WASHINGTON -- A panel of bank economists yesterday predicted that the economy would shake off its current malaise and grow moderately through the rest of this year and next, with only modest gains in inflation.
"The second half of this year will be better than the first half," said Stuart Hoffman, chairman of the American Bankers Association's Economic Advisory Committee and chief economist of PNC Bank Corp. The 11-member panel, which includes economists from Chase Manhattan Bank and First Interstate Bank Corp, released its semiannual macroeconomic forecasts at a news conference in Washington, D.C.
Hoffman acknowledged that the panel's forecast bucks a string of disappointing economic reports over the last few weeks, the latest of which came out yesterday.
In that report, the Commerce Department said that new orders for manufactured goods fell 1.4% in May to $249.3 billion.
This was the third monthly decline in a row and the fourth in five months.
Also, factory inventories gained 0.3% in May to $381.4 billion, which is the fourth straight advance, the department said.
In addition, the department said unfilled manufacturers' orders fell 0.9% in May to $468.6 billion, the lowest level since November 1988.
Specifically, the panel forecast that the economy will grow by 2.4% in real terms this year and by 2.9% next year. After only 0.7% growth in the-first quarter, the panel predicted 2.6% growth in the second quarter and roughly 3% growth through the remainder of the year.
Looking beyond recent reports, the panel considered fundamentals that it thought would pave the way for a stronger economy in the coming quarters, Hoffman said. These include strong capital spending by businesses; ample liquidity of the money supply; and pent-up consumer demand for large-ticket items, such as cars and houses, he said.
The panel cited three factors that it believes will limit growth in the coming quarters, including higher taxes. uncertainty associated with health-care reform. and weak growth abroad that will hold back U.S. exports.
"Three serious vulnerabilities are standing in the way of more robust economic growth," Hoffman said.
He noted that a federal budget designed to reduce the federal deficit by raising taxes and cutting spending will restrain growth next year by perhaps a quarter to a half of a percentage point, but not by enough to pull the economy into recession.
The panel also forecast that inflation will rise gradually in the coming quarters as the business cycle rolls on. The panel expects the consumer price index to rise 3.3% this year and 3.5% next year, compared with a 2.9% advance in 1992.
However, Hoffman said there was significant disagreement on the panel regarding inflation. A couple of panelists believe inflation will start on a downward trend again, and that the CPI will gain less this year than it did last year.
Hoffman also said the panel predicted that nothing will prompt the Federal Reserve to tighten monetary policy in the next month or two. "There are no dark clouds of inflation looming on the horizon," he said.
However, the panel predicted that loan demand and interest rates will begin increasing toward the end of the year, and the Fed may raise short-term rates in the fourth quarter, Hoffman said. Rates are likely to rise more notably on the short end of the yield curve, he said.
The Federal Open Market Committee, the Fed's policymaking arm, will meet next on July 6 and 7. Fed watchers widely believe that the committee shifted its bias toward a possible tightening at its previous meeting in May. The minutes of the May meeting will be released on July 9.
The panel forecast that the yield on three-month Treasury bills will average 3.33% in December, the yield on 10-year Treasury notes will average 6.13%, and the yield on 30-year Treasury bonds will average 6.94%.
The panel also predicted that mortgage rates will change very little between now and the end of the year.