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FDIC Sees Economic Growth Flattening

Rita and Katrina Contribute to Slowdown

October 7, 2005
A new economic analysis sees continued strong conditions along the East and West Coasts, with lagging performance in the Midwest and slower economic growth nationwide as a result of the devastation caused by Hurricanes Rita and Katrina.

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The nation's strongest labor, credit, and residential real estate conditions remain solidly concentrated in the West, Northwest, areas of the South such as Florida and Virginia, and the Northeast; bank industry performance is also strongest in most of these regions, according to a Federal Deposit Insurance Corporation (FDIC) analysis.

In contrast, the Midwest continues to lag the rest of the nation in terms of economic performance.

According to the FDIC's State Profiles publication, the strongest economies in the West and South are also characterized by sustained, vigorous residential and commercial real estate activity, reflecting the effects of low long-term interest rates and a proliferation of innovative mortgage products, particularly in areas experiencing the most rapid rates of home price appreciation.

However, signs of economic and housing moderation could be emerging, and year-over-year job growth in even the strongest regions leveled off in the second quarter.

"Bank growth and performance posted the strongest results in the areas of the country experiencing the most vibrant economies, such as in the West and areas of the South," said Barbara Ryan, head of regional operations for the FDIC's Division of Insurance and Research. "Institutions in these regions also are reporting the highest concentrations of construction and development real estate lending, reflecting vigorous housing activity," she added.

"Loan losses remain extremely low at banks across the nation, but could increase in future quarters due to rising interest rates and higher energy costs. In terms of the recent hurricanes, patterns following previous natural disasters suggest that past-due loan levels could rise for a period at banks operating in regions directly affected by the hurricane.

“Although the full force of the impact of Hurricanes Katrina and Rita will not be fully known for some time, it is clear that the scope of the devastation is unprecedented for the local economies, and is projected to slow U.S. economic activity in the third and fourth quarters," she noted.

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