February 11, 2011

Economics Group
Weekly Economic & Financial Commentary

U.S. Review U.S. Exports and Imports

Year-over-Year Percent Change, 3-Month Moving Average
Economic Growth is Heading in the Right Direction 30% 30%

x The recently released data on the trade balance were a 20% 20%

clear sign that the economy continued to gain

momentum. While the U.S. trade deficit widened 10% 10%

$2.3 billion to $40.6 billion in December, the gap was

0% 0%
less than what the Bureau of Economic Analysis
assumed, which means Q4 real GDP growth should get a
-10% -10%
slight boost.
x Initial jobless claims fell by 36K to 383K (the lowest -20% -20%
level since July 2008) in the week ending February 5.
The Labor Department noted that, “claims are still -30%
Exports: Dec @ 14.6%
-30%

unwinding previous effects of bad winter weather.” Imports: Dec @ 14.0%

x The economy has gotten off to a solid start in Q1 2011. -40%

94 96 98 00 02 04 06 08 10
-40%

Global Review Grain Spot Prices

Dollars per Bushel, Weekly Averages
Are Food Prices an Inflationary Problem? $14 $14
Corn: Feb-4 @ $6.2

x Food prices have risen markedly lately and, in some $12

Wheat: Feb-4 @ $9.2
$12

cases, are near 2008 highs. This increase in food prices

will likely not have major inflationary implications in $10 $10

most advanced economies where food has a relatively

$8 $8
low weight in CPI baskets and where slack in labor
markets makes a wage-price spiral unlikely.
$6 $6
x In contrast, however, food price inflation poses a
significant downside risk to economic growth in many $4 $4
developing economies where food accounts for more of
the consumption basket. Central banks in some $2 $2

important developing economies could end up

tightening monetary policy too aggressively. $0 $0
88 90 92 94 96 98 00 02 04 06 08 10

Wells Fargo U.S. Economic Forecast Inside

Actual Forecast Actual Forecast
2010 2011 2008 2009 2010 2011 2012 U.S. Review 2
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
1
3.7 1.7 2.6 3.2 4.1 3.0 3.0 3.1 0.0 -2.6 2.9 3.2 3.0
U.S. Outlook 3
Real Gross Domestic Produc t
Personal Consumption 1.9 2.2 2.4 4.4 3.3 2.4 2.5 3.1 -0.3 -1.2 1.8 3.0 2.6 Global Review 4
Inflation Indic ators
2
Global Outlook 5
"Core" PCE Deflator
Consumer Price Index
1.8
2.4
1.5
1.8
1.2
1.2
0.8
1.2
0.7
1.6
0.7
2.3
0.9
2.4
1.2
2.4
2.3
3.8 -0.3
1.5 1.3
1.6
0.9
2.2
1.4
2.5
Point of View 6
Industrial Production
1
7.1 7.2 6.5 2.4 5.1 4.3 4.1 3.9 -3.3 -9.3 5.7 4.5 4.0
Topic of the Week 7
Corporate Profits Before Taxes
3
2
37.6 37.0 26.4 12.5 8.2 6.2 6.2 6.7 -16.4 -0.4 27.5 6.8 7.0 Market Data 8
Trade Weighted Dollar Index 76.1 78.8 73.6 73.2 72.5 73.0 74.0 75.0 74.3 77.7 75.6 73.6 78.0
Unemployment Rate 9.7 9.6 9.6 9.6 9.3 9.4 9.3 9.2 5.8 9.3 9.6 9.3 9.0
4
Housing Starts 0.62 0.60 0.59 0.54 0.56 0.61 0.66 0.71 0.90 0.55 0.59 0.64 0.83
5
Quarter-End Interest Rates
Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 1.88 0.25 0.25 0.25 0.75
Conventional Mortgage Rate 4.97 4.74 4.35 4.71 4.90 5.15 5.15 5.20 6.04 5.04 4.69 5.10 5.63
10 Year Note 3.84 2.97 2.53 3.30 3.60 3.75 3.75 3.80 3.66 3.26 3.22 3.73 4.13
Forecast as of: February 9, 2011
1
C ompound Annual Growth Rate Quarter-over-Quarter
2
Year-over-Year Percentage C hange
3
Federal Reserve Major C urrency Index, 1973=100 - Quarter End
4
Millions of Units
5
Annual Numbers Represent Averages
Economics Group U.S. Review Wells Fargo Securities, LLC
U.S. Review
First Quarter Economic Growth: Solid
Trade Balance In Goods And Services
Billions of Dollars
This week had a relatively light schedule of economic reports, but $0 $0
nearly every report painted a more optimistic picture for
economic growth. The recently released data on the trade balance -$10 -$10
were a clear sign that the economy continued to gain momentum.
While the U.S. trade deficit widened $2.3 billion to $40.6 billion -$20 -$20
in December, the gap was less than the Bureau of Economic
Analysis assumed, which means fourth-quarter real GDP growth -$30 -$30
should get a slight boost when revised data are released in two
weeks. Exports of goods and services rose $2.8 billion due, in -$40 -$40
part, to a significant lift from aircraft and auto exports. Imports
outpaced exports as oil prices continued to trend higher in -$50 -$50
December. The increase helped boost petroleum imports
$3.3 billion. Although much of the improvement in imports -$60 -$60
stemmed from oil, we think the trend is sustainable. Due to
strength in imports, trade will subtract modestly from economic -$70 -$70
Total Balance: Dec @ -$40.6 Billion
growth in the coming quarters. Goods Only: Dec @ -$53.6 Billion
-$80 -$80
Labor market indicators for the week were also positive. With the
92 94 96 98 00 02 04 06 08 10
December nonfarm payroll report sending mixed signals between
the establishment and household surveys, many market watchers
are looking intently at other employment indicators to decipher Initial Claims for Unemployment
Seasonally Adjusted, In Thousands
the true underlying trend. This week, initial jobless claims and 700 700
the Job Opening and Labor Turnover Survey were released, but Year-over-Year Percent Change: Feb-5 @ -12.8%
Initial Claims: Feb-5 @ 383.0 Thousand
unfortunately, they still did not clarify the picture. Initial jobless 650 650
4-Week Moving Average: Feb-5 @ 415.5 Thousand
claims fell by 36,000 to 383,000 (the lowest level since July 52-Week Moving Average: Feb-5 @ 451.7 Thousand
600 600
2008) in the week ending February 5. While the decline is an
encouraging sign for the labor market, the Labor Department 550 550
noted that, “claims are still unwinding previous effects of bad
winter weather.” With such noise in the data, what can be made 500 500
of the drop in jobless claims? Well, if we examine claims data
during some of the previous snowstorms, we find claims tend to 450 450

fall the week including the storm (in some cases two weeks) and
400 400
then surge the following week. If historical patterns repeat, recent
claims data should be discounted. 350 350
A better indication of the trend in employment data is the Job
Openings and Labor Turnover Survey. Both the hires and 300 300

separation rate, which is the rate of hires and separations as a

250 250
percentage of total nonfarm payrolls, remained unchanged from 86 88 90 92 94 96 98 00 02 04 06 08 10
the previous month at 3.2 percent. The number of unemployed
workers per job opening is now 4.7, which is well off of its high of
6.3 reached in November 2009. This suggests that, while hires No. of Unemployed for Every Job Opening
Total Unemployed Divided by Job Openings
still have not picked up significantly, separations have at least 7.0 7.0
slowed, which is a step in the right direction. Indeed, we project
that while the unemployment rate, which currently stands at 6.0 6.0
9.0 percent, will approach 9.4 percent by the 2nd quarter of 2011,
we are seeing other signs of improvement in the labor market.
5.0 5.0
Another challenge for the labor market continues to be the
sentiment of small business owners who many believe hold back
4.0 4.0
on hiring plans in uncertain times. This week, the Small Business
Optimism Index showed a glimmer of hope. The index rose
1.6 percent in January, reaching the highest level since December 3.0 3.0

2007. The improvement in small business sentiment is critical as

small business employment makes up 45 percent of private sector 2.0 2.0
employment. Hiring plans for small businesses have picked up in
recent months and suggest the trend in the household survey is 1.0 1.0
likely the more accurate measure. Taken together, it appears that
Number of Unemployed for Every Job Opening: Dec @ 4.7%
the first quarter has gotten off to a solid start. Our forecast calls 0.0 0.0
for real GDP to rise at a 4.1 percent pace during the first quarter. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2
Economics Group U.S. Outlook Wells Fargo Securities, LLC
Retail Sales • Tuesday
December retail sales, which increased 0.6 percent, rose for the
sixth straight month. Sales improved in most categories, as sales of Retail Sales
Month-over-Month Percent Change
motor vehicles and parts rose 1.1 percent, while gas station sales 3.5% 3.5%
increased 1.6 on the month, primarily due to increased gasoline
2.8% 2.8%
prices. Other categories that experienced moderate increases in
December were building materials, health and personal care goods 2.1% 2.1%
and furniture. The positive reading in December led to the
1.4% 1.4%
strongest year for holiday sales since 2005. A healthy growth rate
for retail sales has emerged and will likely continue to improve 0.7% 0.7%
modestly over the next few months. We are forecasting that
0.0% 0.0%
January retail sales improved 1.1 percent due to increased auto
sales and stronger chain store sales. Our expectation is that -0.7% -0.7%
consumer spending will be slightly higher in 2011, driven by some
-1.4% -1.4%
improvement in disposable income. We anticipate that personal
consumption will increase by approximately 3.0 percent for the -2.1% -2.1%
current year.
-2.8% -2.8%
Retail Sales: Dec @ 0.6%
Previous: 0.6% Wells Fargo: 1.1% -3.5% -3.5%
2005 2006 2007 2008 2009 2010
Consensus: 0.5% (Month-over-Month)
Industrial Production • Wednesday
The industrial sector continued to expand in December with a 0.8
Total Industrial Production Growth percent increase in industrial production. The unseasonably cold
Output Growth by Volume, not Revenue
15% 15% weather led to increased utility output, up 4.3 percent, which
Both Series are 3-Month Moving Averages helped boost the December headline number. In addition, mining
10% 10% output improved 0.4 percent, which also contributed to the rise in
the headline number for the month. Manufacturing output also
5% 5%
edged up in December, increasing 0.4 percent, marking the sixth
consecutive month of increases in production. There appears to be
a solid recovery in the manufacturing sector with gains in both
0% 0%
order growth and the backlog of unfilled orders. These factors
suggest a continued expansion of the manufacturing sector going
-5% -5%
forward. We anticipate that industrial production improved to
0.7 percent for the month of January due to continued
-10% -10%
unseasonably cold weather. Our 2011 outlook for industrial
production has been revised upwards to reflect our view of stronger
-15%
3-Month Annual Rate: Dec @ 2.4%
-15% manufacturing growth over the next year.
Year-over-Year Change: Dec @ 5.8%
-20% -20%
Previous: 0.8% Wells Fargo: 0.7%
87 89 91 93 95 97 99 01 03 05 07 09
Consensus: 0.5% (Month-over-Month)
Consumer Price Index • Thursday
The consumer price index continued to increase in December,
rising 0.5 percent. Most of the increase, approximately 80 percent U.S. Consumer Price Index
Both Series are 3-Month Moving Averages
of the change, can be attributed to gasoline prices rising 8.5 9% 9%
percent. The rise in gas prices combined with statistical noise from
the seasonal adjustment process led the index to its higher reading. 6% 6%
Surprisingly, food prices were only up slightly by 0.1 percent,
reflecting the fact that higher commodities prices have not yet been 3% 3%
passed through to consumers. Core CPI, which excludes food and
energy, rose a modest 0.1 percent. We believe that the consumer
0% 0%
price index rose 0.4 percent in January, mostly due to higher
energy prices along some upward movement in the prices for
-3% -3%
services. Going forward, we anticipate that consumer prices will
continue to rise modestly, increasing 2.2 percent for 2011 mostly
-6% -6%
due to continued higher food and energy prices. Meanwhile, core
inflation should remain low, increasing only 1.1 percent for the
year. -9%
CPI 3-Month Annual Rate: Dec @ 2.6%
-9%

CPI: Dec @ 1.2%

Previous: 0.5% Wells Fargo: 0.4% -12% -12%
92 94 96 98 00 02 04 06 08 10
Consensus: 0.3% (Month-over-Month)

3
Economics Group Global Review Wells Fargo Securities, LLC
Global Review
Are Food Prices an Inflationary Problem?
Eurozone Consumer Price Inflation
Year-over-Year Percent Change
Prices of grains, which are internationally traded commodities, 5% 5%
have been rising sharply lately. As shown on the front page, corn Core CPI: Dec @ 1.1%
prices are now within spitting distance of their 2008 highs. CPI: Jan @ 2.4%
Wheat prices are further off of their previous peaks, but they too 4% 4%
have moved up markedly in recent months. A combination of
strong economic growth in some large developing countries,
3% 3%
which has significantly increased the demand for foodstuffs, and
poor harvests in some important food-producing nations, such as
Australia, Russia and the Ukraine, seem to be behind the recent 2% 2%
increase in food prices.
Do recent increases in food prices have implications for overall
1% 1%
inflation rates and, in turn, central bank policy rates? The answer
seems to be “it depends.” In our view, the increase in food prices
has more inflationary pressures for developing economies than 0% 0%
for advanced economies. Take the Eurozone, for example. Food
accounts for only 15 percent of the consumer price index (CPI) in
-1% -1%
the Eurozone. Although the overall rate of CPI inflation has risen
1997 1999 2001 2003 2005 2007 2009 2011
to 2.4 percent, which is above the European Central Bank’s (ECB)
implicit target rate of around two percent, the core rate of
inflation, which excludes food as well as energy prices, remains Chinese CPI Inflation
Year-over-Year Percent Change
benign (top chart). 10% 10%
Our sense is that the ECB will hold fire as long as the core rate of Overall CPI: Dec @ 4.6%
inflation does not start to trend higher. In order for core prices to Non-food CPI: Dec @ 2.1%
8% 8%
accelerate, workers would need to demand higher wages to
compensate them for the recent rise in food prices. With the
6% 6%
Eurozone unemployment rate at 10 percent, which is a 13-year
high, workers probably don’t have much bargaining power at
present. With overall labor costs in the Eurozone up only 0.8 4% 4%

percent over the past 12 months, it is difficult to envision a

significant increase in wage inflation anytime soon. 2% 2%

In contrast, we believe that the rise in food prices has more

inflationary implications for developing countries, because food 0% 0%
accounts for a higher proportion of the consumption basket in
those countries. For example, food accounts for one-third of the -2% -2%
CPI in China. Moreover, strong economic growth in many
developing countries over the past year or so gives workers in -4% -4%
some of those economies more bargaining power. Data on 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Chinese wages are not very current, but wage growth in China
started to edge up in the second half of last year. The large wage
concessions that workers were able to wrestle last year from Chinese Official Lending Rate
1-Year Lending Rate
Japanese auto manufacturers operating in China is consistent 9% 9%
with the uptick in wage growth that is evident in the “hard” data.
The run-up in food prices has lifted the overall rate of Chinese
8% 8%
CPI inflation to five percent (middle chart). More disturbingly,
however, non-food price inflation has trended up to its highest
rate since 2008 (middle chart). In response, the Chinese central 7% 7%
bank has been tightening policy. Since October, the central bank
has hiked its benchmark lending rate by 75 bps (bottom chart). It
6% 6%
has also raised the required reserve ratio by 200 bps since
November in an attempt to drain some of the liquidity out of the
banking system. Although Chinese authorities tend to change 5% 5%
economic policies in a gradual fashion, the risk is growing that
rising inflationary pressures will lead the central bank to tighten
aggressively. This risk also applies to other important developing 4% 4%

economies such as India. In our view, rising food prices represent Lending Rate: Feb @ 6.06%
a significant downside risk to economic growth in the developing 3% 3%
world. 1998 2000 2002 2004 2006 2008 2010

4
Economics Group Global Outlook Wells Fargo Securities, LLC
Chinese CPI • Tuesday
As discussed in the global review section on the previous page, the
run-up in food prices has been lifting overall consumer costs in Chinese Consumer Price Index
Year-over-Year Percent Change
many emerging market economies. In China, where food costs 10% 10%
comprise roughly a third of the consumer prices, the CPI registered
a 4.6 percent increase on a year-over-year basis in January. The 8% 8%
CPI report for February is due out on Tuesday of next week and the
consensus expects to see the inflation rate jump to more than 6% 6%
5.0 percent. Any reading higher than 5.1 percent would signal the
highest rate of inflation since 2008 when the global recession
4% 4%
brought prices back down to earth after the run up in commodity
costs the preceding year. If realized, price growth of this magnitude
2% 2%
would pressure the People’s Bank of China to raise its key lending
rate, and may also result in increased reserve ratios at Chinese
0% 0%
banks. GDP growth increased 9.8 percent year-over-year through
the fourth quarter of 2010, so tightening can be implemented
without too much concern for stunting economic growth. -2% -2%

CPI: Jan @ 4.6%

Previous: 4.6% Wells Fargo: 5.2% -4% -4%
1997 1999 2001 2003 2005 2007 2009 2011
Consensus: 5.4% (Year-over-Year)
Eurozone GDP • Tuesday
Third-quarter GDP data revealed that the 16-member Eurozone
Eurozone Real GDP economy continues to plod along. The modest 1.4 percent
Bars = Compound Annual Rate Line = Yr/Yr % Change
6% 6% annualized growth rate came largely from export growth and a
slight increase in consumer spending. Available indicators,
4% 4%
including the purchasing managers’ indices, suggest that economic
2% 2%
growth in the overall Eurozone remained positive in the fourth
quarter. We expect the weak euro will help sustain export growth,
0% 0% and continued moderate expansion in consumer spending will
allow the recovery there to remain on track, even if the pace seems
-2% -2%
sluggish compared to recoveries in other developed economies.
-4% -4% Recent developments in Egypt have distracted the attention of
markets and pushed the European debt crisis out of the headlines,
-6% -6% but it has not gone away. Should one of the highly levered
economies of the Eurozone have a big miss in economic growth or
-8% -8%
encounter trouble refinancing their debt, the crisis will likely flare
-10% Compound Annual Growth: Q3 @ 1.4% -10% up again.
Year-over-Year Percent Change: Q3 @ 1.9%
-12% -12%
Previous: 1.4% Wells Fargo: 2.3%
2000 2002 2004 2006 2008 2010
Consensus: 1.8%
Canadian CPI • Friday
When considering adjustments to its overnight rate, the primary
consideration for the Bank of Canada (BoC) is the inflation rate. Canadian Consumer Price Index
Year-over-Year Percent Change
The bank aims to keep the overall inflation rate between 1 and 5% 5%
3 percent and as close as possible to the 2 percent midpoint.
Despite a 13 percent year-over-year jump in gasoline prices, the 4% 4%
inflation rate in December was only 2.4 percent. The CPI report is
due out next Friday in Canada and will likely show that inflation 3% 3%
remains in line with expectations. In a recent press release, the BoC
noted that CPI inflation may rise somewhat in coming months due
2% 2%
to the effects of provincial taxes, but “is expected to converge to the
2 percent target by the end of 2012.”
1% 1%
The next BoC meeting is March 1st and at this point the pace of
recovery in Canada and the inflation rate both suggest to us that the
0% 0%
bank will remain on hold.

-1% -1%
Headline: Dec @ 2.4%
"Core": Dec @ 1.5%
Previous: 2.4% Wells Fargo: 2.0% -2% -2%
2000 2002 2004 2006 2008 2010
Consensus: 2.4% (Year-over-Year)

5
Economics Group Point of View Wells Fargo Securities, LLC
Interest Rate Watch Consumer Credit Insights
What’s Behind The Run-Up? Central Bank Policy Rates Consumer Credit Expands but…
7.5% 7.5%
Treasury yields rose during the week, as US Federal Reserve: Feb - 11 @ 0.25%
ECB: Feb - 11 @ 1.00%
Consumer credit outstanding rose by
the financial markets tried to make sense of Bank of Japan: Feb - 11 @ 0.10%
Bank of England: Feb - 11 @ 0.50%
$6.1 billion in December. It was the third
6.0% 6.0%
a number of competing influences. The straight increase and greatly exceeded the
underlying theme driving the bond market expected $2.4 billion increase. Revolving
is a gradually recovering economy, with 4.5% 4.5%
debt, including credit cards, expanded by
modest but increasing inflationary $2.3 billion, the first increase since August
pressures and continued large budget 3.0% 3.0% 2008, as consumers ramped up spending
deficits. The markets also must contend during the holidays. Consumers were more
with increased uncertainty about the size of 1.5% 1.5% inclined to use credit cards as debt-income
the Fed’s Treasury purchases and keep an levels have declined and income and job
eye on events overseas. The net result has 0.0% 0.0% growth has improved. Non-revolving debt
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010
been higher long-term interest rates. rose by $3.8 billion as auto sales continued
The yield on the Treasury’s 10-year note Yield Curve to improve during the month.
briefly hit a 9-month high of 3.77 percent 5.00%
U.S. Treasuries, Active Issues
5.00%
In not seasonally adjusted terms, revolving
on Wednesday. Strong demand for the new debt at commercial banks jumped while
bond auctioned off that day sent yields 4.00% 4.00%
non-revolving debt plunged. These
back down and the continued uncertainty numbers are somewhat at odds with the
of how events will play out in Egypt caused weekly seasonally adjusted data in the
3.00% 3.00%
bonds to rally further Friday morning, Federal Reserve’s H.8 release, however.
bringing the yield back down to 3.65 That report shows non-revolving debt at
percent. That still leaves long-term interest 2.00% 2.00%
commercial banks rose in December, but
rates about 20 basis points higher than revolving debt fell. We can infer from this
they were at the end of January and puts 1.00%
February 11, 2011
1.00%
that the seasonally adjusted monthly
the interest rate on 30-year fixed rate February 4, 2011
January 11, 2011
increase in revolving debt in the consumer
mortgages at around 5.0 percent. 0.00% 0.00% credit report was driven by increases at
3M 2Y 5Y Y Y
10 30
Pinpointing the exact cause of the recent institutions other than commercial banks.
run-up in interest rates is a bit difficult. Forward Rates The decline in overall consumer credit at
The bond market is seldom driven by only 1.40%
90-Day EuroDollar Futures
1.40% commercial banks in December was rather
February 11, 2011
one thing, unless that one thing becomes February 4, 2011 small. However, weekly data for January
January 11, 2011
momentous. This is clearly not the case 1.20% 1.20% show a much bigger decline, for both
today. Inflation is low and likely headed a revolving and non-revolving debt. This
little bit higher. Economic growth is
1.00% 1.00%
suggests that once the holidays passed,
picking up, but we are not at the point yet consumers refocused on paying down their
0.80% 0.80%
where policymakers can safely assume a credit card debt. This might portend a bit of
self-sustaining recovery is underway. The 0.60% 0.60% a pullback in consumer spending in the
one big known variable is the persistence of near term. However, improving income and
large federal budget deficits and that issue 0.40% 0.40% job growth, along with ample savings,
will become much more important once suggest spending will likely remain solid
private credit demand revives. 0.20%
Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12
0.20%
even if credit card balances decline.
We believe that monetary policy will
remain on hold through early-2012. The Mortgage Data
Fed reiterated its plans to complete the
$600 billion Treasury purchase program
Week 4 Weeks Year
along the lines it initially outlined in early
November. Stronger recent economic news Current Ago Ago Ago
had caused some folks to speculate the Fed Mortgage Rates
might end the program early or reduce the 30-Yr Fixed 5.05% 4.81% 4.71% 4.97%
total amount of Treasury purchases. This 15-Yr Fixed 4.29% 4.08% 4.08% 4.34%
looks unlikely. The size of Treasury 5/1 ARM 3.92% 3.69% 3.72% 4.19%
purchases is shrinking a bit, however, as 1-Yr ARM 3.35% 3.26% 3.23% 4.33%
the rise in interest rates has significantly
slowed refinancing activity and reduced the
MBA Applications
number of mortgages maturing each
Composite 464.7 491.7 482.7 613.1
month. Since the Fed was investing those
Purchase 186.1 188.7 192.4 221.2
proceeds back in the Treasury market,
higher interest rates have become Refinance 2,086.4 2,261.2 2,219.2 2,893.9
somewhat self-reinforcing. Source: Freddie Mac, Mortgage Bankers Association and Wells Fargo Securities, LLC

6
Economics Group Topic of the Week Wells Fargo Securities, LLC
Topic of the Week
Let’s Take a “Peak” at a Few Other Sectors
Industrial Production: Percent of Previous Peak
In last week’s Topic of the Week, we noted that even Percent, As of December 2010
though real GDP has returned to its pre-recession peak, 102% 102%
the labor market is still lagging considerably behind and
100% 100%
is nowhere near pre-recession levels. The labor market,
however, is not the only sector of the economy that is 98% 98%
struggling to make the transition from recovery to
expansion. Indeed, along with employment, gross fixed 96% 96%
investment, industrial production (IP), personal income
less transfer payments and consumer confidence are all 94% 94%
still well below pre-recession peaks.
92% 92%
While gross fixed investment in the economy is up
nearly seven percent year-over-year—driven largely by 90% 90%
equipment and software spending—it is still 21.5 percent
below its pre-recession peak. This is one of the reasons 88% 88%
that IP has not recovered as much as real GDP. In terms
of IP, while we have seen a rebound in output driven by 86% 86%
a weakening dollar and a pick up in U.S. exports, IP is
84% 84%
still nearly six percent below its pre-recession peak
reached back in September 2007. However, even though 82% 82%
IP is well off its peak, higher productivity growth in the 59 63 67 71 75 79 83 87 91 95 99 03 07 11
factory sector has helped IP recover much faster than
total manufacturing employment. Since the beginning of
last year, productivity in the factory sector is up over Consumer Confidence Index
Conference Board
3.5 percent while total manufacturing employment is up 160 160
only 1.4 percent, reflecting the shift of industrial
production in the United States from labor intensive
industries to more capital intensive industries. 140 140
Consumer confidence is perhaps the most shocking of
the underperforming segments in the economy. While 120 120
consumer confidence is up nearly 12 percent since
November, the overall level of consumer confidence is
still well below pre-recession levels. Furthermore, 100 100
during the last economic expansion following the 2001
recession, consumer confidence never even made it back 80 80
to its pre-recession peak before the economy slipped
into another recession. This should have been a warning
sign that the economy perhaps was not as strong as 60 60
many believed in the years leading up to the housing
bust. Nevertheless, it will likely take many years, if ever, 40 Confidence Yr/Yr % Chg: Jan @ 7.3% 40
before consumer confidence returns to pre-2001 Confidence: Jan @ 60.6
recession levels, especially since job and wage and salary 12-Month Moving Average: Jan @ 53.7
growth has yet to pick up in a meaningful way. 20 20
87 89 91 93 95 97 99 01 03 05 07 09 11

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7
Economics Group Market Data Wells Fargo Securities, LLC
Market Data i Mid-Day Friday
U.S. Interest Rates Foreign Interest Rates
Friday 1 Week 1 Year Friday 1 Week 1 Year
2/11/2011 Ago Ago 2/11/2011 Ago Ago
3-Month T-Bill 0.11 0.15 0.09 3-Month Euro LIBOR 1.05 1.03 0.60
3-Month LIBOR 0.31 0.31 0.25 3-Month Sterling LIBOR 0.80 0.79 0.63
1-Year Treasury 0.28 0.28 0.33 3-Month Canadian LIBOR 1.21 1.21 0.42
2-Year Treasury 0.80 0.74 0.87 3-Month Yen LIBOR 0.19 0.19 0.26
5-Year Treasury 2.33 2.26 2.36 2-Year German 1.40 1.44 1.05
10-Year Treasury 3.64 3.64 3.72 2-Year U.K. 1.55 1.52 1.21
30-Year Treasury 4.71 4.73 4.66 2-Year Canadian 1.88 1.84 1.38
Bond Buyer Index 5.29 5.25 4.34 2-Year Japanese 0.25 0.21 0.17
10-Year German 3.29 3.26 3.23
Foreign Exchange Rates 10-Year U.K. 3.86 3.82 4.02
Friday 1 Week 1 Year 10-Year Canadian 3.47 3.46 3.47
2/11/2011 Ago Ago 10-Year Japanese 1.32 1.25 1.34
Euro ($/€€) 1.355 1.358 1.369
British Pound ($/ƕ) 1.601 1.611 1.570 Commodity Prices
British Pound (ƕ/€€) 0.846 0.843 0.872 Friday 1 Week 1 Year
Japanese Yen (¥/$) 83.440 82.180 89.770 2/11/2011 Ago Ago
Canadian Dollar (C$/$) 0.990 0.987 1.050 WTI Crude ($/Barrel) 86.39 89.03 75.28
Sw iss Franc (CHF/$) 0.974 0.955 1.070 Gold ($/Ounce) 1361.88 1348.85 1095.40
Australian Dollar (US$/A$) 1.002 1.014 0.890 Hot-Rolled Steel ($/S.Ton) 800.00 800.00 595.00
Mexican Peso (MXN/$) 12.061 11.986 12.946 Copper (¢/Pound) 453.90 457.10 312.95
Chinese Yuan (CNY/$) 6.593 6.584 6.834 Soybeans ($/Bushel) 14.11 14.11 9.20
Indian Rupee (INR/$) 45.685 45.600 46.500 Natural Gas ($/MMBTU) 3.96 4.31 5.40
Brazilian Real (BRL/$) 1.664 1.674 1.843 Nickel ($/Metric Ton) 27,829 27,930 17,634
U.S. Dollar Index 78.449 78.044 79.994 CRB Spot Inds. 616.58 612.72 471.49

Next Week’s Economic Calendar

Monday Tuesday Wednesday Thursday Friday
14 15 16 17 18
Ret a i l Sa l es PPI CPI
Decem ber 0 .6 % Decem ber 1 .1 % Decem ber 0 .5 %
Ja n u a r y 1 .1 % (W ) Ja n u a r y 0 .7 % (W ) Ja n u a r y 0 .4 % (W )
U.S. Data

Im por t Pr i ce In dex Hou si n g St a r t s Cor e CPI

Decem ber 1 .1 %
Ja n u a r y 0 .7 % (W )
Bu sin ess In v en t or i es
Nov em ber 0 .2 %
Decem ber 0 .5 % (W )
Decem ber 5 2 9 K
Ja n u a r y 5 5 0 K (W )
In du st r i a l Pr odu ct i on
Decem ber 0 .8 %
Ja n u a r y 0 .7 % (W )
Decem ber 0 .1 %
Ja n u a r y 0 .1 % (W )
Lea di n g In di ca t or s
Decem ber 1 .0 %
Ja n u a r y 0 .1 % (W )

Eu r ozon e Eu r ozon e Ca n a da
Global Data

In du st r i a l Pr od. (MoM) GDP (QoQ) CPI (YoY)

Pr ev iou s (Nov ) -0 .2 % Pr ev iou s (Q3 ) 0 .3 % Pr ev iou s (Dec) 2 .7 %
Ch i n a Ger m a n y Ger m a n y
PPI (YoY) Zew In dex (Cu r r en t ) PPI (MoM)
Pr ev iou s (Dec) 5 .9 % Pr ev iou s (Ja n ) 8 2 .8 Pr ev iou s (Dec) 0 .7 %

Not e: (W ) = W ells Fa r g o Est im a t e (c) = Con sen su s Est im a t e

8
Wells Fargo Securities, LLC Economics Group

Diane Schumaker-Krieg Global Head of Research (704) 715-8437 diane.schumaker@wellsfargo.com

& Economics (212) 214-5070

John E. Silvia, Ph.D. Chief Economist (704) 374-7034 john.silvia@wellsfargo.com

Mark Vitner Senior Economist (704) 383-5635 mark.vitner@wellsfargo.com
Jay Bryson, Ph.D. Global Economist (704) 383-3518 jay.bryson@wellsfargo.com
Scott Anderson, Ph.D. Senior Economist (612) 667-9281 scott.a.anderson@wellsfargo.com
Eugenio Aleman, Ph.D. Senior Economist (704) 715-0314 eugenio.j.aleman@wellsfargo.com
Sam Bullard Senior Economist (704) 383-7372 sam.bullard@wellsfargo.com
Anika Khan Economist (704) 715-0575 anika.khan@wellsfargo.com
Azhar Iqbal Econometrician (704) 383-6805 azhar.iqbal@wellsfargo.com
Ed Kashmarek Economist (612) 667-0479 ed.kashmarek@wellsfargo.com
Tim Quinlan Economist (704) 374-4407 tim.quinlan@wellsfargo.com
Michael Brown Economist (704) 715-0569 michael.brown4@wellsfargo.com
Tyler B. Kruse Economic Analyst (704) 715-1030 tyler.kruse@wellsfargo.com
Joe Seydl Economic Analyst (704) 715-1488 joseph.seydl@wellsfargo.com
Sarah Watt Economic Analyst (704) 374-7142 sarah.watt@wellsfargo.com

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