05 May 2009
U.S. Economy Should Improve in Late 2009, Fed Chair Bernanke Says
Washington — While domestic unemployment is likely to increase in the coming months, there are indications that the pace of the U.S. economic crisis may be slowing, Federal Reserve Chairman Ben Bernanke says.
“Consumer spending, which dropped sharply in the second half of last year, grew in the first quarter,” Bernanke said in congressional testimony May 5. “In coming months, households’ spending power will be boosted by the fiscal stimulus program, and we have seen some improvement in consumer sentiment.”
Since the recession began in December 2007, the real gross domestic product (GDP), the total value of U.S. goods and services produced in a year and a basic measure of an economy’s performance, dropped at an annual rate of more than 6 percent in the fourth quarter of 2008 and the first quarter of this year, Bernanke said.
“Among the enormous costs of the downturn is the loss of some 5 million payroll jobs over the past 15 months,” he said in prepared testimony for Congress’ Joint Economic Committee. The most recent information from the labor market indicates the United States can expect sizeable job losses and increased unemployment in coming months.
Bernanke said conditions in the labor market and declines in the value of housing along with tight consumer credit conditions will continue to hold consumers back from spending more until they experience a loosening of conditions that impact them directly. Contrasting to somewhat better news with consumers, Bernanke said the available indicators of business investment remain weak.
There has been a 30 percent drop, at an annual rate, in the purchase of equipment and computer software by businesses in both the fourth quarter of 2008 and the first quarter of this year, he said. And the level of new orders for equipment remains below the level of shipments, which suggests a further near-term softness in business equipment spending, he said.
“Conditions in the commercial real estate sector are poor,” Bernanke said. Adding to that bleak outlook is that credit conditions in commercial real estate are severely strained, with no commercial mortgage-backed securities having been issued in almost a year, he said.
Bernanke said economic activity abroad is also an important consideration in how soon the U.S. economy rebounds. “The steep drop in U.S. exports that began last fall has been a significant drag on domestic production, and any improvement on that front would be helpful,” he said. “A few indicators suggest, again quite tentatively, that the decline in foreign economic activity may also be moderating.”
Bernanke said inflation remains well under control as prices for energy and other essential commodities began falling rapidly in the second half of 2008. “Weakness in demand and reduced cost pressures have continued to keep inflation low so far this year,” he said.
ECONOMIC OUTLOOK
“We continue to expect economic activity to bottom out, then to turn up later this year,” Bernanke testified.
Key to the economic turnaround is that the housing market is beginning to stabilize, and that the sharp inventory liquidation that has been occurring will slow over the next few quarters, he said.
But Bernanke warned that the forecast assumes the gradual repair of the financial system continues. “A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” he said.
Bernanke also said the recovery will gain momentum only gradually and that economic slack will decline slowly. And he said that businesses are likely to be cautious about hiring new workers, which means the unemployment rate could remain high for a time, even after economic growth returns. Normally, employment follows the economy, but does not lead it.
Inflation in this type of economic environment is expected to remain low, he said.
“A sustained recovery in economic activity depends critically on restoring stability to the financial system,” he said. “However, financial markets and financial institutions remain under considerable stress, and cumulative declines in asset prices, tight credit conditions, and high levels of risk aversion continue to weigh on the economy.”
