Bank Economists See Rebound After Slow First Quarter
The U.S. economy is expected to overcome a sluggish start to 2016 and turn in a steady full year performance, according to the Economic Advisory Committee of the American Bankers Association. The group forecasts inflation-adjusted GDP growth of 1.9 percent this year and 2.1 percent in 2017.
"Ill winds from the East hindered the markets and the expansion at the outset of the year," said Carl Tannenbaum, chairman of the group and chief economist of Northern Trust. "But moderating turbulence from emerging markets and the sustained thrust of American consumers should put the U.S. economy back on course."
The committee, which includes 16 chief economists from among the largest North American banks, believes that a rising dollar and slackening global trade lowered real GDP growth in 2015 but expects this force to be less of a drag this year.
"Low oil prices, slower international sales and an elevated level of global uncertainty have led many firms to cut back on capital expenditures," noted Tannenbaum. "This will be a limiting factor for the economy this year, but should lead to catch-up investments that stimulate growth in 2017."
The group forecasts a sluggish 0.4 percent increase in capital investments in 2016, but anticipates a recovery to 3.1 percent growth next year.
"Fortunately, consumption will keep us going," Tannenbaum said. "Spending has proven resilient throughout the current expansion."
The group expects consumer spending growth to slow from 2.7 percent last year, but to hold at 2.2-2.4 percent this year and next. This maintains a positive contribution to GDP, mitigating an expected moderation in inventory accumulation throughout the economy.
"Households are fundamentally healthy thanks to rising income, job gains and stronger balance sheets," Tannenbaum said.
The group expects that 2.2 million jobs will be added this year, pushing wages up 2.6 percent and the national unemployment rate down to 4.8 percent, very low by historical standards.
Housing is expected to be another driving force, according to the group. With rising home prices and still-low mortgage rates, residential investment is expected to rise 8.5 percent this year and 4.6 percent next year.
According to the group, diminishing labor market slack will cause inflation to converge to the Fed’s 2 percent objective. The core PCE price index is not expected to exceed this level before the end of 2017. This should allow the Federal Reserve to implement a gradual series of increases in the federal funds rate.
"Although the economy is growing near its long-run potential and inflation is headed toward the 2 percent objective, persistent consumer and business uncertainty is likely to keep the Fed from raising rates aggressively,” said Tannenbaum.
The group expects the Federal Reserve to raise its federal funds target zone two times over the course of 2016, from 0.25-0.50 percent at present to 0.75-1.00 percent.
The bank economists expect the measured pace of Fed rate hikes and continued global demand for U.S. government bonds to keep long-term interest rates low. The group's consensus is that the 10-year Treasury rate will rise from 1.8 percent at present to 2.1 percent at year-end, and that mortgage rates will increase from 3.6 percent to 3.9 percent over the same period.
While the consensus calls for sustained growth, the committee sees risks to the outlook as skewed toward the downside.
"The largest threats are developments globally and the impact these could have on exports and financial markets," said Tannenbaum.
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 6.1 percent and business bank credit 9.0 percent over the course of this year.
"Banks are in an excellent position to support continued expansion," Tannenbaum said.