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Bankers See Economy Perking Up By Summer

But risk of recession remains high, economists warn

By Mark Huffman
ConsumerAffairs.com

January 21, 2008

The American Bankers Association Economic Advisory Committee says the economy may well face turbulence in the next few months, but should bounce back by summer.

"The drag from residential investment will continue to weigh the economy down, but we expect this to moderate after mid-year," said Peter Hooper, chair of the panel and chief economist, Deutsche Bank Securities, New York. "Fed rate cuts and a possible fiscal stimulus package should support stronger economic growth in the second half of 2008."

The consensus EAC opinion is that real economic growth will slow to roughly 1.25 percent in the first six months of the year, picking up to about 2.25 percent in the second half. The unemployment rate is expected to rise moderately to 5.3 percent through yearend and consumer prices are expected to rise 2.5 percent this year, down from 4 percent in 2007.

But the bankers do concede that the outlook for the economy has become more clouded in recent weeks. The group says the risk of substantially weaker economic performance is significant and the EAC now places the probability of recession close to 50 percent.

"Falling home prices, elevated energy prices, and strains in financial markets will continue to pose significant challenges to the economy," Hooper said.

Given the increasing risk of recession, the EAC said it expects the Federal Reserve to cut its short-term interest rates by 50 basis points at the January meeting and by another 25 basis points in both March and April. These cuts would lower the federal funds target rate from 4.25 percent at present to 3.25 percent by mid-year.

"Rate cuts are justified because of the continuing turmoil in the financial markets and a weakening economy," said Hooper. "Inflation risks increasingly are in the background for now," he added.

The panel noted that continued problems in the housing sector, along with funding challenges, are causing many banks to be much more cautious when it comes to lending. Many banks are holding onto their cash, not knowing how many bad mortgages are in their loan portfolios.

"Even as securitization has dried up, bank credit is still flowing," said Hooper. "Borrowers are rediscovering that the banking industry is well-positioned to meet their funding needs. Underwriting standards will naturally reflect the weakening economy, but creditworthy borrowers will continue to have access to credit," he said.

The EAC meets in Washington twice a year to provide perspectives on the national and local economies to top policymakers. The group also met with the Board of Governors of the Federal Reserve System.

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