The U.S. economic expansion, which has now tied the longest post-war period of prosperity at 120 months, is likely to continue even as downside risks are growing, according to the Economic Advisory Committee of the American Bankers Association.
The median forecast of 16 chief economists from major North American banks is that economic growth will continue through 2020 at a rate near the committee’s 2 percent estimate of long-term potential growth.
Positives for the U.S. economy include strong household and business balance sheets, income growth, good credit availability and a supportive financial environment, according to the committee.
“Households are in a good place right now, and they are a major stabilizing force for the economy,” said Robert Dye, EAC chairman and chief economist at Comerica Bank. “Sustained consumer spending will keep the expansion on track.”
The group sees slowing growth in business fixed investment and inventory accumulation, reflecting increased uncertainty. However, monthly job growth is expected to remain solid at 160,000 this year and 130,000 next year. The bank economists expect the national unemployment rate to remain stable at 3.7 percent through 2020.
Tight labor availability is projected to support higher wages as firms have to bid up to hire. The group forecasts average hourly earnings growth to be about 3.2 percent through next year.
“While the outlook is positive, there are some dark clouds on the horizon,” said Dye. “Concerns about an escalation of trade conflicts, a weakening global economy, and the potential for fiscal tightening could lead businesses to pull back on capital investment.”
The bank economists note that escalation of trade disputes is already weighing on global and U.S. business confidence.
“While there is potential for trade tensions to recede in the months ahead, the uncertainty facing businesses is likely to persist,” said Dye.
The committee sees the chance of the economy falling into recession between now and the end of 2020 at 35 percent.
The committee sees inflation running below the Fed’s objective of 2 percent this year before returning to this target in 2020. Accordingly, the bank economists believe that the next monetary policy action by the Federal Reserve will be to lower interest rates by 25 basis points at the end of July. The committee expects a further 25 basis point rate cut before the end of this year.
“The FOMC is achieving its goal of full employment, but with inflation running below target and downside risks to the economy growing, we expect the Fed will want to be more accommodative,” said Dye.
The committee expects rates on three-month Treasuries to drift down with the federal funds rate, from 2.1 percent at present to 2.0 percent at year-end and 1.9 percent a year later.
On the other hand, the group sees long-term interest rates changing course next year as the federal deficit grows to $935 billion in 2019 and $1 trillion in 2020. Ten-year Treasury rates are projected to stay near 2.1 percent through December then rise to 2.4 percent at the end of 2020. Conventional 30-year mortgages are expected to still be about 4.0 percent over the next six months and then 4.2 percent 12 months after that.
The committee expects consumer credit to grow at 4.3 percent this year and 4.0 percent next year, and business credit to grow 4.8 percent in 2019 and 3.8 percent in 2020.
“The strength of the banking industry will continue to support growth in the U.S. economy,” said Dye.
The members of the 2019 ABA Economic Advisory Committee are:
- Robert Dye, committee chair and chief economist, Comerica Bank, Dallas;
- 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 & Associates, Inc., St. Petersburg;
- Beata Caranci, SVP and chief economist, TD Bank Group, Toronto;
- Augustine Faucher, SVP and chief economist, PNC Financial Services Group, Pittsburgh;
- Ethan Harris, head of global economics research, B of A Merrill Lynch, New York;
- Peter Hooper, global head of economic research, Deutsche Bank Securities, New York;
- Nathaniel Karp, EVP and chief U.S. economist, BBVA, Houston;
- Bruce Kasman, chief economist and global head of economic research, JPMorgan Chase & Co., New York;
- Christopher Low, chief economist, First Horizon National Corp’s FTN Financial, New York;
- Catherine L. Mann, managing director and global chief economist, Citigroup Inc., 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;
- 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.
The American Bankers Association is the voice of the nation’s $18 trillion banking industry, which is composed of small, regional and large banks. Together, America’s banks employ more than 2 million men and women, safeguard nearly $14 trillion in deposits and extend more than $10 trillion in loans.