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Friday, February 5, 2016

Bank Economists See Moderate Growth Despite International Challenges

This year will mark the seventh straight year of expansion for the U.S. economy, a trend that will continue through at least 2017, according to the Economic Advisory Committee of the American Bankers Association. The committee forecasts 2.3 percent growth over the four quarters of this year, followed by 2.2 percent growth next year.

“While the current economic expansion is old compared to the five-and-a-half year average we’ve seen over the last half century, it is in some ways young at heart,” said Carl Tannenbaum, chairman of the group and chief economist of Northern Trust. “Important avenues for growth remain and the financial system is far healthier than it was eight years ago. This means that potential global maladies are unlikely to produce contagion for the U.S. economy.”

The committee, which includes 15 chief economists from among the largest banks in North America, believes the ongoing progress will create jobs and lead wages higher. The group expects that 2.2 million jobs will be added in 2016, pushing wages up 2.5 percent and the national unemployment rate down to a nine-year low of 4.7 percent.

Consumer spending will be a key driver this year, as it was last year, according to the committee. The group forecast is that personal consumption will grow 2.5 percent in 2016 and then 2.1 percent next year.

“Household fundamentals are positive, with impressive job gains, low oil prices and stronger balance sheets,” Tannenbaum said.

Housing will be a pillar of growth this year, according to the group. Residential investment is expected to rise 7.0 percent this year and 4.2 percent next year. Strong fundamentals, along with low mortgage rates, should sustain the recovery in home values, which increased 4.9 percent last year on a nationwide basis and are expected to rise 3.9 percent this year.

The committee’s outlook also calls for business capital investment to support growth this year, increasing 3.5 percent.

Moderating import and commodity prices are expected to drive inflation closer to the Federal Reserve’s target of 2 percent over the next two years, according to the committee.

“Outside of stabilizing oil prices, the improving domestic economy and rising wages could put upward pressure on the price level,” Tannenbaum said. “However, the weak global backdrop and a strong dollar may limit any acceleration of inflation.”

With a modest pick-up in inflation and declining unemployment, the group expects the Federal Reserve to raise its federal funds target zone three times over the course of 2016, from 0.25–0.50 percent at present to 1.00–1.25 percent. Thereafter, the bank economists see a gradual rise in rates over the next several years.

“We see this as a gentle normalization of monetary policy rather than an attempt to curb growth and contain inflation,” Tannenbaum said.

While the consensus calls for sustained growth, the committee sees risks to the outlook as skewed toward the downside.

“The potential threats are largely external, and include faltering emerging markets and related financial risks, which could impair market and economic performance,” said Tannenbaum.

The group’s consensus is that the 10-year Treasury rate will rise from 2.0 percent at present to 2.6 percent at year-end, and mortgage rates will increase from 3.9 percent to 4.2 percent over the same period.

The committee sees sustained strength in the quality and availability of bank loans. Delinquency and charge-off rates will remain near historical lows. Consumer bank credit is expected to grow more than 5 percent and business bank credit more than 8 percent over the course of this year.

“The economy may have challenges to address, but the availability of bank credit is not one of them,” Tannenbaum said.

Read the EAC forecast.

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