3 November 2016 Americas Economic Research

US Economy Notes Research Analysts James Sweeney 212 538 4648 [email protected] Jeremy Schwartz 212 538 6419 [email protected] Xiao Cui 212 538 2511 [email protected] Sarah Smith 212 325 1022 [email protected]

The Case For Further Wage Growth The US labor market has tightened to levels often considered to be near "full employment.” Signs of increasing wage pressure have arrived, and labor now has more pricing power than it has had for many years. However, the recent rise in wage growth has been moderate. In this note we examine the data on wages from several different perspectives. A bottom-up analysis reveals that the disappointment in wage growth is broadbased across industries, but some services sectors stand out as laggards. The top-down wage-employment relationship and various other labor market indicators support the case for higher wage growth. The timing and scope of an increase is uncertain, but we would estimate there is potential for wages to accelerate up to 3.0%-3.5% in the medium term.

The Week Ahead Data are light next week – and the key focus will be on Tuesday’s elections. Analysis of voting based on exit polls and turnout will be available throughout the day, but the earliest polls do not close until 6 p.m. EST and the race is unlikely to be called by major news networks before 11 p.m. We have previewed some of the implications of both presidential candidates in our US Economy Note: After the Election. Several FOMC members are scheduled to speak next week. Among them are Evans and Kashkari, two of the regional presidents who become voting members in 2017. Both lean towards the dovish end of the spectrum, although Evans recently suggested he sees three hikes before the end of next year – a steeper path than current market pricing. The University of Michigan Consumer Sentiment is the main data release next week. This is not an usually market-moving report, and the impact should be more muted than usual since it is being released while the US bond market is closed for Veteran’s Day. We will also be getting the Fed’s Senior Loan Officer Opinion Survey and the JOLTS report next week. Forecast Update: We now expect the FOMC to hike rates December and we still expect two hikes in 2017, occurring at December meetings. We moved up our tracking estimate revisions to 3.0% from 2.9% due to slightly stronger data structures investment and core capital goods shipments.

by the for for

25bps in June and Q3 GDP business

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, LEGAL ENTITY DISCLOSURE AND ANALYST CERTIFICATIONS.

3 November 2016

The Case for Further Wage Growth The US labor market has tightened considerably, and wage growth has picked up across various gauges. However, the recent rise has been moderate, and growth in broad measures remains low. Last week’s Employment Cost Index report showed that total compensation for privateindustry workers grew by 2.3% YoY in the third quarter, about 80bps below its 30-year average of 3.1% (Figure 1). Similarly, average hourly earnings growth for non-supervisory workers has risen to 2.6%YoY from a tight post-crisis range, but it still sits 50bps below its long-run average. One exception is the Atlanta Fed’s wage measure, which recently rose to its higher long-run average of 3.6%. It differs from the other two wage measures as it tracks the median hourly wage growth of individuals observed one year apart, instead of the average wage or compensation growth of all workers in a given month.

Figure 1: Measures of Wage Growth YoY% Average hourly earnings, prod & nonsupervisory employees, YoY% ECI: Compensation: Private Industry Workers, YoY% 3.1% (ECI&AHE average) Atlanta Fed 3mma of Median Wage Growth, NSA, % 3.6% (Atlanta Fed Avg)

6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: Bureau of Labor Statistics, Atlanta Fed, Credit Suisse

The unemployment rate – one of the best leading indicators of wage pressure – suggests that there is still some room for wage growth to improve, although we do not expect a sharp acceleration. Declining unemployment typically boosts wage growth after a lag of several quarters. Because of this, the stabilization in the unemployment rate in the past 12 months suggests the cyclical tailwind for wages has diminished. However, wages have underperformed many labor market indicators for several years now, and we see potential for some positive catch-up in the medium term. Figure 2 and Figure 3 show a simple version of the Phillips curve since 1985 using the lagged (nine months) unemployment rate versus two main measures of broad wage growth (average hourly earnings and the ECI). The inverse relationship is clear, and the non-linearity of this relationship is evident as well. Wage growth appears increasingly sensitive to changes in the unemployment rate as the latter drops into the 4.5%-5.5% range, which includes the FOMC’s long-run estimate of 4.5%-5.0%. Although the broad macro relationship still holds, there are some tentative signs that wage growth may now be less sensitive to declines in the unemployment rate. Based on a simple regression using the Phillips curve between 1995 and 2014, the current unemployment rate is consistent with total compensation growth accelerating 100bps to

US Economy Notes

2

3 November 2016

3.4%, roughly its 30-year average1. Using only the relationship between 2005 and 2014, growth should still be higher than current levels, but the projection points to a much smaller acceleration of just 40bps to 2.7%2.

Figure 2: Unemployment and AHE

Figure 3: Unemployment and ECI

Wage growth = average hourly earnings of production and nonsupervisory workers, YoY% 5

6.0 85-95

4.5

5.0

95-05

2005-2009

4

2005-2009

"2010-current"

ECI Growth (y/y)

Wage Inflation (y/y)

85-95

95-05

3.5 3 2.5

4.0

2010-current

3.0 2.0

2

1.0 1.5

0.0 1 2.5

3.5

4.5

5.5 6.5 7.5 8.5 Unemployment Rate (lagged 9m)

9.5

Source: Bureau of Labor Statistics, Credit Suisse

10.5

3.0

4.0

5.0 6.0 7.0 8.0 9.0 Unemployment Rate (lagged three quarters)

10.0

11.0

Source: Bureau of Labor Statistics, Credit Suisse

Figure 4: ECI Growth Projections Based On U-Rate ECI: Private Industry Workers, YoY% Predicted ECI growth, based on the lagged unemployment rate, 2005-2014)

5.0

Predicted ECI growth, based on the lagged unemployment rate, 1995-2014)

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: BLS, Credit Suisse

There are many potential explanations for why the Phillips curve may have flattened. Firms’ reluctance to cut wages during the recession could have led them to delay pay raises in the recovery. Low entry wages for new workers could be suppressing average wage growth measures. The decline in unionization and workers’ bargaining power, trends that probably developed before the recession, is another explanation. An apparent decline in job-switching for workers is also concerning as evidence suggests that a substantial portion of wage growth is actually workers moving to higher-paying jobs.

US Economy Notes

1

We also plotted the Philips curve using real wage growth – average hourly earnings growth deflated by core PCE inflation. A simple regression suggests that real earnings growth has room for another 70bps of acceleration to 1.5%YoY.

2

Regressions based on the broader U6 unemployment rate, which includes the marginally attached workers and those working part-time for economic reasons, give almost identical results.

3

3 November 2016

Evidence from Other Labor Market Barometers Besides the unemployment rate, other labor indicators also support the case for higher wage growth. After falling off to extremely low levels during the recession, the percentage of small businesses in the NFIB survey planning to raise worker compensation is just shy of the past cycle averages and firms seem more comfortable with rising labor costs (Figure 5).

Figure 5: Small Businesses Become More Inclined To Raise Labor Costs 3mma NFIB: Net Percent Raising Worker Compensation Over Past 3 Months, % 35

NFIB: Net Percent Planning to Raise Worker Compensation in Next 3 Months, %

30 25 20

15 10 5

0 -5 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Source: NFIB, Credit Suisse

The composition of unemployment has also improved, which should support wage growth. Voluntary job leavers now make up a larger share of the currently unemployed, with the number of laid-off and fired workers diminishing. Figure 6 shows a scatterplot of the sixmonth average wage growth (annualized) and the spread between job losers and unemployed workers due to other reasons (job leavers, labor force re-entrants and new entrants). Although the correlation is imperfect, a healthier unemployment mix – fewer layoffs, more voluntary exits – tends to be correlated with higher wage growth.

Figure 6: The Composition of Unemployment Is Correlated With Wage Growth Scatterplot based on data from 1990-present 5.0%

y = 0.0013x + 0.129 R² = 0.421

4.5%

AHE, 6mavg of monthly growth, annualized

4.0% 3.5% 3.0% 2.5% 2.0%

latest point

1.5% 1.0%

-95.0

-90.0 -85.0 -80.0 -75.0 -70.0 -65.0 Unemployment Mix: Job Losers - (Job Leavers+Reentrants+New Entranst), %

0.5% -60.0

Source: Bureau of Labor Statistics, Credit Suisse

Another leading indicator for wage growth is the job-quitting rate, which has slowly increased throughout the recovery (Figure 7). In our view, this may even be understating the improvement. The combination of an aging workforce and sluggish business formation has put downward pressure on the quits rate as the labor market recovered. These secular shifts could often obscure underlying cyclical improvements. US Economy Notes

4

3 November 2016

Figure 7: Quits Rate and Wage Growth 4

2.8 ECI YoY

2.6

JOLTS quit rate, rhs

3.5

2.4 3

2.2 2

2.5 1.8 2

1.6 1.4

1.5 1.2 1

1

01

03

05

07

09

11

13

15

Source: Bureau of Labor Statistics, Credit Suisse

Although these empirical relationships tend to be messy, in our view they all tend to point to room for improvement in wage growth. The timing and scope of the increase is uncertain, but we would estimate there is potential for wages to accelerate up to 3.0%3.5% in the medium term.

Industry Breakdown When we look at the composition of wage growth dynamics by industry, it shows that the current weakness is broad-based, but some services industries stand out as laggards. Figure 8 shows the Phillips curve plots for 12 NAICS industries since 20003 using the aggregate unemployment rate (lagged nine months) and compensation growth measured by the ECI. Each industry’s employment share is specified in parentheses and the latest observations are highlighted in green. We calculate the current wage gap for each industry based on its own Phillips curve relationship4. Two observations stand out to us: First, the theoretical relationship between unemployment and wage growth holds for most industries, with the main exceptions concentrated in relatively small sectors with more idiosyncratic drivers (wholesale trade, transportation, information, and utilities). There is some sign that, downward nominal wage rigidity exists in many industries, evidenced by flatter right tails where wage growth becomes increasingly less sensitive to further deteriorations in the unemployment rate. The degree of insensitivity varies among industries, possibly reflecting the rigidity or flexibility of their wage-setting structures. Second, the current wage gap noted in our aggregate Phillips curve work above also applies on an industry basis. Almost all industries, with the exception of retail trade, currently experience wage growth below what the unemployment rate implies. However, the size of the gap varies considerably.

3

4

US Economy Notes

The industry-specific ECI rates are only available from 2000. We also did the same exercise with industry-specific unemployment rates, which have a high correlation with the aggregate u-rate and a high correlation among themselves (0.75-0.95). We decided to use the aggregate u-rate here as one disadvantage to using the industry-specific ones is that they do not account for workers who switch industries, which was shown to account for about half of all job-to-job flows.

5

3 November 2016

Figure 8: Unemployment Rate And Compensation Growth By Industry Latest observations marked green; employment weights in parentheses; unemployment rate (lagged nine months) and ECI growth, YoY%; 7.0%

6.0%

Construction (5.5%)

6.0%

Manufacturing (10%)

5.0%

5.0% 4.0%

4.0%

3.0%

3.0% 2.0%

2.0%

1.0%

1.0%

0.0%

0.0% 3.0

5.0

7.0

9.0

11.0

3.0

5.0

6.0%

Retail Trade (13%) 6.0%

7.0

9.0

11.0

Leisure & Hospitality (13%)

5.0%

5.0%

4.0%

4.0% 3.0%

3.0%

2.0%

2.0%

1.0%

1.0%

0.0% 3.0

5.0

5.0%

7.0

9.0

11.0

0.0% 3.0

5.0

Health Care (16%)

7.0

9.0

11.0

9.0

11.0

9.0

11.0

Education (3%)

5.0% 4.0% 4.0% 3.0%

3.0%

2.0%

2.0%

1.0%

1.0%

0.0% 3.0

5.0

7.0

9.0

11.0

0.0%

3.0

5.0

7.0 Finance (7%)

Profess & Business Serv (16.5%)

5.0%

8.0%

4.0%

6.0%

3.0% 4.0%

2.0% 2.0%

1.0%

0.0%

0.0% 3.0

5.0

7.0

9.0

11.0

3.0

5.0

7.0 Wholesale Trade (5%)

Other serivices (4.5%)

6.0%

5.0

5.0%

4.0

4.0%

3.0

3.0%

2.0

2.0%

1.0

1.0%

0.0

0.0% 3.0

5.0

7.0

9.0

11.0

-1.0 3.0

5.0

7.0

9.0

11.0

9.0

11.0

Information (2.5%)

Transportation (4%) 6.0

8.0%

5.0

6.0%

4.0

4.0%

3.0

2.0%

2.0

0.0%

1.0

-2.0% -4.0%

0.0 3.0

5.0

7.0

9.0

11.0

3.0

5.0

7.0

Source: Bureau of Labor Statistics, Credit Suisse

US Economy Notes

6

3 November 2016

Figure 9: Wage Growth Gap 1.5%

Retail Trade

1.0%

Wage Growth Gap

0.5% 0.0%

Leisure/Hospitality

-0.5%

Transportation

Manufacturing

Other services

Construction

-1.0%

Finance

-1.5% Professional and Business Services

Health Care -2.0% -2.5% $10.0

Wholesale Trade

$15.0

$20.0 $25.0 Average Hourly Earnings

$30.0

$35.0

Source: Bureau of Labor Statistics, Credit Suisse

The low-wage, low-skill services sectors – retail and leisure/hospitality (red bubbles above) – have seen the most pronounced acceleration in compensation growth5. Growth in wages and benefits in the retail trade sector is now almost 1% above what the unemployment rate implies. Leisure and Hospitality wages are also relatively strong. Cyclical improvements and regulatory changes – minimum wage increases and new overtime rules – could explain some of their recent outperformance. Other large services sectors (white bubbles) – health care, education, finance, and professional and business services – have larger-than-average wage gaps. For example, the health care industry, which employs 15% of total private industry workers, observes wage growth of just 1.9%, almost 1.6% below what the unemployment rate implies and 2% below its previous cycle average of 3.8%. Professional and business services sector is another example where the gap is wide – almost 120bps below what the unemployment rate implies. Industry-specific regulations could play a role, but these sectors normally exhibit sensitivity to the tightness of the labor market. Importantly, wage growth in these services industries is correlated with services inflation on a low-frequency cycle. A visible acceleration in wages for these sectors is a potential driver for a pickup in core inflation. The goods-producing industries – construction and manufacturing (blue bubbles) – have only moderate acceleration in wage growth so far, but their underperformance is in line with the broader economy. The manufacturing sector has just experienced its worst slump since the euro crisis due to anemic global demand and the rising dollar. However, the construction industry has, anecdotally, seen rising labor supply constraints, possibly due to both baby boomers retiring and previous construction workers switching jobs. There’s currently no housing boom, but we see fundamental reasons that the construction sector needs to grow.

5

US Economy Notes

As we’ve noted previously, wage growth has indeed broadened out among the income distribution, according to the Household Survey’s quarterly data on “usual weekly earnings” for full-time wage and salary workers.

7

3 November 2016

Bottom Line Wage growth has picked up as the labor market continues to tighten, but the recent rise has been moderate and the level of growth remains disappointing. A bottom-up analysis reveals that the disappointment is broad-based across industries, but some services sectors stand out as laggards in wage growth. The top-down wage-employment relationship, and various other labor market indicators suggest that wage growth is unlikely to rise sharply and reach past cycle peaks, but that there is room for a further acceleration of 50bps-100bps. Going forward, wage pressure in services industries is an important sign to watch for a broad-based acceleration in wage growth. More importantly, a visible acceleration in wages for these industries is a potential stimulant for a pick-up in core inflation.

US Economy Notes

8

3 November 2016

The Week Ahead Calendar of Key Data and Events

Credit Suisse Forecasts

Market Estimates

Prior Results

NA

$18.000B

$25.873B

NA NA

5443K NA

NA NA

0.2% NA

0.2% 0.7%

Monday, November 7 2:00 PM 3:00 PM

Federal Reserve’s Senior Loan Officer Survey (Q3) Consumer Credit (Sep)

Tuesday, November 8 All Day 7:45 AM 10:00 AM

Presidential Election Chicago Fed President Evans Speaks at Council of Foreign Relations (with Q&A) (2017 Voter) JOLTS Job Openings (Sep) NA NA

Wednesday, November 9 10:00 AM 1:30PM 9:00 PM

Wholesale Inventories MoM (Sep Final) Whole Trade Sales MoM (Sep) Minneapolis Fed President Kashkari speaks (2017 Voter) San Francisco Fed President Williams Speaks (with Q&A) (Non-Voter)

Thursday, November 10 8:30 AM

Initial Jobless Claims (Week Ending Nov 5)

NA

NA

265K

9:45 AM

St. Louis Fed President Bullard Speaks (with Q&A) (2016 Voter) Monthly Budget Statement (Oct)

NA

-$88.7B

$33.4B

US Bond Market Closed (Veterans Day) U. of Michigan Sentiment (Nov Preliminary)

87.0

87.0

87.2

U. of Michigan 1 Yr Inflation (Nov Preliminary)

NA

NA

2.4%

U. of Michigan 5-10 Yr Inflation (Nov Preliminary)

NA

NA

2.4%

2:00 PM

Friday, November 11 All Day 10:00 AM

Source: the BLOOMBERG PROFESSIONAL™ service, Thomson Reuters Limited, Credit Suisse estimates.

US Economy Notes

9

3 November 2016

University of Michigan Sentiment Forecast (Nov Preliminary) Forecast: 87.0

Friday, November 11 10:00 AM

The UMich consumer sentiment declined in October to 87.2, matching its September 2015 low. The decline was concentrated in consumers’ expectations for general business conditions. According to UMich, the deterioration may simply reflect the uncertainty caused by the upcoming presidential election. We do not expect the uncertainty to dissipate in the preliminary November reading, as the data will be based on responses collected between October 27 and Election Day (Nov 8). Consumer spending has moderated in the third quarter after a bout of strength earlier in the year. We expect consumption to remain solid in the coming months (Q4 fcst: 2.8% QoQ annualized).

Figure 10: Recent Decline in Consumer Sentiment May Be Driven by Politics Index level 120

Univ. of Michigan Consumer Sentiment

110

Current

100

Expectation

90 80 70

60 50 40 '03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Source: Credit Suisse, University of Michigan

US Economic Forecast 2016 Q1 Real GDP (QoQ% ann. rate) Nominal GDP (QoQ% ann. rate) CPI (YoY%) Core CPI (YoY%) Core PCE (YoY%) Industrial Prod (QoQ% ann. rate) Unemployment Rate (avg., in %) Fed Funds Rate (end of pd., in %)

Q2

2017E Q3

Q4E

Q1

Q2

Q4/Q4 Q3

Q4

15

16E

Annual Average 17E

0.8 1.4 2.9 2.3 2.4 2.2 2.1 2.1 1.9 1.9 2.2 1.3 3.7 4.4 5.7 4.3 3.8 4.1 5.0 3.0 3.8 4.3 1.1 1.1 1.1 1.8 2.4 2.1 2.2 2.1 0.4 1.8 2.1 2.3 2.2 2.2 2.2 2.0 2.0 2.1 2.2 2.0 2.2 2.2 1.6 1.6 1.7 1.8 1.7 1.8 1.9 1.9 1.4 1.8 1.9 -1.8 -0.8 1.8 1.5 ... ... ... ... -1.6 0.2 ... 4.9 4.9 4.9 4.8 4.6 4.5 4.4 4.4 5.0 4.8 4.6 .25-.50 .25-.50 .25-.50 .50-.75 .50-.75 .75-1.00 .75-1.00 1-1.25 .25-.50 .50-.75 1-1.25

15

16E

17E

2.6 3.7 0.1 1.8 1.4 0.3 5.3

1.6 3.0 1.3 2.2 1.7 -0.9 4.9

2.3 4.5 2.2 2.1 1.8 ... 4.6

Source: BEA, BLS, FRB, Credit Suisse

US Economy Notes

10

3 November 2016

US Monthly CPI Forecast Base period 1982-1984=100

Purchasing power Retail gasoline of a 1982-84 price assumptions consumer dollar NSA, $/gallon

CPI NSA Index

CPI SA, MoM%

Core CPI SA, MoM%

CPI YoY%

Core CPI YoY%

Sep-16 (Actual)

241.428

0.3

0.1

1.5

2.2

0.414

2.33

Oct-16

241.752

0.4

0.2

1.6

2.2

0.414

2.36

Nov-16

241.669

0.3

0.2

1.8

2.1

0.414

2.38

Dec-16

241.384

0.1

0.2

2.1

2.1

0.414

2.32

Jan-17

242.119

0.2

0.2

2.2

2.0

0.413

2.33

Feb-17

242.943

0.1

0.2

2.5

1.9

0.412

2.35

Mar-17

244.087

0.1

0.2

2.5

2.1

0.410

2.51

Apr-17

244.703

0.2

0.2

2.3

2.0

0.409

2.55

May-17

245.247

0.0

0.2

2.1

2.0

0.408

2.55

Jun-17

245.827

0.1

0.2

2.0

2.1

0.407

2.55

Jul-17

245.926

0.2

0.2

2.2

2.2

0.407

2.53

Aug-17

246.132

0.2

0.2

2.2

2.1

0.406

2.51

Sep-17

246.640

0.3

0.2

2.2

2.2

0.405

2.50

Oct-17

246.727

0.3

0.2

2.1

2.2

0.405

2.46

Nov-17

246.568

0.3

0.2

2.0

2.2

0.406

2.44

Dec-17

246.474

0.2

0.2

2.1

2.2

0.406

2.44

Source: BLS, Credit Suisse

2016 FOMC Meetings

2016 FOMC Voting Members

2016 FOMC Minutes

January 26-27

Janet Yellen, Board of Governors, Chair

February 17

March 15-16*

Stanley Fischer, Board of Governors, Vice Chair

April 8

April 26-27

William Dudley, New York Fed Pres., FOMC Vice Chair

May 20

June 14-15*

Jerome Powell, Board of Governors

July 8

July 26-27

Lael Brainard, Board of Governors

August 19

September 20-21*

Daniel Tarullo, Board of Governors

October 12

November 1-2

Vacant, Board of Governors

November 18

Vacant, Board of Governors

January 4, 2017

December 13-14*

Eric Rosengren, Boston Fed President Loretta Mester, Cleveland Fed President James Bullard, St. Louis Fed President Esther George, Kansas City Fed President Source: Federal Reserve, Credit Suisse. *= 2:00 PM policy statement & FOMC projections; 2:30 PM press conference. Otherwise, only a 2:00PM policy statement is released.

US Economy Notes

11

3 November 2016

FOMC Economic Projections (From the September 20-21 FOMC Meeting) Real GDP 5

Unemployment rate FOMC Central Tendencies Q4/Q4%

annualized QoQ%

11

FOMC Central Tendencies Q4 avg

%

4

10 3

9 2 '16 '17 '18 '19Longer Run

1

8

7 0

6 -1 '16

5 -2

Sept

4

-3 Q1 2013

Q1 2014

Q1 2015

Jan 2010

Q1 2016

Source: BEA, Federal Reserve, Credit Suisse.

Jan 2011

Jan 2012

Jan 2013

Jan 2014

Jan 2015

Core PCE inflation FOMC Central Tendencies Q4/Q4%

YoY%

FOMC Central Tendencies Q4/Q4%

YoY%

3.0

2.5

2.5

FOMC Inflation Target: 2.0%

Longer Run

FOMC Inflation Target: 2.0%

2.0

2.0 '18 '19 '17

1.5

'18 '19 '17 '16

1.5

Sept

'16

1.0

1.0

0.5

0.5

Sept

0.0 Jan 2010Jan 2011Jan 2012Jan 2013Jan 2014Jan 2015Jan 2016

0.0 Jan 2010

Jan 2016

Source: BLS, Federal Reserve, Credit Suisse.

PCE inflation 3.0

Longer Run '17 '18'19

Jan 2011

Jan 2012

Jan 2013

Jan 2014

Jan 2015

Jan 2016

Source: BEA, Federal Reserve, Credit Suisse.

Source: BEA, Federal Reserve, Credit Suisse.

Appropriate timing of policy firming

Appropriate federal funds rate target at year-end

Federal Funds Rate Projections

Appropriate Federal Funds Rate Target at Year-End As of September 21, 2016 2016 2017 % Median Sept’16 0.63 1.13 Jun’16 0.88 1.63 Mar’16 0.88 1.88 Dec’15 1.38 2.38 Sep '15 1.38 2.63

4.0 September 2016 FOMC Projections 3.5

June 2016 FOMC Projections

3.0

2.5

2.0

1.5

Mean

1.0

0.5 2016

2017

0.0

2018

2019

Long Run

Sept’16 Jun’16 Mar’16 Dec’15 Sep '15

0.65 0.83 1.02 1.29 1.48

1.31 1.63 2.04 2.41 2.64

2018 1.88 2.38 3.00 3.25 3.38

2019 2.63

Longer Run 2.88 3.00 3.25 3.50 3.50

2.11 2.46 2.95 3.16 3.34

2.65

2.91 3.14 3.31 3.41 3.46

Sources: FRB, Credit Suisse

Source: Federal Reserve, Credit Suisse

US Economy Notes

Source: Federal Reserve, Credit Suisse.

12

3 November 2016

Selected Economic Indicators OCT SEP Labor Non-Farm Payrolls (Chg. in thousands) Private Payrolls (Chg. in thousands) Unemployment Rate (%) Average Hourly Earnings ($/Hour, SA) Average Hourly Earnings (YoY%) Aggregate Hours Worked (MoM%) Aggregate Weekly Payrolls (MoM%) Output ISM Manufacturing Index (level) ISM Manufacturing New Orders (level) ISM Non-Manufacturing Index (level) Industrial Production (MoM%) Capacity Utilization (%) Trade Balance-Goods and Services ($bn) Real GDP (QoQ%, AR) Nominal GDP (QoQ%, AR) Consumption Retail Sales (MoM%) Retail Sales (YoY%) Retail Sales Ex. Auto (MoM%) Retail Sales Ex. Auto (YoY%) Vehicle Sales, domestic+import (mn, SAAR) Personal Consumption (MoM%) Disposable Personal Income (MoM%) Personal Saving Rate (%) Reuters/U of Mich Consumer Sentiment (level) Inflation PCE Price Index (MoM%) PCE Price Index (YoY%) Core PCE Price Index (MoM%) Core PCE Price Index (YoY%) CPI (MoM%) CPI (YoY%) Core CPI (MoM%) Core CPI (YoY%) PPI (MoM%) PPI (YoY%) Housing Housing Starts (thous, AR) New Home Sales (thous, AR) Existing Home Sales (thous, AR) Existing Home Sales-Median Price (YoY%) Profits, Productivity and Costs Corp. Profits w/IVA and CCadj (YoY%) Non-Farm Productivity (YoY%) Unit Labor Costs (YoY%) Fiscal/Monetary Conditions Monthly Budget Surplus/Deficit ($bn) Budget, 12m sum ($bn, Sep is FY total) Federal Reserve Bank Credit ($bn) Excess Reserves of Depository Institutions ($bn) St. Louis Financial Stress Index (Monthly Avg)

51.9 52.1 54.8

AUG

JUL

87.2

MAY

APR

MAR

FEB

2016 JAN

DEC

NOV

2015 OCT

156 167 5.0 25.79 2.6 0.4 0.7

167 144 4.9 25.73 2.4 -0.2 -0.1

252 221 4.9 25.71 2.7 0.2 0.5

271 238 4.9 25.62 2.6 0.2 0.3

24 -1 4.7 25.59 2.5 0.0 0.2

144 147 5.0 25.53 2.5 0.2 0.4

186 167 5.0 25.45 2.3 0.1 0.4

233 222 4.9 25.39 2.4 -0.4 -0.4

168 155 4.9 25.38 2.5 0.4 0.9

271 259 5.0 25.26 2.6 0.3 0.2

280 279 5.0 25.27 2.4 0.2 0.5

295 304 5.0 25.21 2.6 0.3 0.6

51.5 55.1 57.1 0.1 75.4

49.4 49.1 51.4 -0.5 75.3 -40.7

52.6 56.9 55.5 0.5 75.8 -39.5

53.2 57.0 56.5 0.5 75.4 -44.7 1.4 3.7

51.3 55.7 52.9 -0.2 75.1 -42.0

50.8 55.8 55.7 0.4 75.2 -38.6

51.8 58.3 54.5 -0.9 74.9 -36.9 0.8 1.3

49.5 51.5 53.4 -0.1 75.6 -45.3

48.2 51.5 53.5 0.5 75.7 -43.0

48.0 48.8 55.8 -0.4 75.4 -41.5 0.9 1.8

48.4 49.0 56.6 -0.6 75.7 -41.1

49.4 50.8 58.3 -0.1 76.3 -41.6

0.6 2.7 0.5 2.7 17.7 0.5 0.3 5.7 91.2

-0.2 2.1 -0.2 2.0 16.9 -0.1 0.2 5.8 89.8

0.1 2.4 -0.4 2.1 17.8 0.3 0.4 5.6 90.0

0.7 2.8 0.8 3.2 16.8 0.5 0.3 5.5 93.5

0.2 2.2 0.3 2.6 17.1 0.3 0.3 5.7 94.7

1.2 3.0 0.9 3.1 17.3 1.1 0.5 5.8 89.0

-0.3 1.7 0.4 2.1 16.6 0.0 0.3 6.2 91.0

0.3 3.6 0.2 2.6 17.6 0.2 -0.1 6.0 91.7

-0.5 2.8 -0.4 2.4 17.8 0.1 0.2 6.2 92.0

0.4 2.8 0.5 1.9 17.4 0.2 0.4 6.1 92.6

0.3 1.6 0.2 0.5 18.1 0.3 0.2 6.0 91.3

-0.2 1.6 -0.2 0.4 18.1 0.1 0.3 6.1 90.0

0.2 1.2 0.1 1.7 0.3 1.5 0.1 2.2 0.3 0.7

0.2 1.0 0.2 1.7 0.2 1.1 0.3 2.3 0.0 0.0

0.0 0.8 0.1 1.6 0.0 0.8 0.1 2.2 -0.4 -0.2

0.1 0.9 0.1 1.6 0.2 1.0 0.2 2.2 0.5 0.3

0.2 1.0 0.2 1.6 0.2 1.0 0.2 2.2 0.3 0.0

0.3 1.0 0.2 1.6 0.4 1.1 0.2 2.1 0.3 0.2

0.1 0.8 0.1 1.6 0.1 0.9 0.1 2.2 -0.2 -0.1

-0.1 0.9 0.2 1.7 -0.2 1.0 0.3 2.3 -0.3 0.1

0.1 1.1 0.3 1.6 0.0 1.4 0.3 2.2 0.4 0.0

-0.1 0.6 0.1 1.4 -0.1 0.7 0.2 2.1 -0.1 -1.1

0.1 0.5 0.1 1.4 0.1 0.5 0.2 2.0 0.1 -1.3

0.1 0.3 0.1 1.3 0.2 0.2 0.2 1.9 -0.2 -1.4

1047 593 5470 5.6

1150 575 5300 5.0

1218 629 5380 5.0

1195 558 5570 4.8

1128 566 5510 4.4

1155 570 5430 5.6

1113 537 5360 5.1

1213 525 5070 5.1

1128 526 5470 8.1

1160 538 5450 7.2

1171 508 4860 6.2

1073 478 5290 5.6

2.9 4.4

17.9 18.0

JUN

-4.3 -0.3 2.5

4415 -1.2

33 -587 4412 2157 -1.1

-107 -464 4417 2249 -1.1

-113 -410 4425 2208 -1.1

6 -489 4426 2267 -1.0

-6.6 0.0 2.4 -53 -513 4422 2283 -1.0

106 -459 4435 2330 -0.9

-108 -622 4443 2368 -0.8

-11.2 0.4 2.7 -193 -636 4450 2358 -0.5

55 -337 4444 2280 -0.6

-14 -521 4448 2330 -0.8

-64.5 -136.6 -601 -466 4439 4451 2513 2579 -1.0 -0.9

Source: BEA, Census, BLS, NAR, Federal Reserve, US Treasury, Univ. of Michigan, Credit Suisse

US Economy Notes

13

3 November 2016

GLOBAL FIXED INCOME AND ECONOMIC RESEARCH James Sweeney, Managing Director Head of Fixed Income and Economic Research +1 212 538 4648 [email protected]

Dr. Neal Soss, Managing Director Vice Chairman, Fixed Income Research 1 212 325 3335 [email protected]

US / GLOBAL ECONOMICS AND STRATEGY James Sweeney Chief Economist +1 212 538 4648 [email protected]

Xiao Cui +1 212 538 2511 [email protected]

Sarah Smith +1 212 325-1022 [email protected]

Wenzhe Zhao +1 212 325 1798 [email protected]

Praveen Korapaty Head of Interest Rate Strategy 212 325 3427 [email protected]

Jonathan Cohn 212 325 4923 [email protected]

Jamie Nicholson-Leener Head of Latin America Credit +1 212 538 6769 [email protected]

Luis Serrano +1 212 325 3147 [email protected]

Axel Lang +1 212 538 4530 [email protected]

Zoltan Pozsar +1 212 538 3779 [email protected]

Jeremy Schwartz +1 212 538 6419 [email protected]

William Marshall 212 325 5584 [email protected]

EUROPEAN ECONOMICS AND STRATEGY Neville Hill Head of European Economics & Strategy +44 20 7888 1334 [email protected] David Sneddon Head of Technical Analysis 44 20 7888 7173 [email protected] William Porter Head of European Credit +44 20 7888 1207 [email protected]

Anais Boussie +44 20 7883 9639 [email protected]

Peter Foley +44 20 7883 4349 [email protected]

Christopher Hine 212 538 5727 [email protected]

James Lim 65 6212 3612 [email protected]

Sonali Punhani +44 20 7883 4297 [email protected]

Veronika Roharova Giovanni Zanni +44 20 7888 2403 +44 20 7888 6827 [email protected] [email protected]

Chiraag Somaia +44 20 7888 2776 [email protected]

GLOBAL FX / EM ECONOMICS AND STRATEGY Shahab Jalinoos Head of Global FX Strategy 212 325 5412 [email protected] Kasper Bartholdy Head of Global EM Strategy +44 20 7883 4907 [email protected] Berna Bayazitoglu Head of EEMEA Economics +44 20 7883 3431 [email protected] Alonso Cervera Head of Latin America Economics +52 55 5283 3845 [email protected] Nilson Teixeira Head of Brazil Economics +55 11 3701 6288 [email protected]

Honglin Jiang 44 20 7888 1501 [email protected]

Trang Thuy Le +852 2101 7426 [email protected]

Alvise Marino 212 325 5911 [email protected]

Bhaveer Shah 44 20 7883 1449 [email protected]

Ashish Agrawal +65 6212 3405 [email protected]

Daniel Chodos +1 212 325 7708 [email protected]

Nimrod Mevorach +44 20 7888 1257 [email protected]

Martin Yu +65 6212 3448 [email protected]

Alexey Pogorelov +44 20 7883 0396 [email protected]

Carlos Teixeira +27 11 012 8054 [email protected]

Juan Lorenzo Maldonado +1 212 325 4245 [email protected]

Casey Reckman +1 212 325 5570 [email protected]

Alberto Rojas +52 55 5283 8975 [email protected]

Paulo Coutinho +55 11 3701-6353 [email protected]

Iana Ferrao +55 11 3701 6345 [email protected]

Leonardo Fonseca +55 11 3701 6348 [email protected]

Lucas Vilela +55 11 3701-6352 lucas.vilela @credit-suisse.com

ASIA PACIFIC DIVISION Ray Farris, Managing Director Head of Fixed Income Research and Economics, Asia Pacific Division +65 6212 3412 [email protected]

EMERGING ASIA ECONOMICS Dr. Santitarn Sathirathai Head of Emerging Asia Economics +65 6212 5675 [email protected]

Vincent Chan Head of China Macro +852 2101 6568 [email protected]

Deepali Bhargava +65 6212 5699 [email protected]

Weishen Deng +852 2101 7162 [email protected]

Christiaan Tuntono Michael Wan +852 2101 7409 +65 6212 3418 [email protected] [email protected]

JAPAN ECONOMICS Hiromichi Shirakawa Head of Japan Economics +81 3 4550 7117 [email protected]

US Economy Notes

Takashi Shiono +81 3 4550 7189 [email protected]

14

3 November 2016

Disclosure Appendix Analyst Certification James Sweeney, Jeremy Schwartz, Xiao Cui and Sarah Smith each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

This report is produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in European Union (except Switzerland): by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Germany: Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). United States and Canada: Credit Suisse Securities (USA) LLC; Switzerland: Credit Suisse AG; Brazil: Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; Mexico: Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); Japan: by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau ( Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; Hong Kong: Credit Suisse (Hong Kong) Limited; Australia: Credit Suisse Equities (Australia) Limited; Thailand: Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok10500, Thailand, Tel. +66 2614 6000; Malaysia: Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch; India: Credit Suisse Securities (India) Private Limited (CIN no.U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777; South Korea: Credit Suisse Securities (Europe) Limited, Seoul Branch; Taiwan: Credit Suisse AG Taipei Securities Branch; Indonesia: PT Credit Suisse Securities Indonesia; Philippines: Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Additional Regional Disclaimers Hong Kong: Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an Australian financial services licence (AFSL) and is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (the Act) under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Act). Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. UAE: This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority (“DFSA”). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials,management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2016 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.

When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

US Economy Notes

15