WASHINGTON — The U.S. economy will continue to expand through next year with support from fiscal stimulus, according to the Economic Advisory Committee of the American Bankers Association.
“The forces that have sustained eight years of progress, such as low interest rates and improvements in labor markets, will continue into next year,” said Christopher Probyn, chairman of the group and managing director and chief economist of State Street Global Advisors. “Moreover, business and personal tax cuts, along with an increase in infrastructure spending, should boost the economy.”
Consumer spending has supported a prolonged expansion that is expected to continue, according to the consensus view of 15 chief economists from among the largest North American banks. The group’s base forecast for continued growth is also driven by a pickup in business capital spending. The bank economists see inflation-adjusted GDP growth at a little over 2 percent this year. The outlook for 2018 is for a slight acceleration, reflecting some fiscal stimulus that will add around 0.3 percentage point to GDP growth.
“The extent of the improvement in 2018 will depend largely on the size and composition of fiscal stimulus,” said Probyn.
The U.S. economy is already at or near full employment, according to the group. Therefore, job growth will taper progressively through 2018. The national unemployment rate, currently 4.3 percent, is forecast to drift gently downward and could drop to 4.0 percent or lower before the end of 2018.
The committee expects inflation to gradually rise to the Fed’s 2.0 percent goal over the medium term.
In this environment, the group believes that the Federal Reserve can continue to slowly raise interest rates without risk of dampening economic growth. Following rate hikes in March and June, the group consensus is a third increase in December, which would bring the target federal funds rate to 1.25-1.50 percent. Similarly, the consensus of the committee is for three 25 basis point hikes in 2018.
“If economic growth surprises to the upside, then the Fed could move more aggressively,” said Probyn. “Conversely, if the recent slowdown in inflation persists, it could lead the Fed to pause, especially if wage growth stalls.”
This gradual Fed tightening will push longer-term interest rates higher through 2018, according to the committee. Two-year Treasury yields are seen rising from 1.4 percent at present to 2.4 percent at the end of 2018, with ten-year Treasuries rising from 2.2 percent to 3.0 percent, and mortgage rates increasing from 4.0 percent to 4.6 percent.
“Last week, the Fed firmed up plans to start running off its $4.2 trillion portfolio of U.S. Treasury securities and mortgage bonds, and there was no disruption to the bond markets,” said Probyn. “Short of some triggering event, tightening monetary policy is not expected to cause a major selloff in the bond market given low inflation, low bond yields globally, and a stable dollar.”
According to the group’s economic forecast, the eight-year span of economic growth will stretch to a tenth year, tying the longest expansion on record. The group generally sees the risks to the forecast as balanced.
The committee sees sustained strength in the availability of bank loans. Delinquency and charge-off rates will remain near historical lows. Bank consumer credit is expected to grow 5.7 percent this year and 5.0 percent next year, while business credit will rise 3.5 percent this year and 4.2 percent next.
“Banks are in an excellent position to support continued expansion,” Probyn said.
Click here for detailed EAC forecast numbers.
The members of the 2017 ABA Economic Advisory Committee are:
- EAC Chair Christopher Probyn, senior managing director and chief economist, State Street Global Advisors, Boston;
- 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.;
- Robert A. Dye, SVP and chief economist, Comerica Bank, Dallas;
- Gus Faucher, SVP and chief economist, The PNC Financial Services Group, Pittsburgh, Penn.;
- Ethan Harris, head of global economics research, B of A Merrill Lynch, New York;
- Keith Hembre, chief economist, US Bank, Minneapolis;
- Peter Hooper, managing director and chief economist, Deutsche Bank Securities Inc., New York;
- Nathaniel Karp, EVP and chief economist, BBVA Compass, Houston;
- Kevin Logan, chief U.S. economist, HSBC Securities Inc., New York;
- Richard F. Moody, SVP and chief economist, Regions Bank, Birmingham, Ala.;
- Doug Porter, chief economist and managing director for economic research, BMO Financial Group, Toronto, Ont.;
- John Silvia, managing director and chief economist, Wells Fargo Corporation, Charlotte, N.C.;
- James Vogel, executive vice president and manager of the interest rate strategies group, First Horizon National Corp’s FTN Financial, New York; and
- Ellen Zentner, managing director and chief U.S economist, Morgan Stanley, New York.