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Bank of America’s Levy Sees U.S. Economy Slowing but Still Growing

Hurt by a slowing housing market, the U.S. economy grew at an anemic 1.6 percent inflation-adjusted annual rate in the third quarter, its slowest pace since 2003. But Bank of America Chief Economist Mickey Levy says that while economic growth is moderating, neither a prolonged slump nor a recession is on the horizon.

“The rate of economic growth is going to moderate and fall somewhat below its trend line, but will remain healthy,” Levy told attendees at the SVIA national forum in Washington, D.C., in October. Noting that GDP has grown at an average rate of 3.4 percent annually since 1960, Levy said the key to the economy’s continued health will be the U.S. consumer, who has let the country’s personal consumption rate fall into negative territory only three times in the past 45 years. During that four-and-a-half-decade period, personal consumption grew at an average annual rate of 3.6 percent, slightly outpacing the overall economy. While personal consumption grew slightly less than 3.6 percent over the past year, he predicted it will not fall below about 2.5 percent to 2.75 percent in the year ahead.

In support of this view, Levy noted that personal consumption is driven most directly by trends in inflation-adjusted disposable income, a metric that has been trending higher—to above the 7 percent level—for the past four years. The recent decline in oil prices, and the downward pressure that decline has put on prices for gasoline, natural gas, and home heating oil, will provide a further boost to disposable income, Levy predicted.

Household net worth is a secondary driver of personal consumption and one impacted by trends in the real estate market, which has recently slumped. But Levy said that even if real estate prices fall by 10 to 15 percent nationally, that would put only a minor dent in household net worth.

While some forecasters worry about the nation’s trade imbalance—U.S. imports are growing faster than exports—Levy is nonplussed. He attributes that trend to the fact that since 1990 the U.S. economy has been growing persistently faster than the economies in Europe or Japan, raising U.S. demand for imports. He also noted that about 40 percent of all imports are industrial supplies and capital goods used by business for production and expansion, a good indicator of a strong economy. “Just because there are trade imbalances, don’t think the world is coming to an end,” Levy cautioned. “You have to analyze why those imbalances exist.”

Levy’s benign forecast could be wrong, he warned, if consumer confidence is so jarred by the decline in housing prices that consumers reign in personal spending, or if the Federal Reserve takes too conservative a stance on interest rates—if, that is, it continues to raise rates so much that businesses stop hiring or cut back on overtime. That could raise mortgage default rates and hurt the bond market. “But the Fed is very aware of this risk, so I don’t see it on the radar screen,” Levy said. Also bolstering his confidence, he said, is the fact that the slowing economy and falling oil prices have both caused expectations for inflation—the bogeyman the Fed fears most—to decline. In fact, Levy said, if the economy and inflation are both growing slower next year, it could even lead the Fed to lower interest rates.

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