Bank Economists: No Clear Recession, Only Slow Growth

The economy will continue to experience slow economic growth this year and into early 2009, according to a press statement Tuesday afternoon from the Economic Advisory Committee of the American Bankers Association. “Although the tax rebates are providing some near-term lift to spending, households will continue to face a multiplicity of negative forces, including energy and food prices, restrained credit conditions and declining home prices,” said Peter Hooper, chair of the committee and chief economist, Deutsche Bank Securities in New York. “The economy is not likely to grow fast enough to absorb the growth of the labor force over the next twelve months,” he said. Committee members were split whether the current and prospective economic slowdown would be formally labeled a recession, but generally agreed that the economy was not going to get dramatically worse — certainly a less bearish expectation than many other economists and financial experts, who as of late have forecast a long and deep recession for the States. EAC economists estiamted that real economic growth will slow to around one percent this year, following a trend-like 2.6 percent in 2007, with the unemployment rate rising to 5.75 percent by year end. The team of economists even managed to sound somewhat optimistic on the prospects for housing, given the darkened clouds yet sitting over most of the nation’s key housing markets. “The bottom of the housing market may be coming into sight, with some glimmers of stabilization seen here and there,” said Hooper. The Committee also sees home sales and new home construction stabilizing in the second half of 2008, with the current drag on GDP from declining homebuilding ending by early next year. Home prices, which are expected to decline well into the first half of 2009, are expected continue to constrain consumer spending through next year. Despite the somewhat sanguine forecasting, the economists’ forecast notes that delinquency rates in consumer credit are expected to rise from 2007’s 2.9 percent level at commercial banks to 3.7 percent by the end of 2009; charge-offs are predicted to rise from the 2.1 percent recorded in 2007 to 3.0 percent of assets, as well. Deutsche Bank’s Hooper also suggested that although the economic growth picture looks sluggish over the year ahead, the Federal Reserve will be especially attentive to inflation risks. “The Fed has some very tough decisions ahead, given the intensification of conflicting pressures between a lagging economy and oil-driven inflation,” he said. The bank economists generally believe that the Fed is likely to begin raising the federal funds target rate early in 2009. However, with core PCE inflation lingering above the Fed’s comfort zone, some members expressed a feeling that they expect the Fed to start raising rates this year. The EAC meets in Washington twice a year to provide perspectives on the national and local economies to top policymakers. The full report is available at http://www.aba.com.