Bank Economists Predict Moderate, Sustained Recovery

June 30, 2010

The economy is on a moderate but solid recovery path and sustainable private sector job growth has returned this year, according to the Economic Advisory Committee of the American Bankers Association.

The committee unanimously noted that a double-dip recession in the U.S. is unlikely. More than 500,000 private industry jobs were created during the first five months of this year, and the committee foresees the creation of 2.2 million new jobs in 2010 and another 2.5 million new jobs in 2011.

The committee noted that private sector employment growth is crucial for self-sustaining economic expansion, as is consumer spending—people are reluctant to spend when they’re concerned about their jobs.

According to the bank economists, consumer spending was a major drag on the economy in 2008-2009, but will grow by roughly 3% this year and next. Increased consumer spending coupled with strong business capital equipment spending will create real GDP annual growth of just over 3% through 2011, the group predicts.

The group also expects the national unemployment rate to drop steadily but slowly, from 9.7% in May to 8.5% at the end of next year.

The committee consensus is that consumer price inflation will slow to nearly 1% this year and rise to just 1.8% in 2011.

The group unanimously expects the Federal Reserve to start raising interest rates at some point in 2011. The committee consensus is that the federal funds rate, which is now below the 0.25% ceiling of the current Fed target range, will rise to a median estimate of 1% by this time next year and 1.5% by year-end 2011.

The move by the Fed toward a less accommodative monetary policy will push other interest rates modestly higher, according to the bank economists. The three-month Treasury bill yield is expected to rise from 0.08% at present to a median estimate of 1% in December 2010 and 1.8% the following December.

The 10-year Treasury and 30-year fixed-rate mortgage rates are expected to rise by just over one percentage point by year-end 2011, to 4.40% and 6.15%, respectively.

The group sees limited adverse impact on the American economy from turmoil in European sovereign debt. According to the bank economists, the backstop provided by European leaders for near-term financing of their deeply indebted nations will help restore market confidence and contain financial market instability.

The negative impact of economic weakness in Europe on the U.S. economy will be mostly offset by lower Treasury and fixed mortgage interest rates, and commodity prices. According to the committee, “the most notable effect on the U.S. will be lower U.S. exports globally due to a weakening European economy and a strengthening dollar.”