US recovery continues but now looks weaker - Bernanke

21 July 2010 20:31  [Source: ICIS news]

WASHINGTON (ICIS news)--The US economic expansion that began in mid-2009 is continuing, Federal Reserve Board Chairman Ben Bernanke told Congress on Wednesday, but the recovery now looks weaker than had been expected.

Testifying before the Senate Banking Committee, Bernanke noted that while the expansion was supported by various federal government stimulus measures, many of those policies were drawing to a close “and will likely be providing less impetus to the recovery than they have in recent quarters”.

To sustain the recovery, he indicated that fundamental economic drivers, such as consumer spending, would have to take over.

“Rising demand from households and businesses should help sustain growth,” he told the committee in his regular semi-annual economic outlook report.

“In particular, real consumer spending appears to have expanded at about a 2.5% annual rate in the first half of this year, with purchases of durable goods increasing especially rapidly,” he said.

Consumer spending accounts for some 70% of all US commercial activity. Durable goods are manufactured items meant to last three years or more, such as refrigerators, washers and dryers.

However, key elements of the nation’s economy continued to lag and remained worrisome, Bernanke added.

“The housing market remains weak, with the overhang of vacant or foreclosed houses weighing on home prices and construction,” he said.

While consumer spending has revived this year, it is not as strong as most economists would like, he said. “An important drag on household spending is the slow recovery in the labour market and the attendant uncertainty about job prospects,” Bernanke noted.

Although private sector payrolls expanded at an average of about 100,000 jobs per month during the first half of this year, he said that level of job growth was not sufficient to reduce the 9.5% unemployment.

The US economy must generate about 100,000 jobs per month just to accommodate young people entering the workforce.

“Progress in reducing unemployment is now expected to be somewhat slower than were previously projected,” Bernanke said, with the jobless rate likely to be still in the 7% range or slightly higher by the end of 2012.

In addition to lingering unease among consumers and persistent high unemployment rates, Bernanke said continuing tight credit conditions hamper the recovery.

While the state of the US banking system has improved significantly since the worst of the financial crisis, he said, “many banks continue to have a large volume of troubled loans on their books, and bank lending standards remain tight”.

“Small businesses, which depend importantly on bank credit, have been particularly hard hit,” he added.

That could be critical because the nation’s small businesses are the principal engines of job creation.

The continuing tight credit situation, the related inability of small businesses to get funding, and the resulting high unemployment figures and consumer uneasiness all contribute to the central bank’s “somewhat weaker outlook” for the economic recovery, he said.

Bernanke said that under the circumstances, the Fed “continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period”.

In the wake of Bernanke’s testimony, major market indices fell, with the Dow Jones Industrial Average falling by nearly 160 points in mid-afternoon trading on Thursday.

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