ABA Banking Journal - June 2008 - (Page 64)

briefing The Economy SCOTT ANDERSON, PH.D. Senior Economist, Wells Fargo Bank, Minneapolis, and a member of the ABA Economic Advisory Committee A funny thing happened on the way to recession AH, SPRING! RENEWAL AND growth are in the air, or perhaps “Hope Springs Eternal” is a better way to describe recent economic and financial market trends. Whatever the case, the fixed income and stock markets are revealing a bit more confidence and risk taking. According to the American Association of Individual Investors, small investors are showing a lot of confidence in stocks, if not their own future job prospects. The investor confidence index has rebounded smartly since March 14, 2008, the day Bear Stearns collapsed. More signs of healing come from the narrowing spread between highyield corporate bonds and the 10-year Treasury yield (see chart). Even bond issuance has perked up recently. This has prompted analysts, Wall Street CEOs, and Treasury Secretary Paulson himself to proclaim that the worst of the financial crisis may be over. The economy is showing a bit more resilience of late, as well. Initial jobless claims are only flirting with recessionary levels and have trended down a bit. Housing demand no longer appears in freefall. The economy isn’t growing yet, but at least the rate of economic descent doesn’t appear to have accelerated. It is looking more likely that the economic stimulus checks being sent to American households will be enough to push GDP growth well into the plus column in the second half of the year. The 2008 fiscal stimulus bill may go down in history as the besttimed fiscal stimulus package ever! Better lucky than smart I always say. But before we rush off to buy homes and pile back into the riskiest stocks and bonds, the outlook for 2009 is looking less appealing. The slow grinding to a halt of this expansion will likely give way to a prolabor market, a higher unemployment rate, still-high consumer debt levels, and even higher prices for food and gasoline. Declining home values and high household debt levels are going to weigh on growth for a long time, while 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 4/1/08 4/8/08 4/15/08 4/22/08 4/29/08 5/6/08 5/13/08 Source: Federal Reserve Baa Corporate/10-year Treasury rate spread longed period of sub-par growth well into 2009 as the lagged effects of a substantial decline in housing wealth and a lingering credit crunch continue to punish consumers. I’m afraid we are facing another jobless recovery a la the early 1990s. This outcome will be well masked over the next few months as the economic stimulus gets spent. But when the party is over, we will be stuck with even larger federal deficits, a weak the fiscal stimulus package was designed to be temporary. Moreover, everyone knows the stimulus is temporary, so business confidence and spending are unlikely to be swayed by one or two quarters of stronger growth. Businesses and banks are likely to remain cautious and hunker down, conserving capital and profits until the fundamental imbalances of the U.S. consumer unwind, and economic renewal can truly take root and grow. BJ 64 JUNE 2008/ABA BANKING JOURNAL www.ababj.com/subscribe.html http://www.ababj.com/subscribe.html

Table of Contents Feed for the Digital Edition of ABA Banking Journal - June 2008

ABA Banking Journal - June 2008 Contents Editor’s Column Do Fee-based Services Have an Edge? Snapshot: Net Interest Margins Vary Sharply with Size 100th Anniversary: Then & Now Letters ABA Resources ABA Chairman’s Position "What? No Annual Surprise Bonus?" Pass the Aspirin Cover Story: Top Community Banks: How They Did... ...And How They Did It Charter Bank First East Side Savings Bank Mackinac Financial Corp. The Peoples Bank Managing the E-mail Monster In Brief Handling PEPs in the Age of "L'affaire Spitzer" Mailbox Banker’s Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - June 2008

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