Fed Chief Cautiously Optimistic about Economy

The U.S. economy is in a moderate recovery and should continue growing through next year, but the unemployment rate is expected to remain higher than usual, and it will take “a significant amount of time” to replace the jobs that have been lost in the recession, Federal Reserve Chairman Ben Bernanke said recently.
By: Kevin G. Hall: RISMEDIA
In testimony before the House Budget Committee, Bernanke offered a mix of optimism and reality check. He pointed to numerous signs of improvement in the economy, but cautioned that improvement in the vital housing sector has been shallow and remains vulnerable.

The Fed’s release of the Beige Book, a survey of economic conditions conducted by its district banks, later confirmed Bernanke’s views. The survey found all 12 Fed districts reporting economic growth, the first time that’s happened since a deep recession began in December 2007.
Private forecasters shared Bernanke’s growing optimism.

Mark Zandi, the chief economist for Moody’s Analytics, recently released a report on economic conditions in the nation’s largest metropolitan areas that was encouraging.

“The economic expansion is broadening out across the country, with nearly two-thirds of the nation’s metro areas now out of recession,” Zandi told McClatchy Newspapers. “The strongest areas are mostly in the South and Midwest, as the economy is benefiting from the strong turn in manufacturing activity, a solid farm economy and more stable housing markets.”

In another positive sign, the Labor Department reported that job openings leapt in April to their highest level in 16 months, signaling that the private sector is ripe for a return to hiring.

“We’re still expecting that the job machine gets cranked up and pushes the unemployment rate a few tenths of a percentage point lower by the end of the year,” said Chris Varvares, the president of Macroeconomic Advisers LLC, the influential St. Louis forecaster. The firm expects 3.7% growth this year and unemployment, now at 9.7%, to dip to the low 8% range next year.

The Fed expects the economy to grow in the range of 3.5% this year, Bernanke said, and faster next year as stimulus spending by the government gives way to business and consumer demand for goods and services.

“This pace of growth, were it to be realized, would probably be associated with only a slow reduction in the unemployment rate over time. In this environment, inflation is likely to remain subdued,” Bernanke said. He later added, “In all likelihood, however, a significant amount of time will be required to restore the nearly 8.5 million jobs that were lost over 2008 and 2009.”

The economy has been growing steadily, and the nation has added jobs in five of the last six months. There also have been less publicized improvements. “Real consumer spending has risen at an annual rate of nearly 3½% so far this year, with particular strength in the highly cyclical category of durable goods,” Bernanke testified. “Consumer spending is likely to increase at a moderate pace going forward, supported by a gradual pickup in employment and income, greater consumer confidence and some improvement in credit conditions.” That’s all likely to increase the demand for goods and services, fueling further economic growth in what economists call a virtuous cycle, he suggested.

“Looking forward, investment in new equipment and software is expected to be supported by healthy corporate balance sheets, relatively low costs of financing of new projects, increased confidence in the durability of the recovery, and the need of many businesses to replace aging equipment and expand capacity as sales prospects brighten,” Bernanke said. “More generally, U.S. manufacturing output, which has benefited from strong export demand, rose at an annual rate of 9% over the first four months of the year.”

For all the positive signs, however, a dark cloud remains over the real estate and construction industries. The temporary boost from a home buyer tax credit is likely to fade now that the April 15 deadline for the program has passed.

The Fed chairman said that “looking through these temporary movements, underlying housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit.”

As if to cement that point, the Mortgage Bankers Association reported that mortgage applications fell last week to their lowest level since 1997. It was a clear sign that the expiration of tax credits reduced incentives for home sales.

Things aren’t much better in commercial real estate, Bernanke suggested, as spending on nonresidential buildings has been curtailed because of high vacancy rates, low property prices and difficulty in obtaining loans.

“Meanwhile, pressures on state and local budgets, though tempered somewhat by ongoing federal support, have led these governments to make further cuts in employment and construction spending,” he said.

Bernanke expressed confidence that the growing debt crisis in Europe won’t slow growth in the United States and pitch the economy back into recession, suggesting that events in Europe will have only a modest impact so long as the U.S. economy continues to grow.

Mounting government and private-sector debt in Europe has led to concerns of default in several European Union countries, and, given the swelling U.S. federal budget deficit, Bernanke warned lawmakers to get U.S. borrowing under control.

Once economic conditions have returned to normal, Congress and the president must address the structural problems in the nation’s health and welfare programs as baby boomers, the 75 million Americans born from 1946 to 1964, enter retirement and strain government programs, Bernanke said.

The Fed chief also took a victory lap of sorts. When House Budget Committee Chairman John Spratt, D-S.C., asked him whether he thought that unpopular government spending and bailout programs helped speed a turnaround, Bernanke said, “Yes, Mr. Chairman, I do.”