Academic journal article ABA Banking Journal

Sustainable Growth Ahead

Academic journal article ABA Banking Journal

Sustainable Growth Ahead

Article excerpt

OVER THE PAST FEW MONTHS, two camps have emerged with regard to the outlook for the economy during 2005. To some extent, this partition can be explained by the recent run up in energy costs. Optimists believe the "soft patch" is clearly behind us and the economy is now accelerating.

They point to solid GDP growth, an improving labor market, and strong consumer demand as indicators that the slowdown during the spring was merely a speed bump in an otherwise growing economy. Moreover, this camp expects the economy can withstand the adverse effects of rising energy costs and interest rates and believes future growth will be above trend as we move through 2005.

The other camp, in which we reside, is less optimistic, although it fully anticipates solid, albeit moderate growth, in the coming year. The reasons for the trepidation stem from concerns surrounding rising interest rates coupled with the delayed impact of skyrocketing energy costs, and the effect both will have on consumption and investment. With regard to interest rates, the Federal Open Market Committee began hiking interest rates in mid-2004 and it is believed that future increases are in the cards. But over the first half of 2004, the economy grew at a real rate of 3.9% when the fed funds rate stood at a mere 1%. Similarly, the third quarter realized a growth rate of 3.7%. So, if the economy could barely achieve above trend growth when the Fed was being extremely accommodative, we believe the best that can be hoped for is trend growth of approximately 3.5%.

Rising rates will curb growth in coming quarters for several reasons. First, an increase in rates will most likely cool the red-hot housing market. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.