April 14, 2010

  

Economic data suggest the severe economic contraction that began in 2007 reached its trough in the second half of 2009, and that a modest expansion in economic activity is underway.  Financial markets are now functioning in a more orderly fashion, many large companies are reporting improved operating results, and the pace of deterioration in housing has been arrested.

 

Although US GDP has expanded for two consecutive quarters on inventory rebuilding, increased export sales, and higher industrial production, unemployment remains persistently high and consumer spending and new business investment are tepid.  The recovery is vulnerable to   adverse geopolitical events, new financial market dislocations, withdrawal of monetary policy support, and government policy misadventures.

 

Economic recoveries in the midst of persistent joblessness have historically been more modest than those with sharper rebounds in employment.  Since World War II, jobless recoveries have resulted in average GPD growth of 2.5% in the first year while recoveries with significant job growth have produced GPD expansion of 6% on average.  Accordingly, we expect the US economy to grow 2.5% to 3.0% this year in line with the applicable historical pattern and a broad consensus of economists.

 

The recession has affected metropolitan Atlanta more severely than most of the country.  Unemployment has risen to 10.3% and there is considerable excess capacity in residential and commercial real estate.  We have seen little improvement in local conditions and anticipate a prolonged and slow recovery here.

Most banks, including Atlantic Capital, will report little, if any, loan growth during the first quarter as the economic recovery has yet to filter through to small and midsized commercial enterprises.  As new economic activity takes root, we expect loan demand and borrower performance to slowly improve over the next few months. 

 

Commercial real estate remains a concern.  Property values have fallen, rental income streams are soft, and capital available for refinancing is limited.  Large volumes of commercial mortgage backed securities mature over the next few years and the limited capital flows to securitized markets will make refinancing of the underlying loans difficult.  The likely result is further declines in property values as collateral is liquidated to repay loans.