Bank economists expect strong growth in 2004

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Low long-term interest rates to support home buying, building and remodeling for the first six months|ret||ret||tab|

Buoyed by an upswing in manufacturing and expectations of stronger job gains, the American Bankers Association Economic Advisory Committee is confident in the economy's growth prospects for 2004.|ret||ret||tab|

The committee's consensus forecast is that the national economy will grow at an annual rate above 4 percent in real terms during 2004. Job growth will accelerate as output gains remain above average and labor productivity growth reverts to a still healthy, but more moderate, pace.|ret||ret||tab|

"Productivity growth has been exceedingly strong," said Lynn Reaser, EAC chair, chief economist and managing director of Banc of America Capital Management in St. Louis, in a Jan. 21 news release. "Companies will need to ramp up staffing to meet orders and sales demands as productivity growth moderates to a more sustainable trend."|ret||ret||tab|

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Job growth|ret||ret||tab|

The committee believes that monthly job growth will reach 200,000 during the first half of this year. |ret||ret||tab|

"Employment will start showing signs of improvement now that we are more than two years into the economic recovery," said Reaser. "Layoffs have subsided substantially. We remain confident that the economy will add more jobs as 2004 proceeds."|ret||ret||tab|

The Economic Advisory Committee believes the Federal Reserve has successfully prevented falling prices. Still, the underlying rate of inflation should remain low because of gains in productivity and significant amounts of excess capacity. |ret||ret||tab|

"The major risk of deflation is behind us," said Reaser. "As 2004 progresses, companies should see a gradual firming in pricing power and the underlying rate of inflation should edge slowly higher, but remain well contained."|ret||ret||tab|

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Interest rates|ret||ret||tab|

Low long-term interest rates will continue to support home buying, building and remodeling for the first half of the year, but the committee feels that this sector will lose momentum as the year proceeds. The committee projects that 30-year fixed mortgage rates will average about 6.75 percent by the end of the year. Most committee members also predict that the Federal Reserve will gradually raise short-term interest rates in 2004. |ret||ret||tab|

"Clear signs of strong growth, improving employment, and modestly rising core inflation are likely to trigger the first interest rate increase since 2000," said Reaser. "However, a rate increase is unlikely before mid-year." |ret||ret||tab|

Recent numbers point to a rebound in the industrial sector and the committee expects further improvement.|ret||ret||tab|

"Manufacturing is benefiting from a rebound in capital spending, the revival in exports, and inventory rebuilding," said Reaser. "Industrial production is likely to rise faster than the overall climb in real GDP." |ret||ret||tab|

Sharp changes in either direction in several factors could significantly alter the outcome. These factors include the level of oil prices, geopolitical developments, and trends in the dollar. On balance, committee members believe the risks are tilted toward stronger growth. |ret||ret||tab|

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Consumer credit|ret||ret||tab|

Consumer credit will continue to expand at a moderate pace, the committee predicted. Meanwhile, commercial loans are expected to grow again in 2004 after three years of decline. Overall credit quality on both the consumer and business sides should improve as delinquencies and charge-offs decline over the next year.|ret||ret||tab|

The Economic Advisory Committee meets in Washington twice a year to provide perspectives on the national and local economies to key policymakers. The group met in January with the Federal Reserve Board of Governors.|ret||ret||tab|

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