Bank Economists Foresee Economic Soft Landing, But Downside Risks Challenge Outlook

The U.S. economy will continue to expand through 2024, but at a slower pace than its long-term potential, according to the latest forecast of the American Bankers Association’s Economic Advisory Committee. The economists also expect inflation to gradually slow toward the Federal Reserve’s objective of 2% over the next two years.
The committee, made up of 13 chief economists from some of North America’s largest banks, forecasts 1.6% inflation-adjusted growth this year (Q4 over Q4) and 1.5% in 2023, well below last year’s 5.5% growth.

“Earlier this year, the committee anticipated that containing COVID-19 would support continued above-trend growth,” said Richard DeKaser, committee chair and chief corporate economist at Wells Fargo & Co. “That outlook deteriorated when supply chain issues reemerged due to Russia’s invasion of Ukraine and another pandemic wave in Asia, compounding persistently high inflation and prompting a more aggressive Federal Reserve response.”

Despite these headwinds, the bank economists expect strong consumer spending to keep the overall economy moving forward. The group expects real consumer spending to rise 2.5% this year and 1.8% next year, supported by low unemployment and exceptional wealth gains over the previous few years.

“Unemployment remains low and job gains are expected to continue,” said DeKaser. “Moreover, 2019, 2020 and 2021 were the highest three years on record for gains in inflation-adjusted wealth per household, which will provide a strong tailwind for the consumer economy.” 

The committee sees a mixed picture from businesses. On one hand, business investment is seen rising 6.2% in 2022, then 2.8% in 2023. On the other, inventory accumulation is expected to slow. 

“Labor shortages have constrained production, spurring firms to invest in technology to increase efficiency,” said DeKaser. “At the same time, profit margins are strong and supply chain conditions are expected to improve, which should mitigate inflation pressures somewhat.”

Despite support from the consumer and business sectors, foreign trade and government sectors will drag on the outlook, according to the group. International trade is expected to be weak because the nation’s major trade partners in Europe and Asia are suffering from miliary conflict, COVID-19 and high energy prices. Government spending will remain weak with termination of pandemic-support programs.

After inflation and labor compensation surged during the first quarter, the Federal Reserve adopted a more aggressive posture for monetary tightening. Following a 50 basis point increase in the federal funds rate target in early May, the group expects another 150 basis points this year followed by 50 basis points more early next year.

Quantitative tightening of the Fed’s balance sheet will further contribute to rising interest rates going forward. Market interest rates are forecast to respond accordingly, with rates on the 10-Year Treasury Note climbing to 3.2% and mortgage rates at 5.3% by year-end.

The committee expects higher interest rates, along with the other drags on the economy, to stem excessive inflation. The group forecast is for consumer price inflation to recede steadily from near 8% in the first quarter to 6.3% in the fourth quarter, then 2.4% a year later.

“It looks like the Federal Reserve will successfully bring inflation down to more tolerable levels in the foreseeable future,” said DeKaser. “However, there are substantial risks to this outlook.”

According to the committee, the risks are biased to the downside and there is a 40% chance of recession next year. Over-tightening by the Federal Reserve, stubbornly elevated inflation, little resolution to supply chain problems, or a housing correction could tip the economy into a downturn.

As to housing, all the bank economists believe that stretched affordability will drive a substantial deceleration in future house price appreciation. Nonetheless, due to the short supply of homes for sale, the group does not expect broad-based price declines. Home construction, like so many things, continues to be constrained by materials shortages due to supply chain issues.

View detailed EAC forecast numbers.

The members of the 2022 ABA Economic Advisory Committee are:

• EAC Chair Richard DeKaser, EVP and chief corporate economist, Wells Fargo & Co., Washington;
• Scott Anderson, EVP and chief economist, Bank of the West/BNP Paribas, San Francisco;
• Beata Caranci, SVP and chief economist, TD Bank Group, Toronto;
• Augustine Faucher, SVP and chief economist, PNC Financial Services Group, Pittsburgh;
• Peter Hooper, managing director and global head of economics, Deutsche Bank Securities Inc., New York;
• Tendayi Kapfidze, SVP and chief economist, U.S. Bancorp, New York;
• Bruce Kasman, managing director and chief economist, JPMorgan Chase & Co., New York;
• Christopher Low, chief economist, FHN Financial, New York;
• Simona Mocuta, managing director and chief economist, State Street Global Advisors, Boston;
• Richard Moody, SVP and chief economist, Regions Bank, Birmingham, Alabama;
• Doug Porter, managing director and chief economist, BMO Financial Group, Toronto; 
• Carl Tannenbaum, EVP and chief economist, The Northern Trust Company, Chicago; and
• Ellen Zentner, managing director and chief U.S economist, Morgan Stanley, New York.