The U.S. economy will continue to grow, add jobs and support wage gains in 2020 and beyond, according to the latest forecast of the American Bankers Association Economic Advisory Committee.
There is broad agreement among the group’s 15 chief economists from some of North America’s largest banks, however, that the rate of growth is moderating. Moreover, the majority of the economists believe the risks to growth are still weighted to the downside. The median forecast is for a 1.9% inflation-adjusted growth in GDP this year and next year (as measured on a Q4/Q4 basis), following an estimated 2.3% change last year.
The committee’s forecast reflects a balance of risks between the consumer and business side. On the consumer side, continued strength in the labor market, including rising wages, remains a positive force for growth. However, the committee believes that consumption will moderate as job growth slows. The group forecast is for personal consumption to rise just over 2% through 2021 compared to around 2.7% last year.
“Sustained job gains, low unemployment and strong wage growth will enable consumers to continue supporting the economy, although less robustly than last year,” said Catherine Mann, chair of the committee and chief economist at Citigroup.
Business investment is expected to increase as firms look to technology to improve efficiencies and enhance productivity amid tight labor markets. Global growth should slowly improve thanks to easing trade tensions and accommodative financial conditions, but a range of uncertainties are expected to continue to weigh on decisions to expand operations.
“The U.S. economy will be stronger if trade tensions dissipate and other economies stabilize globally. On balance, the risk is to the upside for consumers in that wages could rise more rapidly, especially for those at the lower end of the income distribution, providing greater spending power,” said Mann. “On the other hand, the risk is to the downside for business investment because of economic uncertainty, as well as concerns about ongoing issues in the aerospace industry.”
The committee expects the national unemployment rate to remain close to the current 3.5% level through next year, despite anticipated declines in monthly additions to the workforce from 176,000 in 2019 to close to 100,000 by 2021.
“Labor force participation is expected to continue to increase, bringing new entrants to the labor market to satisfy the demand for workers,” said Mann. “Job growth above 70,000 per month and rising wages signal to those outside the labor force to re-enter the job market, renew their skills and add to the economy.”
The committee believes that tightness in the labor market will support pay raises going forward. Wages will rise about 3.3% annually through 2021, according to the bank economists. Increasing price transparency through technology will continue to limit firms’ pricing power, and will keep inflation near 2% through next June.
Over the next 12 months, the committee sees the odds of recession at 25%, a modest decrease from the EAC’s last survey due to the easing of trade tensions and lagged effects of monetary policy actions since the last survey.
With respect to Federal Reserve policy, the median consensus is no change to the federal funds rate through 2021. However, the committee was split on whether the next move would be an increase or decrease in the policy rate as members had differing views on the tightness of the labor market and its potential pass-through to inflation.
In light of the projected path for growth and Federal Reserve policy, the committee forecast relatively stable interest rates. No significant change is expected for three-month Treasury rates, with rates on 10-year bonds seen rising from 1.8% now to 1.9% at year-end and 2.1% a year later.
Very modest increases are expected in 30-year mortgage rates to 4.0% at the end of 2021, which will not undermine housing starts, sales or prices. The committee foresees gains in construction activity and sales amid home prices rising 2.5% through 2021.
“Historically low mortgage rates and good credit availability, along with increased employment and higher incomes, provide a positive outlook for housing,” said Mann.
The committee expects continued availability of credit with growth rates in 2020 of 4.1% for consumer credit and 3.4% for business credit. On the other hand, while the committee agreed that credit quality is unlikely to improve, it was split on whether it will stay steady or weaken slightly.
“The banking industry remains well positioned to continue making the loans that help drive the economy forward,” said Mann.
The members of the 2020 ABA Economic Advisory Committee are:
- Catherine L. Mann, committee chair and managing director and chief economist, Citigroup Inc., New York;
- Scott Anderson, EVP and chief economist, Bank of the West / BNP Paribas, San Francisco;
- Scott J. Brown, Senior Vice President and Chief Economist, Raymond James Financial, St. Petersburg;
- Beata Caranci, SVP and chief economist, TD Bank Group, Toronto;
- Robert Dye, SVP and chief economist, Comerica Bank, Dallas;
- Augustine Faucher, SVP and chief economist, PNC Financial Services Group, Pittsburgh;
- Peter Hooper, global head of economic research, Deutsche Bank Securities, New York;
- Nathaniel Karp, EVP and chief U.S. economist, BBVA, Houston;
- Christopher Low, chief economist, First Horizon National Corp’s FHN Financial, New York;
- George Mokrzan, SVP and director of economics, Huntington Bancshares, Inc., Columbus, Ohio;
- Richard Moody, SVP and chief economist, Regions Bank, Birmingham, Alabama;
- Doug Porter, chief economist and managing director, BMO Financial Group, Toronto;
- Chris Rupkey, managing director and chief financial economist, MUFG Union Bank, New York;
- Carl R. Tannenbaum, EVP and chief economist, The Northern Trust Company, Chicago; and
- Ellen Zentner, managing director and chief U.S. economist, Morgan Stanley, New York.