Bank Economists See Economy Returning to Growth, but with Elevated Unemployment

WASHINGTON – The country’s economic recession will end during the third quarter, but high unemployment and large federal deficits will linger, according to the Economic Advisory Committee (EAC) of the American Bankers Association.

“The economy will return to growth but not to health,” said Bruce Kasman, committee chairman and chief economist for JP Morgan Chase, New York. “Growth in the coming quarters is likely to gather momentum but will not prove sufficiently robust to undo much of the severe damage done to our labor markets and public finances,” he said.

The EAC noted that consumer spending stabilized in the first half of 2009.  This appears to be allowing businesses to reduce costs and inventories significantly and is setting the stage for moderation in both layoffs and in investment spending cutbacks.  Coupled with support from policy stimulus and an improvement in financial market conditions, these developments have made it likely that the overall economy will expand in the second half of the year.  The improvement in financial market conditions is broad-based and includes narrowing credit spreads, rising equity prices, and increased issuance of corporate bonds and securitized debt.

The group forecasts that inflation-adjusted GDP will finish a third straight quarterly decline and return to positive growth in the third quarter, picking up to over a three percent pace by the second half of 2010.

Significantly, the committee sees an end to the three-year downturn in the housing market.

Lower prices and low mortgage rates have greatly improved the affordability of homes,” said Kasman. “A recovery in the housing sector will be an important contributor to economic growth.”

The committee sees housing starts rising later this year and home values moving modestly higher in 2010.  

However, credit conditions remain tight and the bank economists feel that jobs will continue to be shed.  Unemployment is expected to peak at 10 percent and remain at or above 9.5 percent through next year.  As a result, the group predicts that households will remain cautious, increasing spending at under a two percent pace over the next four quarters.

“The combination of lingering drags on labor markets and restrained recovery in consumer spending means that growth momentum will build only slowly,” said Kasman. “We do not see growth returning to a trend pace until mid-2010.”  

Budget deficits are expected to remain well above $1 trillion this year and next. However, the committee forecasts that the ten-year Treasury bond yield will stay in the 3.75-4.25 percent range through next year because core inflation is forecast to fall towards one percent, restraining pressure on rates. Nevertheless, the committee expressed concern over the rising trend in federal debt and the implications for inflation risk beyond 2010.

The Federal Reserve is expected to hold short-term interest rates at their current level in response to falling core inflation and an elevated unemployment rate.

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 and Director of Economic Research, Union Bank of California, San Francisco 
• Gregory Miller, VP and chief economist, SunTrust Bank, Inc., Atlanta 
• George Mokrzan, VP and senior economist, Private Financial & Capital Markets Group, Huntington Bancshares Inc., Columbus, Ohio 
• John Silvia, chief economist, Wachovia Corporation, Charlotte, N.C.

The full Economic Consensus is available at: http://www.aba.com/aba/documents/press/ABAEACConsensusForecastJune2009.pdf

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 $13.5 trillion in assets and employ over 2 million men and women.