U.S. Economic Outlook Mark Vitner, Managing Director & Senior Economist March 18, 2015

Economic Outlook 2 Five Critical Questions About the Economic Outlook Overall Growth Oil Prices  Why have oil prices fallen so dramatically and what does it tell us about the global economy and U.S. economic outlook? Interest Rates  Will the global economic slowdown and deflation fears pull interest rates lower and keep the Fed on hold? Housing  Will 2015 be the year the housing recovery finally gains traction? Global Economy  Just how sluggish is the global economy and what will it take to get Europe, Japan and China back on track?  How much of last year’s strong momentum will carry over into 2015?

Overall Growth

Economic Outlook 4 Economic Growth Real GDP growth is expected to average close to a 3 percent pace over the next few years. Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Economic Outlook 55 Employment Situation Job growth appears to have ratcheted up over the past year but wage gains have not. The improvement in job growth is evident across industries and regions. Source: U.S. Department of Labor and Wells Fargo Securities, LLC Unemployment RateNonfarm Employment

Economic Outlook 6 Unemployment The unemployment rate is improving regardless of which measure is used. The broader U6 unemployment rate has done a better job of capturing the excess slack in the labor market in this recovery. U6 improved relative to the overall unemployment rate during the first half of the year, suggesting that some of the headwinds in the labor market are lessening. Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Economic Outlook 7 Employment: Structural Full-time employment has yet to recover to its pre-recession level. Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Oil Prices

Economic Outlook 99 Energy Oil prices have collapsed in recent months and the number of active oil rigs has fallen sharply. We expect this trend to continue as companies slash capital spending. Source: IHS Global Insight, Baker-Hughes, U.S. Department of Energy, U.S. Department of Labor and Wells Fargo Securities, LLC Production & EmploymentWTI

Interest Rates

Economic Outlook 11 Inflation Global disinflation has led more aggressive easing moves by the ECB and BOJ. We expect the Fed to look through this transitory slowdown, however, and raise the federal funds rate. Source: U.S. Department of Labor, IHS Global Insight and Wells Fargo Securities, LLC Eurozone CPI U.S. CPI

Economic Outlook 12 Global Yields Easing by central banks around the globe will likely keep downward pressure on U.S. interest rates and lead to further dollar appreciation. Source: IHS Global Insight and Wells Fargo Securities, LLC

Housing

Economic Outlook 14 Housing We continue to look for a gradual recovery in homebuilding. Apartment demand remains exceptionally strong but supply is catching up with demand. Single-family housing starts are beginning to ramp back up. Gains will be more modest than in past building cycles. Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Global Growth

Economic Outlook 16 Global Slower global growth and a stronger dollar will likely be a drag on U.S. economic growth. Source: International Monetary Fund, Bloomberg LP and Wells Fargo Securities, LLC Dollar Global Growth

Economic Outlook 17 North Carolina & The Triangle Economic Outlook Large Metro Area’s Led The State’s Recovery  The Triangle and Charlotte accounted for the bulk of the state’s job gains in the early part of the recovery. This past year saw gains broaden to other parts of the state. Technology & Innovation  Technology & innovation are driving the state’s growth, which is fueling gains in urban areas. These new jobs also have relatively large multipliers, driving hiring in retailing and the leisure and hospitality sectors. Manufacturing Is Making A Comeback  Industries are coming back to the U.S. and North Carolina. The new arrivals tend to be more capital intensive and require workers with advanced skills. Commercial Real Estate  Demand for commercial real estate has steadily improved and construction has been slow to come back. Rising interest rates will present some challenges.  North Carolina remains one of the most attractive places in the nation to do business and live. Job growth has accelerated over the past year, led by tech and innovation.

Economic Outlook 18 Year-over-Year Percent Change in Personal Income: Q U.S. = 3.9% Greater than 4.5% Less than 3.0% 4.0%–4.4% 3.7%–3.9% 3.0%–3.6% WEST MIDWEST NORTHEAST SOUTH AK 5.9 HI 4.1 WI SD OH NE ND MO MN MI KS IN IL IA CT 4.3 VT RI PA NY NJ NH ME MA WY WA UT OR NV NM MT ID CO CA AZ TX TN SC OK MS LA GA FL AR AL WV VA NC MD KY 4.1 DE DC 4.2

Economic Outlook 19 North Carolina Employment growth has been broad-based in North Carolina. Professional services, technology and other knowledge industries are clear outperformers in the state. Source: U.S. Department of Labor and Wells Fargo Securities, LLC Employment by IndustryEmployment

Economic Outlook 20 North Carolina Technology employment has led gains in North Carolina. Technology services have outperformed manufacturing recently. Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Economic Outlook 21 North Carolina North Carolina’s unemployment rate has fallen back in line with the national rate. Part of the drop is due to declining labor force participation, particularly outside Raleigh and Charlotte. Source: U.S. Department of Labor, Moody’s Analytics and Wells Fargo Securities, LLC Labor Force ParticipationUnemployment

Economic Outlook 22 North Carolina Growth in major metros has been strong this past year, with growth accelerating in some of the metros more closely tied to the manufacturing sector. Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Economic Outlook 23 North Carolina Most of the improvement in the housing market has been in apartments, much of which is taking place in urban areas or along key transit corridors. Source: U.S. Department of Commerce, CoreLogic and Wells Fargo Securities, LLC Home PricesPermits

Economic Outlook 24 North Carolina Most of the population growth has come from North Carolina’s largest metros. Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Metro Population GrowthPopulation Growth

Economic Outlook 25 Raleigh Growth in Raleigh has been quite strong, although employment gains have slowed as of late. High tech employment has led the way in Raleigh. Source: U.S. Department of Labor and Wells Fargo Securities, LLC Employment by IndustryEmployment

Economic Outlook 26 Raleigh Raleigh’s manufacturing employment had large upward revisions. Office employment has been boosted by strong gains in professional and business services. Source: U.S. Department of Labor and Wells Fargo Securities, LLC Office EmploymentManufacturing Employment

Economic Outlook 27 Raleigh Impressive job and population growth in the Raleigh has supported the housing market recovery. Source: U.S. Department of Commerce, CoreLogic and Wells Fargo Securities, LLC Home PricesPermits

Economic Outlook 28 Durham A revitalization of Durham’s downtown area has brought businesses and jobs back to the metro’s urban areas. Source: U.S. Department of Labor and Wells Fargo Securities, LLC Employment by IndustryEmployment

Economic Outlook 29 Durham Single-family permits continue to trek higher. Durham did not experience the same boom and bust cycle in housing as the rest of the nation. Source: U.S. Department of Commerce, CoreLogic and Wells Fargo Securities, LLC Home PricesPermits

Economic Outlook 30 Commercial Real Estate Rapid population growth has caused an apartment boom. Retail has also benefitted, although not to the same extent. Source: Reis, Inc. and Wells Fargo Securities, LLC RetailApartments

Economic Outlook 31 Commercial Real Estate Strong growth in office using employment has fueled demand for office space. Manufacturing employment has been mixed, although industrial vacancy rates continue to fall. Source: Reis, Inc., CoStar Portfolio Strategy and Wells Fargo Securities, LLC IndustrialOffice

Economic Outlook 32 Five Critical Key Takeaways Economic Outlook Oil Prices Will Bottom Out Soon  Oil prices will likely overshoot to the downside and bottom out by early spring. Growth in the energy states will slow considerably this year. Interest Rates Will Rise This Year  Despite the slide in Treasury yields early this year, we still expect the Fed to begin to raise short-term interest rates in June. Treasury yields will also rise modestly. The Housing Recovery Will Gain Momentum  Single-family homebuilding could be an upside surprise this year, as stronger job growth boosts household formation. Apartment construction is close to peaking. Global economic growth remains a wildcard  Slower global economic growth and the appreciation of the dollar will weigh on exports this year and encourage imports. International tourism may also struggle.  The economy should weather the recent slide in oil prices and turmoil in Europe. Look for real GDP to rise 2.7 percent in 2015 and 3.0 percent in 2016.

Economic Outlook 33 Our Forecast

Appendix

Economic Outlook 35 Wells Fargo Economics Group Publications To view any of our past research please visit: economics To join any of our research distribution lists please visit: economics A Sampling of Our Recent Special, Regional & Industry Commentary

Economic Outlook Wells Fargo Securities, LLC Economics Group 36 John E. Silvia … … Global Head of Research and Economics Diane Schumaker-Krieg ………………… …… Global Head of Research & Economics Chief Economist Mark Vitner, Senior Economist……………....………... Jay H. Bryson, Global Economist …………………....…… …. Sam Bullard, Senior Nick Bennenbroek, Currency Eugenio J. Alemán, Senior Economist… …………. Anika R. Khan, Senior Economist …. Senior Economists Mackenzie Miller, Economic Analyst Erik Nelson, Economic Analyst Alex Moehring, Economic Analyst Economists Azhar Iqbal, Econometrician………………… Tim Quinlan, Economist …………………… Eric J. Viloria, Currency Strategist Sarah Watt House, Economist …………… Michael A. Brown, Economist ……………… … Michael T. Wolf, Economist ………………… …. Economic Analysts Administrative Assistants Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2015 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE Important Information for Non-U.S. Recipients For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority’s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only. Donna LaFleur, Executive Assistant. Cyndi Burris, Senior Administrative Assistant