Bankers expect economy to pick up steam

More than 2 million jobs will be created this year, more than twice as many as last year, followed by about 2.5 million next year, the committee said.

Still, the persistently high unemployment is likely to remain in place for some time, dropping from 9.1 percent in May to below 8 percent by the end of 2012, according to the group's analysis. 

While business investment is expected to grow at twice the pace of the overall economy this year and accelerate in 2012, consumers spending will increase modestly, about 2.5 percent this year and into 2012, the group estimated. 

“The high price of food and gas is eating into discretionary spending and the termination of the payroll tax cuts next year won’t help,” Hooper said.

“Moreover, lingering high unemployment and further weakness in home prices will add to consumer caution.”

A separate report on Tuesday showed prices easing through May and retail sales, excluding a drop in car sales, rising 0.3 percent, ahead of expectations and a sign that consumers are remaining resilient through the ebb and flow of the recovery. 

Consumers' patience could pay off if prices continue their slide, giving households more money to spend on discretionary items through the summer. 

Consumer spending has been restrained during the economic downturn and when it appeared Americans were ready to spend again, high gas and food prices cut into their discretionary household budgets. 

In another report, corporate executives expect to ramp up hiring in the second half of the year, which would provide a much-needed boost to the recovery, according to a survey conducted by the Business Roundtable.

The survey, released on Tuesday, found that 87 percent of the group’s CEOs expect higher sales over the next six months, and more than half plan to increase capital spending and U.S. hiring.

Banking economists argue that housing is another problem for the economy and market experts aren't seeing a healthy recovery for at least a couple of years. 

Home prices will likely fall another 3 percentage points before bottoming by mid-2012, the bankers group said. At that point, however, the committee foresees that home building and sales will start to grow and begin to contribute positively to the economy with low interest rates and strengthening credit supporting the growth, according to the committee.  

For consumer credit, and even more so for business credit, the committee predicts a steady reduction in delinquencies and strengthening of credit growth into 2012. Consumer loans should grow by 3.9 percent while business loans expand at a 6.1 percent rate in 2012, the group said. 

“Even with overall inflation somewhat elevated currently, core inflation is expected to be tame – below 2 percent – through 2012. Absent inflationary pressures, the Fed will hold back on raising interest rates until next year,” Hooper said.

The committee forecast is that the Fed will not raise the federal funds target rate from the current 0.25 percent ceiling until the second quarter of next year, with the target rate moving above 1 percent by year-end 2012.

Last week, Federal Reserve Chairman Ben Bernanke said he expects interest rates to remain at or near zero for an extended period, most likely through the end of this year. 

“As economic growth solidifies, the Fed will want to stay ahead of the inflation curve by gradually pushing rates up,” Hooper said. 

Low inflation and Fed restraint will keep interest rates down in general, according to the committee. 

The forecast for three-month Treasury bills will hold near 0.1 percent through this year. 

The 10-year Treasury note and 30-year mortgage rates are expected to rise to 3.6 percent and 5.1 percent (respectively) by year-end.  

As the Fed begins to tighten monetary policy, interest rates will move higher. 

Treasury bills will rise to 1.3 percent, 10-year Treasuries will rise to 4.3 percent, and 30-year mortgages will rise to 5.8 percent by year-end 2012, the group said. 

“With the Fed moving slowly and credit quality steadily improving, bank lending will support economic recovery,” Hooper said.