WELLS FARGO INVESTMENT MANAGEMENT

1
THE ECONOMIC FINANCIAL MARKET OUTLOOK THROUGH
2004 What Next For The U.S. California
Economies? A Presentation To The Annual CMTA
Pre-Conference Workshop South Lake Tahoe,
California April 19, 2004
2
ANOTHER "JOBLESS RECOVERY" Cumulative Change
In Private, Non-Farm Payrolls Before And After
The Cyclical Low Point
7
Recession
Recovery
C
6
U
Avg., Past 6 Long
M
Economic Cycles
U
5
L
A
4
T
I
V
3
E
G
2
3/90-7/92 Cycle
R
O
W
1
T
H
0
Current Cycle, 11/00-3/04
-1
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
Months Before And After The Cyclical Low In
Economic Activity
Based on six economic cycles back through 1953.
Source U.S. Commerce Department
3
"MISERY'S" WARNING FLAG FOR THE
PRESIDENTCumulative Chg. In The "Misery
Index"
20
Current Recovery
15
(11/01-3/04
10
5
0
-5
3/91-7/93 Recovery
-10
-15
0
3
6
9
12
15
18
21
24
27
30
33
36
Months From The Start Of Recovery

Avg. of inverted index for job gains, rolling
12-mo. periods, and an index of retail gasoline
prices.
Sources U.S. Dep'ts. Of Energy and Labor
4
INVENTORIES UNUSUALLY "LEAN" VS. SALESBusiness
Inventory-Sales (I/S) Ratio
1.49
Rolling 3-Year
1.47
Avg.
Monthly
1.45
1.43
1.41
1.39
1.37
1.35
1.33
2/04
1.31
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Source U.S. Department Of Commerce
5
U.S. EXPORT ORDERS RESPOND TO A WEAKER DOLLAR
Rept'g An Increase
Index 2000100
60
112
Export Orders, Mfd.
Goods
110
(Left Scale)
58
108
56
106
54
104
52
102
3/04
100
50
98
48
"Real Trade-Weighted"
96
(Right Scale)
46
94
92
44
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Based on the dollar's inflation-adjusted,
trade-weighted exchange rate against 44 other
currencies.
Sources Nat'l Ass'n Of Purchasing Mgrs. J.P.
Morgan Co.
6
A BETTER SHOWING BY CALIFORNIA DURING THE CURRENT
ECONOMIC CYCLENon-Farm Job Growth Year-Ago
Percent Change
4.5
CA
3.5
2.5
U.S.
1.5
3/04
0.5
-0.5
Note Bars Denote U.S. Recession
Periods
-1.5
-2.5
Dec-89
Dec-91
Dec-93
Dec-95
Dec-97
Dec-99
Dec-01
Dec-03
Source U.S. Dep't Of Labor
7
TRADING PLACES NORTHERN CALIFORNIA ON THE
LEADING EDGE OF THE ECONOMIC SLOWDOWNYr-Ago
Change In Non-Farm Payrolls
6.2
5.2
4.2
3.2
Central Valley
2.2
1.2
0.2
-0.8
2/04
-1.8
No. California
-2.8
So. California
-3.8
-4.8
Note Bars Denote Recession
Periods
-5.8
-6.8
-7.8
Dec-89
Dec-91
Dec-93
Dec-95
Dec-97
Dec-99
Dec-01
Dec-03
Source U.S. Dep't Of Labor
8
CALIFORNIA'S ECONOMIC GROWTH DRIVEN BY
"DOMESTIC," NOT EXPORT INDUSTRIESYear-Ago
Percent Change In Employment, March 2004
6
"Export" Industries
5
"Domestic" Industries
4
F
3
I
S
n
2
v
l
c
1
s
0
M
Leisure
Hosp.ity
Real Estate
-1
Resid. Constr.
Software Pub.
Educ Health
Prof Bus Svcs
o
T
Svcs
I
P
Total Nonfarm
t
e
-2
n
I
I
c
t
c
o
h
-3
e
t
n
Government
r
u
M
-4
n
r
f
e
e
g
-5
t
s
-6
-7
Source California Employment Development
Department
9
A MORE VULNERABLE CA HOUSING MARKET TO HIGHER
INTEREST RATES? Of Households Qualifying For
The Median-Priced Home, By Selected Area
60
50
12/96
12/00
40
2/03
2/04
30
20
10
0
U.S.
CA
LA
SF
Cent. Valley
Source California Association Of Realtors
10
ECONOMIC OUTLOOK THE U.S. AND CALIFORNIA
ECONOMIES COMPARED Year-To-Year Percent Change,
Unless Otherwise Specified
Forecast
1991
1992
1993
2000
2001
2002
2003
2004
2005
"Real" GDP/ GSP
U.S.
-0.9
2.7
2.7
3.7
0.5
2.2
3.1
4.1
3.0
California
-1.9
-1.2
-0.8
6.5
-1.3
1.9
3.0
3.7
2.7
Unemployment Rate ()
U.S.
6.9
7.5
6.9
4.0
4.8
5.8
6
5.8
6.0
California
7.7
9.3
9.4
4.9
5.4
6.7
6.7
6.2
6.2
Housing Starts/Permits
U.S. (Starts, MM)
1.01
1.2
1.29
1.57
1.60
1.71
1.85
1.86
1.67
California (Permits, Th)
105
98
84
149
149
168
198
196
189
Other Key California Data
Tax. Retail Sales( Chg.)
-3.9
0.6
-0.1
12.0
0.0
-0.2
3.1
4.2
4.9
Population ( Chg.)
2.3
2.1
1.3
1.9
1.9
1.7
1.6
1.5
1.4
Net Inmigration (Thus)
224
225
-45
322
364
308
251
237
199
Source The UCLA Anderson Forecast, March 2004
11
AGGRESSIVE COST-CUTTING HELPS SUSTAIN THE
RECOVERY IN MARGINS AND PROFITS Year-Ago
Change, Selling Prices Vs. Non-Farm Unit Labor
Costs
5
Margin Pressure
Note Bars Denote
4
Recession Periods
3
Selling Prices
2
1
'03Q4
0
-1
Unit Labor Costs
Margin Expansion
-2
-3
-4
Mar-89
Mar-91
Mar-93
Mar-95
Mar-97
Mar-99
Mar-01
Mar-03
Source U.S. Commerce Dep't.
12
WEAK "PRICING POWER" DRIVES A TECH-LED INVESTMENT
RECOVERYYear-Ago Percent Change,
Inflation-Adjusted Spending
28
Info Processing Equipment
24
'03Q4
20
16
Low-Tech Equipment
12
8
4
0
-4
-8
Structures
-12
-16
Note Bars Denote
Recession Periods
-20
-24
01-Mar-91
01-Mar-94
01-Mar-97
01-Mar-00
01-Mar-03
Source U.S. Commerce Department
13
"APPRECIATING-CURRENCY" COUNTRIES LIFT U.S.
IMPORT PRICES PRICING POWER Year-Ago Percent
Change, Import Prices Of Manufactured Goods
7
5
Canada
Europe
3
3/04
1
-1
-3
"Emerging Asian"
Economies
-5
-7
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Source U.S. Department Of Labor
14
SMALL BUSINESS "PRICING POWER" ON THE
RISEPercent Of Small Businesses Reporting Price
Increases
20
Mar. '04
16
12
8
4
0
Recession
-4
Period
-8
Dec-94
Dec-96
Dec-98
Dec-00
Dec-02
Source National Federation Of Independent
Businesses (NFIB)
15
A LOOK BACK AT THE LAST UP CYCLE FOR INTEREST
RATES The Treasury Yield Curve, Selected
Periods Yields In Percent
7.3
Federal Funds Target Rate,
5/18/00
5/16/006.50
6.3
6/29/99
5.3
Fed Funds Target Rate,
11/18/98
11/17/984.75
4.3
0
5
10
15
20
25
30
35
Years To Maturity
Source Bloomberg Financial News, Inc.
16
HOW CLOSE A CLASH BETWEEN PUBLIC PRIVATE-SECTOR
BORROWING?Year-Ago Change In Federal
Non-Federal Borrowing
15
'03Q4
Non-Federal
10
5
0
-5
Federal
-10
Dec-89
Dec-91
Dec-93
Dec-95
Dec-97
Dec-99
Dec-01
Dec-03
Source Federal Reserve Board
17
THE FEDERAL RESERVE KEEPING THE POLICY "PEDAL TO
THE METAL" The Federal Funds Rate Less The PCE
"Deflator" Percent
5.0
4.0
3.0
Avg., 1969-20032.6
2.0
1.0
Fed "Easing" During The
Sluggish 1991-92 Recovery
0.0
Note Bars Denote
-1.0
3/04
Recession Periods
-2.0
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Sources Bloomberg Financial News, Inc., U.S.
Commerce Dep't
18
EIGHT SURPRISES FOR 2004
ANOTHER TERRORIST ATTACK THE CARRY TRADE
UNRAVELS DISINFLATION LINGERS ON A DOLLAR
TAILSPIN SAUDI TURMOIL A CHINESE RECESSION
A DEMOCRATIC ELECTION VICTORY POLICY STRAINS
BEGIN TO SHAKE THE EURO
19
BOND MANAGERS STILL CAUTIOUSPortfolio Duration
Vs. Target, In Percent 4-Wk. Moving Averages
104
103
102
101
100
99
"Neutral" (100 Of
Benchmark Duration)
98
97
4/13/04
Week
96
95
94
25-Dec-01
25-Jun-02
24-Dec-02
24-Jun-03
23-Dec-03
22-Jun-04
Source Stone McCarthy Research Associates, Inc.
20
EARNINGS GROWTH TO PROPEL STOCKS HIGHER
Yr.-Ago Chg.
Qtr-To-Qtr Chg
80
25
SP 500 Earnings Growth
(Left Scale)
60
19
Forecast
13
40
7
20
1
0
-5
SP 500
-20
(Left Scale)
-11
-40
-17
-23
-60
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
First Call "bottom-up" consensus estimate,
including goodwill adjustments.
Source First Call, Inc.
21
A FAIRLY TIGHT LINK BETWEEN THE SP 500 P/E
MULTIPLE AND INTEREST RATES
SP 500 Price Per Of Opng. Earnings
Percent
16
27
10-Yr T-Note
(Left Scale)
14
23
12
19
10
8
15
4/5/04
6
11
P/E Ratio
4
(Right Scale)
7
2
0
3
Jan-79
Jan-82
Jan-85
Jan-88
Jan-91
Jan-94
Jan-97
Jan-00
Jan-03
Sources Standard Poors, Inc. Federal Reserve
Board
22
SEEMINGLY "RICH" STOCKS "CHEAP" VS. BONDS
Yield Ratio
SP 500 P/E Multiple
27
1.8
SP 500 P/E Multiple
1.6
(Left Scale)
23
1.4
19
1.2
15
4/16/04
1.0
11
0.8
Yield Ratio, Bonds Vs. Stocks
7
0.6
(Right Scale)
3
0.4
Jan-79
Jan-83
Jan-87
Jan-91
Jan-95
Jan-99
Jan-03
Ratio, 10-Yr. Treasury yield vs. earnings-price
yield (E/P) on SP 500 stocks.
Sources Standard Poors, Inc., IBES, Federal
Reserve Board
23
"DEFENSIVE" STOCKS TURN WITH INTEREST
RATESCumulative Chg., Past 4 Bus. Cycles
6
3
Cum. Chg. In 10-Yr. Treas.
1
Yields
(Right Scale)
3
-1
-3
0
-5
-3
-7
-9
-6
-11
-13
Cum. Chg. In "Defensive" Vs.
-9
SP 500 Stocks
-15
(Left Scale)
-12
-17
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
32
34
36
38
40
42
44
46
48
Month's From Recession's End
Health care and consumer staples. Expansions
beginning 12/70, 4/75, 1/83 and 4/91.
Source Federal Reserve Board Citigroup, Inc.
24
ISSUES IN THE LONGER-TERM ECONOMIC INVESTMENT
OUTLOOK
A SLOW ADJUSTMENT TO WEAK PRICING POWER
--Fostering Tech Investment, Strong Productivity
Growth MUTED BUSINESS CYCLES, VOLATILE
FINANCIAL MARKETS FRIENDLIER DEMOGRAPHICS
COMPETING IN A DYNAMIC GLOBAL ENVIRONMENT
--Out-Sourcing The U.S. Labor Market --A
More Flexible, Market-Oriented Form Of
Capitalism WEIGHING THE THREATS TO GROWTH
--Rising Budget Deficits,Re-Regulation,
Geo-Political Risks, Global Competition The
Reaction To It