BofA Predicts Slightly Faster U.S. Economic Growth This Year.

SAN FRANCISCO--(BUSINESS WIRE)--March 28, 1996--In response to easier monetary policy and lower long-term interest rates, economic growth in the United States is expected to pick up slightly to an average annual rate of 1.6 percent over the four quarters of 1996, which is up from a rate of 1.4 percent

Writing in the latest edition of Bank of America's Economic & Business Outlook, Wilson also notes that slowly rising energy prices have helped hold down consumer inflation to a 2.7 percent annual rate during the past 12 months. However, oil prices are now picking up, and inflation will likely edge up to about 3 percent this year.

The BofA Economic & Business Outlook contains these additional observations by Wilson:

-- The yield on 30-year Treasury bonds shot up to 6.7 percent recently from 6.1 percent in mid-February in reaction to relatively healthy February economic statistics. However, the 30- year yield is expected to slide back to 6.1 percent by October as the economy grows sluggishly, inflation remains low, and the budget deficit declines.

-- The Federal Reserve drove down the federal funds rate from 6 percent last July to 5.25 percent currently in response to sluggish economic growth and subdued inflation. But because of the recent healthy economic numbers, the Fed will likely hold the funds rate steady until midyear, before pushing it down another half percentage point by yearend.

According to the report, the big January blizzard in the East has played havoc with recent economic statistics. Nonfarm payroll employment plummeted 188,000 in January, but then soared 705,000 in February. Industrial production fell 0.4 percent in January, only to jump 1.2 percent in February. Total vehicle sales (autos plus light trucks) plunged from a 15.5 million annual rate in December to 13.7 million in January, but then rebounded to 15.5 million in February. And the Conference Board's index of consumer confidence fell from 99.2 in December to 88.4 in January, but then bounced back to 98.0 in February, says Wilson.

Cutting through all this volatility, economic growth is expected to increase to a 1.6 percent annual rate during the four quarters of this year from 1.4 percent in 1995, says Wilson.

In the report, Wilson notes that the inflation news continues to be exceptionally good. During the past 12 months, the consumer price index has increased only 2.7 percent, down slightly from 2.9 percent during the previous 12 months. The inflation performance over the past year, however, was helped by weak energy prices. If energy and food prices are excluded from the CPI, the resulting "underlying" inflation rate was a faster 2.9 percent over the past 12 months, which is unchanged from the previous 12 months.

Since oil prices have begun rising, Wilson expects consumer inflation to edge up to the underlying rate of about 3 percent this year. This will make the fifth straight year that inflation will be 3 percent or less, a record not matched since the early 1960s.

After driving up the federal funds rate from 3 percent in early 1994 to 6 percent in early 1995 to slow a rapidly growing economy, the Federal Reserve reversed course last July and began pushing the funds rate down. The Fed cut its funds rate target three times in quarter-percentage-point increments from 6 percent to 5.25 percent to keep the economy from sliding into a recession, Wilson points out in the report.

In response to the relatively healthy February economic numbers, the Fed will likely postpone further easing until July, says Wilson. Once it becomes clear that economic growth remains sluggish and inflation remains subdued, the Fed will resume easing, cutting the funds rate another half percentage point by the end of the year, Wilson predicts.

The yield on 30-year Treasury bonds fell from 8.1 percent in November 1994 to 6.1 percent last December in response to slower economic growth, anticipation of smaller budget deficits, and lower inflation expectations, says Frank McCormick, vice president and senior economist at Bank of America, who co-authored the current edition of the Economic & Business Outlook. The 30-year yield then fluctuated around 6.1 percent until mid- February, when it suddenly shot up to 6.7 percent in early March. The main reasons for this upsurge were a shift in the political debate away from balancing the budget and toward spurring economic growth, and the relatively healthy February economic statistics, especially the huge increase in payroll employment.

However, McCormick thinks the bond market overreacted to the February employment number. In fact, he expects economic growth to remain fairly sluggish and inflation to remain subdued. Furthermore, the Republican-controlled Congress is making substantial progress in reducing the federal budget deficit this year by restraining discretionary federal spending through a series of "continuing resolutions," says McCormick.

During the first five months of the current fiscal year (October through February), the deficit has been running at only 84 percent of last year's rate. "Although we do not think this rate of improvement can be maintained for the entire fiscal year, we expect the deficit to decline from $164 billion in fiscal 1995 to $142 billion this year," says McCormick. This is much more deficit reduction than was proposed for this year by either the Republicans or the Democrats in their seven-year plans to balance the budget.

The outlook for long-term interest rates depends crucially on the elections in November, states McCormick. "If the Republicans recapture the presidency and retain control of the House and Senate, they will likely enact large parts of their Contract with America. This includes balancing the budget in seven years by slowing the growth of entitlement spending, which should lead to lower interest rates," says McCormick.

"On the other hand, if the Democrats regain control of the House and Senate and retain the presidency, they will likely take this as a mandate to continue existing government programs. They will do little to slow entitlement spending, and will probably increase discretionary spending. The result will be continued large budget deficits and upward pressure on interest rates," McCormick points out.

At the present time, the most likely outcome of the November elections would appear to be neither of these two extremes, but a continuation of divided government, the report states.

CONTACT: Bank of America

Shirley Norton, (415) 622-4041

Juliet Don, (415) 622-1588