Resilient household spending and a strong labor market will likely help the U.S. economy avoid a severe recession, according to a new forecast from economists at some of the country's biggest banks.
The economy is poised to grow at a rate of less than 1% through the second quarter of 2024, the American Bankers Association's Economic Advisory Committee said Monday. That is low compared with the second quarter rate of 4.1% but well above the dire predictions some economists once harbored for 2024.
"The odds of a soft landing have improved quite dramatically in the near term," said Simona Mocuta, chief economist at State Street Global Advisors and the chair of the ABA's committee of economic advisors.
The specter of recession has weighed on banks for close to 18 months, since the Federal Reserve began its campaign of rate hikes in March 2022. The health of the U.S. economy plays a key role in the profitability of banks, so the prospect of a contraction in economic growth raised red flags for banks large and small. The likely avoidance of one of the harsher economic scenarios — a severe recession — is good news for banks, which are also contending with generally tighter profit margins and increasing competition for customers.
Robust consumer spending has helped boost the U.S. economy so far in 2023, the ABA economists noted. Low unemployment and strong wage gains mean households have been able to keep up with many of their spending habits, even as inflation has persisted.
Inflation is also expected to improve in the coming quarters. Big-bank economists anticipate inflation levels to continue to cool to an annualized rate of 2.2% by the second quarter of 2024, close to the central bank's target rate of 2%.
Although the overall economic picture is brighter, economists warn that there are several lingering threats that could make it more difficult for the U.S. economy and banks alike to grow.
The economists expect businesses to invest less capital in the short term, which could weigh on loan growth at banks. Loan growth at U.S. commercial banks increased 4.5% in the second quarter from a year earlier, according to Federal Deposit Insurance Corp. data.
About 4.4% of the labor force will be unemployed by the end of 2024, according to the economists' forecast. A higher unemployment rate could make it more difficult for laid-off workers to make loan payments, potentially boosting the level of charge-offs at banks.
Credit quality reached historic lows during the pandemic, when many creditors offered grace periods and other breaks to struggling borrowers until the economy got back on track. Analysts expect asset quality to continue to deteriorate, with loan-loss increases spreading beyond the credit card and commercial real estate arenas.
"Investors are eager to learn how much higher net charge-offs are expected to go, especially with the student loan moratorium coming to an end," Jason Goldberg, managing director and senior equity analyst at Barclays, wrote in a recent research note.
Certain elements of the ABA's advisory committee's forecast provide a strong contrast to the details issued when the last forecast was issued earlier this year, when economists believed the U.S. was on the edge of a mild recession.
"The tone of the conversation certainly feels much more positive today," Mocuta said.
The ABA committee includes economists from some of the country's largest banks. The group meets twice a year to discuss the economic environment and issue forecasts on economic growth, inflation and the trajectory of interest rate moves.
This year's committee features representatives from U.S. Bank, Wells Fargo, JPMorgan Chase, State Street, Comerica Bank, BMO, TD Bank, PNC Financial Services, Deutsche Bank, First Horizon, Regions Financial, Northern Trust, Wilmington Trust and Morgan Stanley.
