Tuesday June 16, 06:04 PM
US to emerge from recession in third quarter: bank economists
WASHINGTON (AFP) - The United States should emerge from recession in the third quarter of this year but will continue to reel from high unemployment and budget deficits, economists from top banks forecast Tuesday.
"The economy will return to growth but not to health," said Bruce Kasman, chief economist for JPMorgan Chase and head of the economic advisory committee of the American Bankers Association.
"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 forecasts that inflation-adjusted gross domestic product (GDP) will return to positive growth in the third quarter after three straight quarterly declines.
The US economy declined by 5.7 percent in the first quarter of this year after a 6.1 percent contraction in the last quarter of 2008, according to the government.
Based on latest projections by the Federal Reserve, the economy would contract between 1.3-2.0 percent in 2009, in the worst downturn in decades, and grow at a modest pace between 2.0-3.0 percent in 2010.
The American Bankers Association's economic panel said Tuesday it saw the economy picking up to growth above a three percent pace by the second half of 2010.
Consumer spending, which stabilized in the first half of 2009, could help businesses reduce costs and inventories "significantly" and is setting the stage for moderation in both layoffs and in investment spending cutbacks, the panel said in a statement
"Coupled with support from policy stimulus and an improvement in financial market conditions, these developments have made it likely that the overall economy will expand in the second half of the year," it said.
The panel also sees an end to the three-year downturn in the housing market at the epicenter of global financial turmoil.
"Lower prices and low mortgage rates have greatly improved the affordability of homes," Kasman said. "A recovery in the housing sector will be an important contributor to economic growth."
The committee sees housing starts -- the number of privately owned new homes on which construction has been started -- rising later this year and home values moving modestly higher in 2010.
However, the bank economists said credit conditions remained tight and that jobs will continue to be shed.
Unemployment, they said, was expected to peak at 10 percent and remain at or above 9.5 percent through next year.
As a result, the group predicts that households would remain cautious, increasing spending at under a two percent pace over the next four quarters.
"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 economists also highlighted concerns over spiking budget deficits, which they said were expected to remain well above one trillion dollars this year and next.
They also forecast that the 10-year Treasury bond yield, a key barometer for interest rates, would stay in the 3.75-4.25 percent range through next year, citing core inflation, which was forecast to fall towards one percent, restraining pressure on rates.
Nevertheless, the committee expressed concern over the rising trend in federal debt and the implications for inflation risk beyond 2010.
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