1. Wells Fargo Economics The Long Road Ahead Ed Kashmarek Economist Wells Fargo Institutional Retirement and Trust Client Forum Omaha, NE June 7, 2011 © 2011 Wells Fargo Bank, N.A. All rights reserved.

2. Agenda  Labor Market  Inflation/Mortgage Rates  Housing Market  Credit Quality  Lending  Manufacturing  Consumers  Economic Outlook  Budget Deficit/Debt  Questions

3. 22 Labor Market Improving but Still Weak

7. Source: Bureau of Labor Statistics, Wells Fargo Securities, LLC

14. 13 Inflation Rising but Core Still Low

19. 18 Housing Market Mixed Signals

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25. Why Are Home Sales So Constrained?  High Unemployment  Tight Mortgage Standards  Buyers Fear  Further price declines  More foreclosures entering market  Sellers Can’t Sell Current Home  No demand at desired price  Low appraisals  Already underwater (28%)

26. 25 Credit Quality Improving But Challenging

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40. 39 Lending Remains Constrained

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45. 44 Manufacturing Strong, but Losing Momentum?

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49. 48 Consumers Better But Still Not Confident

57. 56 Economic Growth and Outlook

60. 59 Budget Deficit and Debt Big, Big Problems

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69. Federal Debt Limit Has Been Reached  Debt limit of $14.294 trillion reached May 16  Payments to two big gov’t pension plans halted  Republicans say no debt limit increase without cuts  Other possible options until August 2  trim or delay sales of marketable securities  suspend sales of non-marketable securities  suspend flows or redeem securities of gov’t accounts  swap debt with Federal Financing Bank  If debt limit not raised by August 2  suspend payments (Social Security, Medicare, military)  default on bonds, interest rates rise

70. Key Takeaways  Job growth - will be less than desired  weak labor demand (productivity, off-shoring)  weak product demand (unemployment)  skills imbalance  regulations (healthcare, Dodd-Frank, EPA)  uncertainty  Housing Market – will remain challenged  weak labor market  tight lending standards  Buyers fear further price declines, more foreclosures  Seller can’t sell (low offers, low appraisals, negative equity)  high inventories, shadow inventory  Budget Deficits – will likely weigh on growth  tax increases  spending cuts  higher interest rates?  less domestic investment  lower income growth

71. 70 Questions? ed.kashmarek@wellsfargo.com www.wellsfargo.com/com/research/economics