Bank Of America Joins Economic Slowdown Chorus, Pushes First Rate Hike Estimate Out To 2012
Bank of America, via economist Ethan Harris, has joined the chorus of large banks reducing economic forecasts, and as a result has reduced its GDP projections for 2010 and 2011 to 3.0% and 2.6%, from 3.2% and 3.3% respectively. The inflection in 2011 is notable as now the bank sees a material slow down in the economy where before it saw growth. Also, BofA is now expecting that the Fed will leave the Fed Fund language unchanged unchanged for 18 months, until March 2012. This is not surprising: with QE2.0 around the corner, it means that the Fed will soon be implicitly lowering rates. Of course, should the Fed find some naughty pictures of Barney and Chris, it may soon pass laws that allow negative interest rates for the first time. Of course, nothing at this point would be surprising.
Ethan Harris note summary:
In the face of weak data and tighter financial conditions, we are switching sides in the growth debate: we now expect GDP growth to fall short of consensus expectations both this year and next. Our biggest cuts are to:
- Consumption – assumed to growth about 2% this year and next
- Housing – anemic 5% growth over the next six quarters, with a real recovery delayed until 2012
- Inventories – a slower rebound, adding 0.2 pp to GDP growth over the next six quarters.
Our biggest downward revision is to employment
Perhaps our biggest revision is to job growth. Back in May, when the payroll numbers were steadily accelerating, we bumped up payroll growth. We expected monthly private job gains to hit 275,000 by Q4 (up from the old forecast of 200,000). With both payrolls and jobless claims slipping rather than rising further, we are beginning to regret that decision! We now assume private payrolls accelerate to 190,000 by year-end.
Pushing out the first Fed rate hike to March 2012
A few months ago, the Fed call was interesting, with a fairly even split between economists who expected rate hikes before year end and those looking for hikes in 2011. We were firmly in the latter camp. We have already moved the first hike from March 2011 to August 2011 and now, we are moving it further out into the hinterland—March 2012. Of course, there is a very flat distribution around the Fed call and we think reasonable any time from the middle of next year to the end of 2012 makes sense. In conjunction with our Interest Rate Committee, we are also cutting our 10-year rate call: we expect bond yields to be essentially flat.
Ongoing disinflationary pressure
Our new forecast increases the risk of a recession in the next several years. As we have argued for some time, the US will remain vulnerable to external shocks until there is substantial healing in the labor, housing and banking industries. Our new forecast means an even slower healing process. The unemployment rate falls only 0.1% per quarter and remains well above our 6.3% estimate of the inflation neutral unemployment rate for years to come. This, in turn, means ongoing disinflationary pressure, a slow healing in bank balance sheets and an even longer period of very high home foreclosures.