US economy in recovery but still restrained - US Fed

14 April 2010 20:41  [Source: ICIS news]

WASHINGTON (ICIS news)--The US economy is recovering from the worst recession since World War II, but the turnaround should be moderate at best and still faces significant restraints that will keep unemployment high, Fed Chairman Ben Bernanke said on Wednesday.

In presenting his semi-annual economic outlook before the Joint Economic Committee of Congress, Bernanke said the recovery began in the second half of last year and the economy was likely to improve slowly over the next several calendar quarters.

The Fed chairman noted that consumer spending - the principal engine of US commerce - continued to increase in the first two months of this year and rose at an annual rate of about 2.5% since the middle of last year.

“Going forward, consumer spending should be aided by a gradual pickup in jobs and earnings, the recovery in household wealth from recent lows and some improvement in credit availability,” Bernanke said.

He also pointed to increased capital spending by businesses, an 8% gain in US manufacturing output during the eight months ending in February, and improving financial and credit conditions.

However, he added, “significant restraints on the pace of the recovery remain, including weakness in both residential and non-residential construction and the poor fiscal condition of many state and local governments”.

He noted that sales of new and existing homes fell in January and February, “and the pace of new single-family housing starts has changed little since the middle of last year”.

New home construction is a crucial driving force of the US economy overall and a major downstream consuming sector for chemicals and resins.

“Outlays for non-residential construction continue to contract amid rising vacancy rates, falling property prices and difficulties in obtaining financing,” Bernanke said.

As a consequence of the still depressed housing sector and the general moderate pace of the recovery, Bernanke indicated that significant improvement in the nation’s jobless rate was not imminent.

“Recently, we have seen some encouraging signs that layoffs are slowing and that employment has turned up,” he said, adding:  “However, if the pace of recovery is moderate, as I expect, a significant amount of time will be required to restore the 8.5m jobs that were lost during the past two years.”

The US unemployment rate has been at or near 10% since August last year.

He also raised caution about loan availability, saying that while financial markets have improved and the banking sector is stable, lending remained tight.

“Despite their stronger financial positions, banks’ lending to both households and businesses has continued to fall,” he noted. “The decline in large part reflects sluggish loan demand and the fact that many potential borrowers no longer qualify for credit, both results of a weak economy.”

He said the Fed, the US central bank, is working with bankers to ensure that regulatory supervision “does not inadvertently impede sound lending and thus slow the recovery”.

Bernanke said inflation remains subdued and in the long run “inflation expectations appear stable”, suggesting that the Fed will continue to maintain its record-low interest rates, at least for the near term.

As he did in a speech to business leaders last week, Bernanke again warned that policymakers must take prompt and decisive steps to reduce the federal budget deficit and the national debt.

He said that under current policies, the federal debt - now expected to exceed 70% of the nation’s gross domestic production (GDP) by late 2012 - could rise considerably higher and reach 100% or more of GDP by 2020 and seriously undermine the economy.

“Maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance,” Bernanke said.

“Addressing the country’s fiscal problems will require difficult choices,” he said, “but postponing them will only make them more difficult.”

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