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Bank Economists Expect Sustained Economic Recovery in 2010

Jan 15 - The economy is on a sustainable recovery path and job growth will return this year, according to the Economic Advisory Committee of the American Bankers Association.  High unemployment and restrained consumer spending, however, will be major impediments to more rapid economic growth. 

“We’re on the cusp of private industry job creation, which will gain momentum throughout the year,” said Stuart Hoffman, committee chairman and chief economist, PNC Financial Services, Inc., Pittsburgh.

The consensus of the bank economists is that the annualized inflation-adjusted real GDP growth rate will be around 3.1 percent throughout 2010 – which is roughly half the normal pace following past deep recessions. This growth would be just above the economy’s long-term trend, but not enough to reduce the unemployment rate much below ten percent by year-end.

“The recession technically ended last year,” said Hoffman. “However, the normal rapid economic rebound seen in the first year or so following past deep recessions will not occur.”

Improving financial conditions and accommodative monetary and fiscal policies have helped restart the economy. The group expects that private sector spending, investment and employment will gather momentum, which will sustain the recovery even as the policy stimulus wanes.  However, labor income and home prices remain depressed, which will therefore prevent rapid gains in consumer spending this year.

The group expects the availability of credit to improve, and Hoffman noted that banks are working hard to ensure that customers – both consumers and businesses – have access to the credit.

“As business confidence continues to improve, inventory and capital investments will increase, and lending will expand,” said Hoffman.

Bank economists see the constraints on economic growth also holding down inflation. The consensus is that “core inflation” – excluding food and energy costs – will be 1.2 percent in 2010, while overall consumer inflation (PCE measure) will be 1.6 percent, due, in part, to rising oil prices.

Low inflation will allow the Federal Reserve to hold short-term interest rates near current low levels during the first half of this year, according to the bankers. The group expects the Fed to start raising the target federal funds rate in the second half, but only to three-quarters of one percent by year-end.  The group expects 10-year Treasury yields to rise to 4.4 percent and mortgage rates are projected to rise to 6.2 percent by year-end.

The members of the ABA Economic Advisory Committee are:

• EAC Chair Stuart Hoffman,  PNC Financial Services, Inc., Pittsburgh.
• Robert Allsbrook, Regions Financial Corporation, Birmingham, Alabama.
• Scott Anderson, Wells Fargo & Company, Minneapolis.
• Scott J. Brown, Raymond James and Associates, St. Petersburg, Florida.
• Ethan Harris, Bank of America Merrill Lynch, New York.
• Peter Hooper, Deutsche Bank, New York.
• Dana Johnson, Comerica Bank, Dallas.
• Bruce Kasman, JP Morgan Chase, New York.
• Christopher Low, First Horizon National Corp’s FTN Financial, New York.
• Kei Matsuda, Union Bank of California, San Francisco.
• Gregory Miller, SunTrust Bank, Inc., Atlanta.
• George Mokrzan, Huntington Bancorp., Columbus, Ohio.

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