The economic slowdown should bottom out this quarter, possibly giving some relief to banks bearing the brunt of credit-quality woes, according to Richard J. DeKaser, chief economist at National City Corp. in Cleveland.

But the slowdown, he said, will continue to cast a shadow over loan growth.

"We've basically got five major aspects to the current slowdown," Mr. DeKaser said in a recent interview with American Banker. Last year's Fed tightening of monetary policy, as well as widening credit spreads and the general tightening of lending conditions are two factors. The others, he said, are this winter's bad weather (which helped push consumer spending down and energy costs up), falling stock prices, and sharp inventory corrections.

Two of these factors - the Fed's tightening and the weather-related phenomena - are over, and the inventory correction is probably half over, he said, which leaves bank spreads and the equity market as the economy's main concerns. The outlook, therefore, should improve as the year goes on, he said.

Mr. DeKaser said he questions whether the Fed needs to continue cutting interest rates after the reductions, totaling 150 basis points, since January.

"When I look at the economic indicators, my answer is 'no,' " he said. With the exception of the manufacturing sector, things are looking better than in the last couple of months, and Mr. DeKaser said he expects no more than a quarter-point reduction in the federal funds rate at the next Federal Open Market Committee meeting.

"The Fed is essentially done," he said.

Mr. DeKaser pointed to loan growth as the weak spot in any recovery scenario.

Commercial and industrial lending is likely to slow as companies shy away from production-related investments until they feel confident that the economy has turned around, he said.

The first quarter's double-digit increase in commercial and industrial loan growth, he said, is misleading. It mostly reflects increased use of existing lines of credit to finance inventories. And as inventories shrink, there is likely to be less demand for capital.

But the consumer lending business may get a boost from lower interest rates, he said.

Though demand for nonmortgage consumer loans might weaken as people grow more conservative with credit cards, lower rates have spurred an increase in home sales.

Mr. DeKaser said that consumers are not pessimistic enough now to postpone important personal economic decisions. "There can be a considerable distinction between Wall Street and Main Street," he said.

Nevertheless, he said, banks will continue to lend more cautiously until the economy improves.

"There is no ignoring what is going on in the stock market," he said. But banks can still benefit from the fixed-income market, as well as from some modest deposit growth, he said.


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