Bank Economists See Recession Deepening; Policy Action Key to Second Half Recovery

The U.S. economy is in the throes of a severe recession and the Economic Advisory Committee (EAC) of the American Bankers Association believes that significant efforts by policymakers will be required to ensure recovery takes hold later this year.

“Conditions have deteriorated considerably since the committee met in June,” said Bruce Kasman, committee chair and chief economist for JP Morgan Chase, New York.  “With consumption contracting and job losses intensifying, it is unlikely that the picture will brighten soon,” he said.

The consensus of the bank economists is that the economy fell at the sharpest rate in nearly three decades in the fourth quarter of last year, and that the downturn will continue through the first half of 2009. While growth is expected to return later this year, the current recession is likely to be the longest since World War II.  The committee sees the unemployment rate rising to 8½ percent later this year, its highest level since 1983.

However, according to Kasman, “Implementation of a substantial stimulus package combined with continued monetary ease by the Federal Reserve should bring the economy out of recession before the end of the year.”

Mr. Kasman noted that, with unemployment rising and inflation in check, the Federal Reserve will focus on promoting economic growth and financial stability throughout the year. The committee foresees no change in the current federal funds target rate and expects further expansion of the Fed’s lending and asset-purchase programs. As a result, financial market stress should ebb and private sector access to credit should improve.

The committee sees conventional 30-year fixed mortgage rates remaining below five percent for several months, but also sees home prices continuing to fall.  

“A surge of refinancing is already underway and lower home prices and interest rates will gradually support an increase in home sales,” said Kasman.  As a result, the group sees the extended slide in housing starts ending around midyear.

The committee sees mortgage delinquencies continuing to rise in 2009, and noted that banks will continue their efforts to reach out to troubled borrowers in an effort to craft workable solutions. The panel made clear that banks are being careful with credit in the weak economic environment, but that their loan portfolios have grown.

“Banks are paying close attention to credit quality, but continue to provide funding for credit-worthy households and firms,” said Kasman.  “Treasury’s capital injections have helped.”

The committee is wary of downside risks to the outlook in an environment of financial market fragility and broadening global weakness. Consumers may continue to retrench, saving more and spending less, further weakening demand for goods and services.  Exports, which have been a source of economic strength in the recent past, are now declining.

“We are in the midst of an unusually synchronized global recession and U.S. growth is being hurt by the deterioration of economic conditions in all of our major trading partners,” said Kasman.

The EAC meets in Washington twice a year to provide perspectives on the national and local economies to top policymakers.  The group also met with the Board of Governors of the Federal Reserve System.

Members of the ABA Economic Advisory Committee are:

• EAC Chair Bruce Kasman, chief economist, JP Morgan Chase, New York
• Robert Allsbrook, SVP and chief economist, Regions Financial Corporation, Birmingham, Ala.
• Scott A. Anderson, VP  and senior economist, Wells Fargo & Company, Minneapolis 
• Richard Berner, chief economist, Morgan Stanley & Company, Inc., New York 
• Scott J. Brown, SVP and chief economist, Raymond James and Associates, St. Petersburg, Fla. 
• Stuart Hoffman, chief economist, PNC Financial Services Group, Pittsburgh 
• Peter Hooper, chief economist, Deutsche Bank, New York 
• Dana B. Johnson, SVP and chief economist, Comerica Bank, Dallas 
• Paul L. Kasriel, SVP, Northern Trust Company, Chicago  
• Kei Matsuda, SVP, Union Bank of California, San Francisco 
• Gregory Miller, VP and chief economist, SunTrust Bank, Inc., Atlanta 
• George Mokrzan, VP and senior economist, Huntington Bancshares Inc., Columbus, Ohio 
• Lynn Reaser, chief economist and managing director, Bank of America Investment Strategies Group, Boston 
• John Silvia, chief economist, Wachovia Corporation, Charlotte, N.C.

The full Economic Consensus is available at: http://www.aba.com/EP/EP_EACommittee.htm

The American Bankers Association brings together banks of all sizes and charters into one association. ABA works to enhance the competitiveness of the nation’s banking industry and strengthen America’s economy and communities. Its members – the majority of which are banks with less than $125 million in assets – represent over 95 percent of the industry’s $13.6 trillion in assets and employ over 2 million men and women.