This year the U.S. economy will enjoy its strongest growth this cycle, pushing unemployment to the lowest rate in nearly half a century, according to the Economic Advisory Committee of the American Bankers Association.
The consensus of 16 chief economists from among the largest North American banks is that the economy, entering a tenth year of expansion, will see inflation-adjusted GDP growth accelerating to 2.8 percent this year – the strongest pace since 2005 – up from 2.6 percent last year.
“We see the economy as fundamentally strong this year with little down drift in major sectors,” said Ellen Zentner, chair of the group and chief U.S. economist for Morgan Stanley. “Tax cuts and regulatory reform will help support continued growth in business investment.”
Business investment and a pickup in federal government spending were key drivers that led the group to revise upward its GDP forecast this year from January’s forecast of 2.4 percent. The committee expects business capital spending to grow for the second straight year at about 6 percent in 2018.
The group expects growth to slow toward its long-run trend next year.
“The slowing will occur as the tax impact begins to fade, fiscal spending moderates and the Fed continues to raise short-term interest rates,” Zentner said.
The committee spent a great deal of time discussing the risks to the forecast, and trade policy dominated the discussion.
“There were a wide range of opinions about the impact of potential trade actions, but there is no question that the committee believes lingering uncertainty threatens to dampen business investment,” said Zentner.
The committee’s forecast does not incorporate a significant escalation of trade tensions. However, should there be an escalation, the committee expressed concerns.
“Supply chain disruptions and other secondary effects such as tightening of financial conditions could have a cumulative impact that would adversely affect economic growth,” Zentner said.
The committee is forecasting unemployment to drop to 3.6 percent by 2019. Such a low unemployment rate will likely generate more wage pressure, which could help drive inflation beyond the Fed’s expectations.
“If inflation were to rise appreciably above the Fed’s 2 percent goal, particularly in a tight labor market, it would likely trigger a more aggressive monetary policy response,” Zentner said.
Households’ financial health will remain solid. Advances in jobs, higher wages and cuts in personal income taxes will sustain consumer spending above 2 percent annually through next year, according to the group. Purchases of durable goods, including automobile sales, are predicted to remain strong but slacken a bit from last year’s peak, a normal late-cycle phenomenon. Moreover, even with mortgage interest rates rising, the committee sees strong demand driving home prices up 6.4 percent nationally this year followed by 4.2 percent next year.
The group expects the Federal Reserve to continue edging the federal funds rate higher. Following three rate hikes last year, the group consensus is for four total this year – with additional rate hikes in September and December – followed by three in 2019.
The committee sees persistent strength in the availability of bank credit, with delinquency and charge-off rates holding near historical lows. Bank consumer credit grew 4.2 percent last year and is forecast to grow 5.0 percent this year, while business credit rose 0.7 percent last year and is forecast to grow 3.0 percent in 2018.
The members of the 2018 ABA Economic Advisory Committee are:
- EAC Chair Ellen Zentner, chief U.S economist, Morgan Stanley, New York;
- Scott A. Anderson, EVP and chief economist, Bank of the West, San Francisco;
- Scott J. Brown, SVP and chief economist, Raymond James Financial, St. Petersburg, Fla.;
- Beata Caranci, SVP and chief economist, TD Bank Group, Toronto;
- Robert Dye, SVP and chief economist, Comerica Bank, Dallas, Texas;
- Gus Faucher, SVP and chief economist, PNC Financial Services Group, Pittsburgh, Pa.;
- Ethan Harris, head of global economics research, B of A Merrill Lynch, New York;
- Peter Hooper, chief economist, Deutsche Bank Securities Inc., New York;
- Nathaniel Karp, chief economist, BBVA USA, The Woodlands, Texas;
- Bruce Kasman, managing director and chief economist, JPMorgan Chase & Co., New York;
- Kevin Logan, chief U.S. economist, HSBC Securities Inc., New York;
- Christopher Low, chief economist, First Horizon National Corp’s FTN 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; and
- Carl Tannenbaum, chief economist, The Northern Trust Company, Chicago.
The American Bankers Association is the voice of the nation’s $17 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $13 trillion in deposits and extend more than $9 trillion in loans.