Watch Christopher Low, Chief Economist at First Horizon National Corp's FTN Financial discuss the June 2014 forecast.
WASHINGTON—Growth resumed in the second quarter of 2014 after a surprisingly weak start to the year, but investment in businesses and homes – along with reduced fiscal drag – will spur the U.S. economy over the next two years, according to the Economic Advisory Committee of the American Bankers Association.
The committee, which includes 14 chief economists from among the largest banks in North America, predicts that inflation-adjusted GDP will achieve roughly 3 percent growth for the remainder of 2014 and into next year.
“The unusually cold winter, along with temporary drags from an inventory correction and weaker trade, slowed economic activity in the first quarter,” said Christopher Low, chairman of the group and chief economist of First Horizon National Corp's FTN Financial. “As these temporary factors fade, the underlying health of the economy will show through, with business spending and hiring leading the charge.”
The committee expects moderate consumer spending growth until wage growth accelerates.
"Households are benefiting from a material rise in home and equity prices, but remain constrained by weak wage growth,” said Low. “A more meaningful pickup in consumption will be elusive without stronger wage growth.”
The bank economists believe home prices nationwide will rise solidly and residential investment will increase 10 percent for the remainder of the year. Improving labor market activity will foster stronger household formation, supporting the housing recovery.
“We foresee enough growth in jobs and income to keep housing strong even as mortgage rates rise,” Low said. “As home prices rise, we may begin to see an increasing wealth effect contribution to consumer spending.”
With sustained job growth, the unemployment rate will continue its downward trend, according to the bank economists.
The group sees unemployment falling to 6.1 percent by the end of the year and close to a full-employment level of 5.6 percent by the end of next year.
"Job growth will average gains of over 200,000 per month for the remainder of the year," Low said. “Today's jobs report, indicating 217,000 jobs created in May, reaffirms our outlook for the jobs market.”
The committee forecasts inflation to speed up near the Federal Reserve’s target levels by the end of 2015. The bank economists believe the Federal Reserve will keep policy rates unchanged until mid-2015. The group expects the Fed to finish “tapering” asset purchases late this year, to begin the process of normalizing interest rates during the second half of 2015 and to end reinvestment of bond proceeds later that year.
The bank economists forecast that bank lending to consumers will grow modestly this year, as banks face increased regulatory restraints and cautious consumers who are selective about taking on more debt. Lending to businesses will be stronger. In 2014, loans to individuals are expected to grow about 4.5 percent and loans to businesses will grow 9.0 percent.
"We’re optimistic that business lending will grow at a near double-digit rate over the next couple of years,” Low said. “Banks stand ready to meet demand as businesses take the next step forward.”
Despite recent declines in the federal deficit, the bank economists find the current federal debt levels concerning. The group forecasts the federal deficit falling to $490 billion in fiscal year 2014 and $470 billion in fiscal year 2015.
“Despite near-term improvements in deficit levels, we remain concerned about the prospects of larger looming deficits in the long run,” Low said.
The members of the 2014 ABA Economic Advisory Committee are:
- EAC Chair Christopher Low, chief economist, First Horizon National Corp’s FTN Financial, New York;
- Scott A. Anderson, SVP and chief economist, Bank of the West, San Francisco, Calif.;
- Scott J. Brown, SVP and chief economist, Raymond James & Associates, Inc., St. Petersburg, Fla.;
- Robert A. Dye, SVP and chief economist, Comerica Bank, Dallas;
- Ethan S. Harris, co-head of global economics research, Bank of America Merrill Lynch, New York;
- Stuart G. Hoffman, chief economist, PNC Financial Services Group, Pittsburgh;
- Peter Hooper, managing director and chief economist, Deutsche Bank Securities Inc., New York;
- Nathaniel Karp, EVP and chief economist, BBVA Compass, Houston;
- Bruce C. Kasman, chief economist, JP Morgan Chase & Company, New York;
- Gregory L. Miller, SVP and chief economist, SunTrust Banks, Inc., Atlanta;
- George Mokrzan, SVP director of economics, Huntington National Bank, Columbus, Ohio;
- Richard F. Moody, SVP and chief economist, Regions Financial Corporation, Birmingham, Ala.;
- Christopher Probyn, senior managing director and chief economist, State Street Global Advisors, Boston, Mass.;
- Carl R. Tannenbaum, SVP and chief economist, Northern Trust, Chicago
Click here for detailed EAC forecast numbers.
Click here for a two-minute video clip of EAC chairman Christopher Low’s summary of the forecast.
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The American Bankers Association is the voice of the nation’s $14 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $11 trillion in deposits and extend nearly $8 trillion in loans.