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Economic Outlook

2013 Banking Outlook Conference: Navigating the New Banking Landscape, February 28, 2013

Donna Fay: I'm Donna Fay with the Federal Reserve Bank of Atlanta at the Banking Outlook Conference, and today we are talking with Michelle Meyers, senior economist with the Bank of America Merrill Lynch.

Michelle, thank you so much for being with us today.

Michelle Meyers: Thank you.

Fay: Michelle, are the gains that we are seeing in the housing market sufficient to offset the fiscal cliff?

Meyers: That's a very good question, and one that we often get asked by a lot of our clients. I think the way to think about it is the fact that the housing market is starting to recover provides a nice cushion for some of the fiscal cuts that we will be seeing, but by itself it is not sufficient to offset the complete amount of fiscal cuts. So we estimate the federal cuts to be in the order of 2 percentage points of GDP, whereas housing this year, perhaps can add about a half of a percent or slightly more to that than GDP. So it provides an offset, but it's not an entire offset.

Fay: Is the housing recovery sustainable, and if so, why?

Meyers: I do believe that the housing recovery is sustainable, and I think that the recovery that started last year will persist into this year and into subsequent years. There are a few reasons that I think the fundamentals are supportive of housing. One, most importantly, is the fact that inventory is now low. In fact, there is a lack of supply in certain markets around the country. If you look at the broad measures of months' supply or an inventory-to-sales ratio, we are down to precrisis levels or below, and that's creating opportunities for new construction, and it's creating opportunities for rising home prices. Adding on top of that the fact that household formation is starting to pick up, we have record affordability thanks to this low-interest-rate environment from the Federal Reserve, and it creates a nice backdrop for a continued recovery in the housing market.

Fay: Given all that you have said, what will it take to get us to the 6 1/2 percent unemployment?

Meyers: I think there is still a lot of time before we get to 6 1/2 percent because we are at 7.8 percent right now, and the unemployment rate has remained pretty sticky in the past several quarters. So we need to see signs of much stronger job growth. I think in the near term, one of the challenges, of course, comes from the fiscal cuts and what that might mean in terms of federal job cuts. The fact that we are starting to see a bit stronger momentum in housing, I think, will help to boost employment, but again it's a gradual process.

So in my view we won't get down to 6 1/2 percent probably until late 2015, and I think by the time we get down to 6 1/2 percent, we are going to see 3 percent GDP growth, 250,000 or so job growth, and the labor force participation rate picking up again. So that 6 1/2 percent that will help to trigger Fed hikes will come in an environment of a smaller output gap and a much more resilient and strong economy.

Fay: Michelle, thank you so much for your insight, and thank you again for joining us.

Meyers: Thank you.