The stock and bond markets plunged early Friday in reaction to a revision in the government estimate of fourth-quarter economic growth, but economists remained confident that conditions would remain favorable to banks.

Despite the early market plunge sparked by the news about the gross domestic product, economists predicted that the nation is set for a "soft landing" - moderate growth with low inflation - that would enable banks to enjoy a healthy 1995.

The Commerce Department's revised estimate of growth in fourth-quarter gross domestic product came in at 5.1%, far above consensus estimates of 4.6% and prompting renewed fear that the Federal Reserve might raise interest rates again.

Faced with the revised GDP number and a dollar that was hitting yet another post-World War II low against the Japanese yen, investors raced out of the bond and stock markets before regaining some confidence by day's end.

Economists said the data were not that bad. The Fed, if it moves at all, would increase interest rates only once more, they said. That would be good news for banks, which investors view as interest rate sensitive.

"If we have something resembling a soft landing, which we are likely to get at the moment, long-term interest rates will continue to decline, and banks with their securities under water would benefit," said Sung Won Sohn, chief economist at Norwest Corp.

"Banks have everything to gain: Low interest rates means higher portfolio prices," he said. "A soft landing will mean stronger loan demand for businesses, and also the credit-quality problem would not be a significant concern."

The economic expansion is now 60 months old, which is unusually long. Since World War II, recession has always followed recovery, so if the Fed achieves a soft landing, it would be a first, said Gary Ciminero, chief economist at Fleet Financial Group.

Like many of his peers, Mr. Ciminero is betting that economic growth in the first half of 1995 will average 2.5%, which would be less than the pace of recent years.

The GDP revision, he said, was higher than expected because of a narrowing in the fourth quarter's trade gap. But the Mexican currency crisis did not begin until Dec. 15, and January saw the worst U.S. trade deficit in history, he said.

So the economy is clearly slowing, Mr. Ciminero said. The Fed, which chose not to raise rates at last week's Federal Open Market Committee meeting, will achieve a soft landing unless it feels it must raise interest rates again, perhaps to defend the sick dollar, he said.

The dollar resumed its plunge against the Japanese and German currencies after Thursday's decision by the Bundesbank to cut interest rates had given it a one-day boost.

Nonetheless, Mr. Ciminero said, the outlook is very good for banks, given that the recovery is five years old. "You won't see the cyclical damage traditionally meted out to banks at this point in a recovery," he said.

Credit quality, while it will deteriorate, should remain sound during a soft landing, he added.

Bucking his colleagues' optimistic outlook on interest rates is Jeffrey Thredgold, chief economist at Keycorp, who foresees as many as two more rate increases on the horizon.

While the retail side of the economy has slowed, he said, it remains to be seen to what extent the industrial sector will slow, and how soon.

"The crucial factor is what will happen to inflation," said Richard Berner, chief economist at Mellon Bank Corp. If inflation stays low, then financial institutions should do well, he added.

Mr. Berner predicted that loan growth would remain healthy in 1995, though not at the fevered pace of 1994.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.