A panel of economists predicts a turnaround in the third quarter, but high unemployment and deficits will temper any rebound
A group of bank economists sees the recession ending during the third quarter of 2009, but high unemployment and large federal deficits will keep the economy in a funk for some time to come.
The June 16 report by the Economic Advisory Committee of the American Bankers Assn. echoes a number of recent outlooks by economists who forecast the recession ending this year followed by a slow turnaround.
"The economy will return to growth but not to health," said Bruce Kasman, committee chairman and chief economist for JPMorgan Chase (JPM), in a statement released by the group. "Growth in the coming quarters is likely to gather momentum but will not prove sufficiently robust to undo much of the severe damage done to our labor markets and public finances," he said.
The group's report comes amid some new economic reports that show small improvements in the economic outlook. New home construction jumped 17.2% to a seasonally adjusted annual rate of 532,000 units, from April's record low of 454,000 units, the Commerce Dept. said Tuesday. Building permits, an indicator of future activity, rose 4% to an annual rate of 518,000 units, also better than expected. The gains in construction were driven by a surge in the highly volatile category of multifamily buildings, which soared 61.7% in May after plunging 49.4% in April. Single-family home construction rose at a much lower rate, 7.5%.
Meanwhile, the Producer Price Index, which measures wholesale prices, rose by a seasonally adjusted 0.2% from April, the Labor Dept. said. That was below analysts' expectations of a 0.6% rise.
Prediction: GDP Growth in Third Quarter
The ABA economic committee said that consumer spending "stabilized" in the first half of the year, allowing business to reduce costs and inventories, and mitigating layoffs and cutbacks in investment spending. That, accompanied by federal stimulus spending and a firming in the financial markets, "have made it likely that the overall economy will expand in the second half of the year."
The panel predicted that inflation-adjusted GDP will finish a third straight quarterly decline and then revert to growth in the third quarter, picking up to a more than 3% pace by the second half of 2010.
The panel also predicts a bottom to the three-year decline in housing, with lower prices and lower mortgage rates improving affordability. Housing starts should start rising later in the year, and housing prices should improve "modestly" in 2010, the group said.
Holding back growth will be continued tight credit conditions and high unemployment—peaking at 10%—that will crimp household spending.
"The combination of lingering drags on labor markets and restrained recovery in consumer spending means that growth momentum will build only slowly," said Kasman. "We do not see growth returning to a trend pace until mid-2010."
The group also expressed concern about continuing large budget deficits this year and next and the "implications for inflation risk beyond 2010."
The Associated Press contributed to this report.