLIDE 10

Economic Outlook

10

Federal Fiscal Policy Outlook

Key Tax Law Changes

Individual Tax Code Changes

Bill slashes marginal tax rates across the

board

Limits state & local income and property

tax deductions to $10,000

Pass-throughs would be allowed to deduct

up to 20 percent of income

Doubles the standard deduction and the

child tax credit

Caps mortgage interest deduction at $750K
Doubles the estate tax exemption
Keeps the Alternative Minimum Tax (AMT)

but lifts the threshold to $500K

Maintains several deductions including

medical expenses, student loans and private activity bonds (PABs)

Repeals Obamacare individual mandate
Individual cuts expire on December 31,

2025 Business Tax Code Changes

Permanently reduces the corporate tax

rate to 21% from the current 35% federal rate starting in 2018

Corporate AMT repealed
Business interest expense deductions

are capped at 30 percent of EBITDA for 4 years and 30 percent of EBIT thereafter

The bill allows for full and immediate

expensing of business capital

investments. This provision expires in

five years.

Ends the current worldwide corporate

tax system by switching to a territorial

system. Existing profits held abroad

are taxed at 15.5 percent for cash and cash equivalents and 8 percent for reinvested foreign earnings.

SLIDE 11

Economic Outlook

11

$0 $50 $100 $150 $200 $250 $300 $350 $0 $50 $100 $150 $200 $250 $300 $350 FY 2014/ 2015 FY 2016/ 2017 FY 2018/ 2019

Increase in BCA Budget Caps

Billions of USD

Defense Spending Nondefense Spending

Federal Fiscal Policy Outlook The budget deal reached in February provides additional fiscal stimulus to the U.S. economy

Source: Congressional Budget Office and Wells Fargo Securities

SLIDE 12

Economic Outlook

12

$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200

$0 $200 $400

$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200

$0 $200 $400 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

U.S. Federal Budget Balance

Billions of Dollars Federal Budget Balance: FY 2017 @ -$665.8B WF Forecast: FY 2018 @ -$775.0B

Budget Deficit The Tax Cuts and Jobs Act, budget deal and mandatory spending have the deficit on track to breach $1 trillion while the economy is still in an expansion

Source: U.S. Department of the Treasury and Wells Fargo Securities

SLIDE 13

Economic Outlook

13

40%
30%
20%
10%

0% 10% 20% 30%

40%
30%
20%
10%

0% 10% 20% 30% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Real Business Fixed Investment

Bars = CAGR Line = Yr/ Yr Percent Change Non-Res Fixed Invest - CAGR: Q2 @ 8.6% Non-Res Fixed Invest - Yr/Yr Percent Change: Q2 @ 7.0% Forecast

Business Investment Business fixed investment growth should be bolstered by tax reform, an area that has lagged outside of the tech and energy sector.

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

SLIDE 14

Economic Outlook

14

10%
8%
6%
4%
2%

0% 2% 4% 6% 25 30 35 40 45 50 55 60 65 92 94 96 98 00 02 04 06 08 10 12 14 16 18

I SM Manufacturing I ndex & Real GDP

Index, 3-Month Moving Average, Year-over-Year Percent Change I SM Manufacturing Index: Aug @ 59.9 (Left Axis) Real GDP, Year-over-Year Percent Change: Jun @ 3.0% (Right Axis)

Business Activity Underlying manufacturing activity continues to look strong, supporting the case for solid economic momentum.

Source: Institute for Supply Management and Wells Fargo Securities

SLIDE 15

Economic Outlook

15 15

Small Business Optimism Small business optimism spiked following the presidential election and remains at an all time

high. Business owners have become much less worried about the regulatory environment.

Source: National Federation of Independent Business (NFIB), Office of Information and Regulatory Affairs and Wells Fargo Securities

Sm all Business Concerns Sm all Business Optim ism

80 85 90 95 100 105 110 80 85 90 95 100 105 110 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

NFIB Small Business Optimism

Overall Index 1986 = 100 Small Business Optimism : Jul @ 107.9

100 200 300 400 500 600 700 800 100 200 300 400 500 600 700 800 94 96 98 00 02 04 06 08 10 12 14 16

Major New Regulatory Changes

Number of Rules Reviewed By the OIRA Each Year Clinton Obama Bush Trump

15

SLIDE 16

Economic Outlook

16

Global Growth Global growth continues to be solid. Although many central banks have started to hike rates, monetary policy remains accommodative, which should keep the global expansion intact.

1.5%

0.0% 1.5% 3.0% 4.5% 6.0% 7.5%

1.5%

0.0% 1.5% 3.0% 4.5% 6.0% 7.5% 1980 1985 1990 1995 2000 2005 2010 2015

Real Global GDP Growth

Year-over-Year Percent Change, PPP Weights Period Average WF Forecast

Source: International Monetary Fund, Federal Reserve Board and Wells Fargo Securities

The Dollar Global Growth

65 70 75 80 85 90 95 100 105 110 115 65 70 75 80 85 90 95 100 105 110 115 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Trade Weighted Dollar

Major Currency Index, 1973 = 100 Trade Weighted Dollar: Q2 @ 90.0 Forecast

SLIDE 17

Economic Outlook

17 17

Trade

Source: International Monetary Fund, OECD, United Nations, U.S. Department of Commerce and Wells Fargo Securities

U.S. Industry Exposure U.S.-China Export Exposure

0% 4% 8% 12% 16% 20% 0% 4% 8% 12% 16% 20% U.S. China

Bilateral Export Exposure

Percent Percent of Total Exports (2017) Percent of Value Add (2016)

0% 5% 10% 15% 20% 25% 30% 0% 5% 10% 15% 20% 25% 30%

Ag. & Other

Prim ary Products Aerospace Products/ Parts Motor Vehicles Products/ Parts Chem icals

Exports by Industry

China Share of Exports vs. Exports Share of Gross Output, 2016 Exports to China/ Total Exports Exports Share of Gross Output

Trade tensions continue to escalate. China appears to have more to lose if a full-blown trade war were to develop, but such an event would not be costless for the United States

SLIDE 18

Economic Outlook

18

1,500
750

750 1,500 2,250 3,000 3,750 50% 55% 60% 65% 70% 75% 80% 85% 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17

U.S. Homeowners vs. Renters

Percent; Annual Change in Occupied Units, In Thousands Renters: 2017 @ -183.7K (Right Axis) Hom eowners: 2017 @ 1,109.3K Right Axis) Hom eownership: 2017 @ 64.2% (Left Axis)

Household Formation Household formation has improved over the past few years but generally remains below prior decades. Still, the homeownership rate appears to be reversing course.

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

SLIDE 19

Economic Outlook

19

Home Sales Low inventories and high prices have restrained sales so far in

2018. Demand should continue

to be strong and keep activity trending higher.

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Existing & New Single-Family Home Sales

Both Series in Millions of Units, Seasonally Adjusted Annual Rate New Home Sales: Jul @ 0.6 Million (Left Axis) SF Existing Hom e Sales: Jul @ 4.8M (Right Axis)

Source: National Association of Realtors, U.S. Department of Commerce and Wells Fargo Securities

SLIDE 20

Economic Outlook

20

Lack of Inventory Pushing Prices Higher Although starting to rise, mortgage rates are still relatively cheap. More of an issue is the shortage of inventory pushing up prices, especially in the West where shortfalls are most acute.

13.0% 12.8% 10.7% 8.3% 7.4% 7.2% 7.1% 6.9% 6.9% 6.4% 6.4% 5.8% 5.7% 5.7% 5.2% 5.2% 5.1% 3.8% 3.3% 2.9% 6.0% 6.3% 6.2% 0% 2% 4% 6% 8% 10% 12% 14% Las Vegas Seat tle San Francisco Denver Los Angeles Phoenix Boston San Diego Tam pa Minneapolis Det roit Portland Charlot te Atlant a Dallas Miami Cleveland New York City Chicago Washingt on, D.C. C-10 C-20 National HPI

S&P CoreLogic Case-Shiller Home Prices

Year-over-Year Percent Change, NSA June 2018

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

Mortgage Rates Hom e Prices

2% 4% 6% 8% 10% 12% 14% 10% 13% 16% 19% 22% 25% 28% 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Mortgage Payment vs. Mortgage Rate

Principal & Interest Payment as a Percent of Income 6 Mont h Moving Average: Jun @ 16.9% (Left Axis) Mortgage Paym ent as Percent of Incom e: Jun @ 18.5% (Left Axis) 30-Yr. Convent ional Mortg. Rate: Jul @ 4.53% (Right Axis)

SLIDE 21

Economic Outlook

21

0.0 0.3 0.6 0.9 1.2 1.5 1.8 2.1 2.4 0.0 0.3 0.6 0.9 1.2 1.5 1.8 2.1 2.4 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

Housing Starts

Millions of Units

Multifamily Starts Multifamily Forecast Single-Family Starts Single-Family Forecast

Forecast

Single-Family Starts Are Gaining Momentum, as Apartments Begin to Moderate The housing market is at a key turning point where the momentum will shift more toward single-family construction.

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

SLIDE 22

Economic Outlook

22 22

Housing Permits Houston & Dallas continue to be the leader in single-family housing permits. Multifamily construction is concentrated in large cities, however is spreading towards smaller and more affordable markets.

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

Multifam ily Single Fam ily

5 10 15 20 25 Jacksonville, FL Los Angeles, CA Riverside, CA Raleigh, NC Denver, CO Nashville, TN Tam pa, FL Washingt on, D.C. Charlot te,NC Orlando, FL Aust in, TX Phoenix, AZ Atlant a, GA Dallas, TX Houston, TX

Single-Family Housing Permits by MSA

Year to Date, Total Number of Permits in Thousands June 2018

0.0 5.0 10.0 15.0 20.0 Tam pa, FL Houston, TX Boston, MA-NH Washington, DC-VA-MD-WV Phoenix, AZ San Francisco, CA Austin, TX Atlanta, GA Chicago, I L-IN-WI Miami, FL Seat tle, WA Denver, CO Los Angeles, CA Dallas, TX New York, NY-NJ-PA

Multifamily Housing Permits by MSA

Year to Date, Total Number of Permits in Thousands May 2018

SLIDE 23

Economic Outlook

23

Construction Constraints: Higher Costs Tariffs on lumber and steel have pushed up prices, however strong demand has caused building material prices to rise across the board. A shortage of skilled labor is putting upward pressure on overall construction wages.

50%
40%
30%
20%
10%

0% 10% 20% 30% 40% 50% 60%

50%
40%
30%
20%
10%

0% 10% 20% 30% 40% 50% 60% 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Construction, Lumber & Steel Prices

Year-over-Year Percent Change, 3-Month Moving Average Softwood Lum ber: Jul @ 19.3% Steel Mill Products: Jul @ 11.7% Const ruction Materials: Jul @ 7.8%

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

Higher Labor Costs Higher Material Prices

0% 1% 2% 3% 4% 5% 0% 1% 2% 3% 4% 5% 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Employment Cost Index: Construction

Year-Over-Year Percent Change Em ploym ent Cost I ndex: Construction: Q2 @ 3.2%

SLIDE 24

Texas Outlook

SLIDE 25

Wells Fargo Economics

25

Year-over-Year Employment Growth: July 2018 The West Coast is growing solidly, led by the gains in the tech

sector. The Southeast is

also doing well thanks to a relatively low cost of living.

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

SLIDE 26

Wells Fargo Economics

Employment Growth by MSA

Boston Atlanta Miami Los Angeles San Francisco Dallas Houston Philadelphia Charlotte Seattle Chicago Minneapolis San Diego Tampa

St. Louis

Baltimore New York San Jose Las Vegas Washington, D.C. Richmond Detroit Phoenix

1%

0% 1% 2% 3% 4% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 3-Month Annualized Percent Change Year-over-Year Percent Change

U.S. Employment Growth by MSA

3-Month Moving Averages, July 2018

Percent of Total Em ployees Less t han 4% 4% to 6% More t han 6% Expanding Decelerating

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

SLIDE 27

Economic Outlook

27

6%
4%
2%

0% 2% 4% 6% 8% 06 07 08 09 10 11 12 13 14 15 16 17 18

6%
4%
2%

0% 2% 4% 6% 8%

Texas Real GDP Growth vs. U.S.

Year-over-Year Percent Change Texas: Q1 @ 4.2% United States: Q1 @ 2.6%

Texas GDP The Texas economy regained a lot of ground in 2017, rebuilding momentum lost following the plunge in oil prices around the middle of the decade.

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

SLIDE 28

Economic Outlook

28 28

Texas Employment The Texas job market is back to firing on all cylinders. Recent improvement have been broad- based across many industries and regions, which should keep payroll growth strong.

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

Em ploym ent by Industry Em ploym ent

6%
4%
2%

0% 2% 4% 6%

6%
4%
2%

0% 2% 4% 6% 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Texas Nonfarm Employment

3-Month Moving Averages QCEW: Yr/Yr Pct. Change: Mar @ 2.0% Nonfarm : Yr/ Yr Pct. Change: Jul @ 3.0% United States: Aug @ 1.6% July 2018

5%

0% 5% 10% 15% 20% Inform ation

Nat. Res. and Mining

Other Services Construction Financial Activities Manufacturing Leisure & Hospitality

Prof. & Bus. Svcs.
Educ. & Health Services

Governm ent Trade, Trans. & Utilities Tot al Nonfarm

Texas Employment Growth By Industry

Year-over-Year Percent Change, 3-MMA Number of Employees Less More

SLIDE 29

Wells Fargo Economics

29 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Texas Unemployment Rate

Seasonally Adjusted Texas Unemploym ent Rate: Jul @ 4.0% 12-Mont h Moving Average: Jul @ 4.0%

Unemployment Rate The Texas jobless rate has recovered from the upward spurt caused by the oil downturn, and now sits at a near record low. A tightening labor market has caused a shortage of skilled workers.

Source: Baker Hughes, Inc., Bloomberg LP and Wells Fargo Securities

SLIDE 30

Economic Outlook

30

Texas Employment by Metropolitan Area

Corpus Christ i College St at ion Beaumont Houst on San Ant onio Dallas Longview Aust in Brownsville McAllen Waco El Paso Fort Wort h Lubbock Amarillo Killeen Tyler Laredo

3%
2%
1%

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

2%
1%

0% 1% 2% 3% 4% 5% 3-Month Annualized Percent Change (3MMA) Year-over-Year Percent Change

Texas Employment Growth by Metro

3-Month Moving Averages, July 2018

Total Nonfarm Em ployment More Than 2.5 Million 1 - 2 Million 150 - 320 Thousand Less than 150 Thousand

Recovering Expanding Contracting Decelerating

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

SLIDE 31

Wells Fargo Economics

31 10 20 30 40 50 60 70 Dallas-Fort Worth, TX Phoenix, AZ Tam pa, FL Atlanta, GA Charlotte, NC Aust in, TX Las Vegas, NV San Ant onio, TX Orlando, FL Riverside, CA Seattle, WA Jacksonville, FL Nashville, TN Raleigh, NC Portland, OR Sacram ento, CA Colum bus, OH Denver, CO Kansas City, MO Minneapolis, MN

Metro Area Net Domestic Migration: Top 20

Thousands, 2017

Net Migration Several Texas metros continue top the list of destinations for state-to-state movers.

Source: Baker Hughes, Inc., Bloomberg LP and Wells Fargo Securities

SLIDE 32

Economic Outlook

32 100 200 300 400 500 600 700 800 900 1,000 200 250 300 350 400 450 500 550 600 650 700 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Energy Extraction-Related Jobs and Active Rigs: TX

Thousand Jobs, Baker Hughes Rotary Rig Count Mining, m etal & m achinery m anuf.: Jul @ 481K (Left Axis) Active rotary rigs: Jan @ 525 (Right Axis)

Energy Sector The rebound in commodity prices since early 2016 has supported new investment

spending. However, extraction-

related employment has not returned to prior peak levels.

Source: Baker Hughes, Inc., Bloomberg LP and Wells Fargo Securities

SLIDE 33

Economic Outlook

33

60
40
20

20 40 60

60
40
20

20 40 60 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Dallas Fed Manufacturing Activity

Diffusion Index Dallas Fed Outlook of General Business Activity: Jun @ 36.5

Manufacturing Texas manufacturers continue to report expanding activity, however tariffs and uncertainty surrounding trade policy are creating headwinds.

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

SLIDE 34

Economic Outlook

34 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 98 00 02 04 06 08 10 12 14 16 18

Texas Exports

In Millions of Dollars Export s: Q2 @ $80,673.8 Year-over-Year Percent Change: Q2 @ 24.3%

Exports Firmer commodity prices are also boosting exports, as oil and gas exports nearly doubled last

year. Trade is vital to the Texas

economy, with exports accounting for roughly 15 percent of total economic

utput.

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

SLIDE 35

Economic Outlook

35 35

Tech and Financial Activities Tech sector employment has moderated recently, with stronger growth outside of Austin. Financial activities employment also continues to expand at a pace ahead on the nation.

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

Financial Activities Tech Sector

12%
8%
4%

0% 4% 8% 12% 16% 20%

12%
8%
4%

0% 4% 8% 12% 16% 20% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Professional, Scientific and Tech Employment

Year-over-Year Percent Change, NSA Austin: Jul @ 3.0% Rest of Texas: Jul @ 4.4%

6%
4%
2%

0% 2% 4% 6%

6%
4%
2%

0% 2% 4% 6% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Financial Activities Employment Growth

Year-over-Year Percent Change, 3-Month Moving Average United St ates: Jun @ 1.5% Texas: Jun @ 2.5%

SLIDE 36

Economic Outlook

36 50 100 150 200 250 50 100 150 200 250 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Texas Housing Permits

Thousands of Permits, Annual Rate Single-Family: May @ 138,636 Single-Family, 12-MMA: May @ 119,364 Mult ifam ily, 12-MMA: May @ 57,211

Single-Family Average (1998-2003): 110,689

Texas Housing Homebuilding moderated somewhat last year, however Texas remains the largest market for new residential construction, supported by strong employment and population growth.

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

SLIDE 37

Economic Outlook

37 33% 14% 13% 12% 10% 8% 7% 6% 5% 4%

1%
4%
13%
25%
5%

15% 35% Beaumont Houston Forth Worth Aust in McAllen Texas United States Dallas Midland Brownsville San Antonio Corpus Christi El Paso

Texas Building Permits

Year-over-Year Percent Change of 12-Month Moving Average July 2018

Housing Activity by Metro Houston, Dallas, and Austin continue to lead both the state and nation in terms of new homebuilding.

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

SLIDE 38

Economic Outlook

3 8 38

Texas Home Prices Housing affordability is a major advantage for Texas. Relatively low land costs and an entitlement process that works closely with builders helps keep the housing market in balance.

Source: CoreLogic and Wells Fargo Securities

Hom e Price Growth by MSA Hom e Price Index

40 60 80 100 120 140 160 180 200 220 40 60 80 100 120 140 160 180 200 220 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

CoreLogic HPI: TX vs. U.S.

Index, 2000= 100, Not Seasonally Adjusted United St ates: Jul @ 203.6 Texas: Jul @ 187.4 8.7% 6.8% 6.2% 5.5% 5.4% 5.4% 4.9% 4.6% 4.1% 3.4% 3.4% 0% 2% 4% 6% 8% 10% 12% 14% Fort Wort h DMSA San Ant onio U.S. Dallas DMSA Houston Texas El Paso Austin McAllen Midland Corpus Christi

Core Logic Home Prices

Year-over-Year Percent Change July 2018

SLIDE 39

Economic Outlook

39

80 90 100 110 120 130 140 80 90 100 110 120 130 140 82 85 88 91 94 97 00 03 06 09 12 15 18

Texas Leading Economic I ndex

Index, 1987= 100, Seasonally Adjusted Texas Leading Index: Jan @ 129.9

Texas Outlook Texas has strong momentum headed into the second half of 2018 and we are looking for Texas to continue to grow solidly over the next couple of years.

Source: The Federal Reserve Bank of Dallas and Wells Fargo Securities

SLIDE 40

Appendix

SLIDE 41

Economic Outlook

41

U.S. Economic Forecast

Wells Fargo U.S. Econom ic Forecast

q 3 2 01 8 20 18

2016 2017 2018 2019 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Real Gross Domest ic Product 1 2.2 4.2 3.1 2.8 2.6 2.9 2.6 2.4 2.2 2.0 1.9 1.8 1.6 2.2 2.9 2.8 Personal Consumpt ion 0.5 3.8 2.9 2.8 2.2 2.9 2.6 2.5 2.1 2.2 1.8 1.7 2.7 2.5 2.6 2.7 Business Fixed Invest ment 11.5 8.5 6.8 5.1 4.7 4.9 4.4 4.0 3.7 3.6 2.9 2.8 0.5 5.3 7.4 5.2 Equipment 8.5 4.4 6.9 4.3 3.8 4.2 3.7 3.1 2.7 2.6 2.1 2.0

1.5

6.1 7.7 4.3 Int ellect ual Propert y Product s 14.1 11.0 7.1 5.2 4.8 5.3 4.7 4.6 4.7 4.6 3.7 3.6 7.5 4.6 7.5 5.6 St ruct ures 13.9 13.2 7.0 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.5

5.0

4.6 6.8 6.7 Resident ial Const ruct ion

3.4
1.6

2.0 4.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 6.5 3.3 0.9 4.0 Government Purchases 1.5 2.4 3.4 2.9 2.2 1.4 0.8 0.7 0.7 0.5 0.3 0.1 1.4

0.1

1.7 2.1 Net Export s 2 0.0 1.2

1.2
0.6
0.3
0.5
0.3
0.2

0.0

0.2

0.1 0.1

0.4
0.4
0.2
0.4

Invent ories 2 0.3

1.0

1.2 0.1 0.1 0.2 0.1 0.0 0.0 0.0 0.0 0.0

0.6

0.0 0.0 0.2 Nominal GDP 1 4.3 7.6 4.6 5.0 5.3 5.5 5.2 4.8 4.4 4.3 4.0 4.4 2.7 4.2 5.2 5.3 Corporat e Profit s Before Taxes 3 5.9 7.7 8.0 6.2 5.6 1.8 0.5

0.8
1.6
2.2
2.6
3.4
1.1

3.2 6.9 1.7

Forecast as of: Septem ber 12, 2018

1 Com pound Annual Growth Rate Quarter-over-Quarter 2 Percentage Point Contribution to GDP 3 Year-over-Year Percentage Change

Forecast 2020 Actual 2018 Forecast 2019 Actual Source: IHS Global Insight and Wells Fargo Securities

SLIDE 42

Economic Outlook

42

Economic Outlook Group Publications To view any of our past research please visit: http:/ / www.wellsfargo.com/ economics To join any of our research distribution lists please visit: http:/ / www.wellsfargo.com/ economicsemail

A Sampling of Our Recent Special, Regional & Industry Commentary

Date Title Authors

U.S. Macro

August - 10 Recession Updat e: Should We Worry? Iqbal August - 07 Tax Reform 2.0: The Sequel Bryson, Pugliese & Kinnaman August - 03 The Animal Spirit s Index A Updat e Iqbal & Vaisey August - 01 FOMC Remains on Hold, But More Rat e Hikes Clearly on t he Way Bryson August - 01 The Low- Skill Labor Crunch House & Vaisey

U.S. Regional

August - 06 Colorado Economic Out look: August 2018 Vit ner July- 19 California Payrolls Flat in June Vit ner & Doughert y July- 19 Solid Gain for Texas Payrolls in June Vit ner & Doughert y July- 19 Nort h Carolina Job Growt h Picked Up Considerably in June Vit ner & Doughert y July- 19 Florida Employment Ramps Up in June Vit ner & Doughert y

Global Econom y

August - 10 In Japan, St ill Wat ers Merit At t ent ion t o Any Ripple Quinlan August - 10 U.K. Mid- Year Economic Out look Bryson & Kinnaman July- 31 Taiwanese GDO Growt h Tops Expect at ions in Q2 Bryson & Pugliese July- 31 Eurozone Mid- Year Economic Out look Bryson & Kinnaman July- 30 Swedish GDP Grew St rongly in Q2- 2018 Bryson

Interest Rates/ Credit Market

August - 01 Corporat e Loans in a World of Rising Rat es Silvia & Vaisey July- 25 Household Balance Sheet s Remain Solid in Q1 Silvia & Kinnaman July- 18 Is Credit Growt h Driving Economic Growt h? Silvia, Iqbal, Kinnaman & Seery July- 11 The Flat t ening Yield Curve: To Worry or Not t o Worry? Silvia, Iqbal & Seery June- 27 Rising Rat es and Corporat e Balance Sheet s: The Long View Silvia & Kinnaman

Real Estate & H ousing

August - 09 Housing Remains in t he Slow Lane Vit ner, Doughert y & Honnold June- 29 Housing Chart book: June 2018 Vit ner & Doughert y June- 12 Q1 CRE Chart book: Propert y Prices Vit ner, Doughert y, Carmichael & Vaisey May- 02 Tax Reform: Regional Real Est at e Impact Vit ner & Doughert y April- 19 Sout hern St at es: 2018 Economic Out look Vit ner, Feik & Carmichael

To view any past research please visit: www.wellsfargo.com/ economics

Recen t Special Com m en tary

SLIDE 43

Economic Outlook

Wells Fargo Securities Economics Group

43