Bank Economists See Improving U.S. Economic and Employment Growth

Economic activity will pick up in the second half of this year from the current soft patch, according to the Economic Advisory Committee of the American Bankers Association.

The group, which includes a dozen chief economists from the largest banks across the country, predicts that inflation-adjusted GDP growth will rise to near 3 percent in the second half of this year and during 2012.

“Business growth has built up some staying power, despite continued head winds,” said Peter Hooper, committee chairman and chief economist of Deutsche Bank, New York. “Economic recovery at an above-trend pace will support continuing recovery of jobs, but we have a long way to go to get back to where we were before the Great Recession.”

According to the committee, more than 2 million jobs will be created this year – more than twice as many as last year. And next year, it will be 2.5 million.

However, with nearly 9 million jobs lost in 2008-2009, and less than 2 million regained so far, the bank economists see high unemployment lingering yet trending down. The group forecast is for the national unemployment rate to decline from 9.1 percent in May to a bit under 8 percent by the end of next year.

The bank economists see businesses leading growth, while consumers remain cautious. Business investment is expected to grow at twice the pace of the overall economy this year and accelerate in 2012. On the other hand, the committee sees real consumer spending growing around 2.5 percent this year and next.

“The high price of food and gas is eating into discretionary spending and the termination of the payroll tax cuts next year won’t help,” said Hooper. “Moreover, lingering high unemployment and further weakness in home prices will add to consumer caution.”

In addition, the committee expects the housing sector to remain weak into next year. The bank economists see home prices falling another 3 percentage points before bottoming by mid-2012. At that point, however, the committee foresees that home building and sales will start to grow and begin to contribute positively to the economy.

Low interest rates and strengthening credit will support growth, according to the committee.  For consumer credit, and even more so for business credit, the committee foresees steady reduction in delinquencies and strengthening of credit growth into 2012.  The committee forecasts consumer loans to grow at 3.9 percent and business loans to grow at 6.1 percent in 2012.

“Even with overall inflation somewhat elevated currently, core inflation is expected to be tame – below 2 percent – through 2012. Absent inflationary pressures, the Fed will hold back on raising interest rates until next year,” said Hooper.

The committee forecast is that the Fed will not raise the federal funds target rate from the current 0.25 percent ceiling until the second quarter of next year, with the target rate moving above 1 percent by year-end 2012.

“As economic growth solidifies, the Fed will want to stay ahead of the inflation curve by gradually pushing rates up.”

Low inflation and Fed restraint will keep interest rates down in general, according to the committee. The forecast for 3-month Treasury bills is to hold near 0.1 percent through this year. The 10-year Treasury note and 30-year mortgage rates are expected to rise to 3.6 percent and 5.1 percent (respectively) by year-end.  As the Fed begins to tighten monetary policy, interest rates will move higher.  Treasury bills will rise to 1.3 percent, 10-year Treasuries will rise to 4.3 percent, and 30-year mortgages will rise to 5.8 percent by year-end 2012.

“With the Fed moving slowly and credit quality steadily improving, bank lending will support economic recovery,” said Hooper.

Along with Hooper, the members of the ABA Economic Advisory Committee are:

• Robert Allsbrook, SVP and chief economist, Regions Financial Corporation, Birmingham,  Ala;
• Scott Anderson, director and senior economist, Wells Fargo & Company, Minneapolis;
• Scott J. Brown, SVP and chief economist, Raymond James and Associates, St. Petersburg, Fla;
• Ethan Harris, global economics coordinator, Bank of America Merrill Lynch, New York;
• Stuart Hoffman, chief economist, PNC Financial Services Group, Inc., Pittsburgh;
• Bruce Kasman, chief economist, JP Morgan Chase Inc., New York;
• Nathaniel Karp, executive vice president & chief economist BBVA Compass, Houston, Texas;
• Christopher Low, chief economist, First Horizon National Corp’s FTN Financial, New York;
• Gregory Miller, SVP and chief economist, SunTrust Bank, Inc., Atlanta; and
• George Mokrzan, VP and director of economics, Huntington Bancorp., Columbus, Ohio.

Click here for detailed EAC forecast numbers (PDF file).

The American Bankers Association represents banks of all sizes and charters and is the voice for the nation’s $13 trillion banking industry and its two million employees. The majority of ABA’s members are banks with less than $165 million in assets.