US recovery threatened by housing, tight credit - Bernanke

25 February 2010 19:28  [Source: ICIS news]

WASHINGTON (ICIS news)--A sustained US economic recovery is threatened by ongoing weakness in the nation’s housing sector, continued high unemployment and tight credit amid market uncertainty, US Federal Reserve Chairman Ben Bernanke said on Thursday.

In his regular semi-annual testimony before the Senate Banking Committee, Bernanke said that the US economy has begun to pull out of the two-year-old recession, with the nation’s output of goods and services growing at an annual rate of 4% in the second half of last year.

However, he added, “A significant portion of that growth can be attributed to the progress firms made in working down unwanted inventories of unsold goods, which left them more willing to increase production”.

“As the impetus provided by the inventory cycle is temporary, and as the fiscal support for economic growth likely will diminish later this year, a sustained recovery will depend on continued growth in private-sector final demand for goods and services,” Bernanke said.

His reference to “fiscal support for economic growth” is to the federal $787bn (€582bn) stimulus package passed early last year. The effect of that federal pump-priming for the economy is expected to diminish through this year.

Bernanke said that private demand for goods and services - which alone can carry the recovery forward and higher - has been improving at a moderate pace, citing some gains in consumer spending and improving US exports.

But consumer confidence has taken a nose-dive, according to more recent estimates.

He noted that construction of single-family homes has been flat recently despite a stimulus-driven boost late last year, “and commercial construction is declining sharply, reflecting poor fundamentals and continued difficulty in financing”.

The job market remains quite weak, he said, with unemployment rate still near 10% and job openings scarce. 

“Of particular concern, because of its long-term implications for workers’ skills and wages, is the increasing incidence of long-term unemployment,” he said, noting that more than 40% of the unemployed have been without work for six months or more, nearly double what the rate was a year ago.

Although financial markets have stabilized since the crisis at the end of 2008 and into 2009, Bernanke said that mostly larger firms have had any success in issuing corporate bonds or new equity.

“In contrast, bank lending continues to contract, reflecting both tightened lending standards and weak demand for credit amid uncertain economic prospects.”

That suggests that small- and medium-size companies - who generate most job creation in the US economy - are still having difficulty getting financing for expansion or additional hiring, or they are not seeking loans because they don’t see demand growth.

Because of those ongoing uncertainties, Bernanke again declared that the Federal Reserve Board, the US central bank, will continue to keep its key federal funds interest rates “exceptionally low for an extended period”.

He also said that the Fed at some point will need to tighten monetary policy as the recovery gains strength in order to prevent development of inflation.

That risk still appears some time away, he indicated, noting that inflation is expected to remain subdued, with consumer prices rising at 1% or 2% at most through this year, into 2012 and even beyond.

At that level of inflation, he indicated the Fed was unlikely to intervene with interest rate increases.

($1 = €0.74)

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