Wednesday, June 3, 2015

Bank Economists See Rebound from Economic Soft Patch

The U.S. economy will rebound from a lackluster first half with 2.8% annualized inflation-adjusted real GDP growth in the second half of this year, according to the Economic Advisory Committee of the ABA. The committee sees 1.8% growth over the four quarters of the year, rising to 2.6% in 2016.

The committee, which includes 16 chief economists from among the largest banks in North America, attributes the weak first quarter to a range of temporary factors, including seasonal distortions, bad weather, the West Coast port strike and the sharp drop in oil sector investment. However, the fundamentals remain positive, with healthy household and business balance sheets, low oil prices and interest rates, and strengthening housing and stock prices.

The fiscal and monetary policy environment is also supportive of growth. Fiscal policy is no longer a headwind, as tax and spending policies turn neutral at the federal, state and local level. The group forecasts the federal budget deficit will stabilize at $480 billion in fiscal year 2015.

The committee expects the Federal Reserve to maintain near-zero interest rates until September. Thereafter, the bank economists see a gradual normalization of rates over the next several years.

“The Fed is ready to move once the data show clearly that the weak first quarter was an aberration,” said Ethan Harris, chairman of the group and co-head of global economics research at Bank of America Merrill Lynch. “Nonetheless, we see this as a gentle normalization process rather than an attempt to curb growth and stop inflation.”

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

"Initially, the oil price drop has triggered a sharp drop in the mining sector, but little response from consumers," said Harris. "However, as the year unfolds we expect mining to level off even as consumers spend more of their savings from gas."

While the collapse in mining investment contributed to a 2.8% annualized decline in business fixed investment in the first quarter, the committee sees about 5% growth in overall capital expenditures over the coming quarters as investments in other industries pick up.

The committee sees monthly job gains of 200,000 or so this year and next, with the unemployment rate expected to decline to about 5% over the year ahead. Moreover, the improving labor market is starting to show up in modestly better wage growth.

"The stronger job market is finally giving your average Joe a little bit of wage-negotiating power," said Harris. "Over the next several years, this should help reverse some of the dramatic widening in the income distribution."

The committee expects 2.7% real consumption growth in 2015.

"Solid job growth, improving wages and lower energy costs should encourage more families to spend," said Harris.

The group expects residential investment to continue to recover, with gains in housing starts and home sales. The EAC expects home prices nationally to rise almost 5% this year.

"While mortgage lending remains tight, an improving labor market and stronger household formation should support the housing market," said Harris. "However, millennials seem more inclined to rent rather than own, suggesting that growth will remain concentrated in the multi-family market."

The group sees improving credit quality and availability. Delinquency and charge-off rates are expected to continue to fall. Consumer bank credit is expected to grow more than 5% over the course of this year and next.

"We're optimistic that business lending will continue to grow at a double-digit rate, supporting the rise of business investment ahead of anticipated interest rate increases," said Harris.

Low inflation resulting from falling energy prices has temporarily pushed year-over-year headline inflation into negative territory.

"Outside of energy, the improving domestic economy could put upward pressure on prices, but the weak global backdrop and a strong dollar should limit any inflation acceleration," said Harris. As we move to 2016, the committee expects inflation to settle around 2%.

Read the full press release.
See the detailed EAC forecast numbers.

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