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Friday, January 16, 2015

Bank Economists See Healthy U.S. Economic Growth Through 2015

The U.S. economy will grow nearly 3% on an inflation-adjusted basis this year compared to 2.5% last year, according to the Economic Advisory Committee of the American Bankers Association.

The committee, which includes 15 chief economists from among the largest banks in North America, sees an improved fundamental backdrop for growth. Sectors that were severely damaged during the 2008-2009 crisis have healed significantly. In particular, the banking and real estate sectors are in much better health. Household balance sheets have also improved, with strong gains in asset prices and a dramatic drop in debt service burden.

The fiscal and monetary policy environment is supportive of growth. Fiscal policy is no longer a headwind as budget brinkmanship battles abate and tax and spending policies stabilize. The group forecasts the federal budget deficit will stabilize at $470 billion in fiscal year 2015.

The committee expects the Federal Reserve to maintain near-zero interest rates through mid-2015. Thereafter, the bank economists see a very gradual normalization of interest rates over the next several years. “We expect the Fed to calibrate its policy to minimize any shock to growth,” said Ethan Harris, chairman of the group and co-head of global economics research at Bank of America Merrill Lynch.

The group sees falling energy prices as a net positive for the economy. Low prices will hurt the oil patch, cutting into mining employment and capital spending. However, this will likely be more than offset by the boost to energy consumers.

"Gas at about $2 a gallon is like an across-the-board tax cut," said Harris. "Cash savings at the pump leave more money for consumers to save or spend elsewhere." Despite the weakness in energy sector investment, the group sees business investment as a strong point for the economy. The consensus forecast is that business investment will rise 5% on an inflation-adjusted basis this year.

The Committee sees continued monthly job gains of 200,000 or higher through this year. However, the bank economists expressed concerns that job gains had not yet triggered healthy wage growth. "Top earners have fared well since the last recession, but the same can't be said for middle and lower-income families," said Harris. "Wages have barely kept up with inflation over the last six years, straining household budgets."

Nonetheless, the Committee believes the ongoing drop in unemployment will start pushing wage growth higher.

Read the press release.
Read the detailed forecast.

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