Fed chief Bernanke says US economic recovery slows, outlook murky

27 August 2010 17:40  [Source: ICIS news]

WASHINGTON (ICIS)--Federal Reserve Board Chairman Ben Bernanke on Friday said that the US economic recovery has slowed and the outlook is “inherently uncertain” but that the central bank will intervene if the economy deteriorates further.

Speaking at an annual meeting of US and other nations’ central bank officials, Bernanke said that “the pace of recovery in output and employment has slowed somewhat in recent months, in part because of slower-than-expected growth in consumer spending, as well as continued weakness in residential and non-residential construction.”

Bernanke spoke shortly after the Commerce Department on Friday revised downward US gross domestic production (GDP) for the second quarter, reporting that growth in the nation’s second-quarter output of goods and services had slumped to a 1.6% pace from the initial estimate of 2.4%.

The central bank chief also was making reference to reports earlier this week of sharp new declines in US sales of existing homes and newly built single-family housing.

Speaking at the Jackson Hole, Wyoming, conference site, Bernanke cautioned that the outlook for continued growth “is inherently uncertain, and the economy remains vulnerable to unexpected developments”.

“Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker” than Federal Reserve officials had projected earlier this year, he said.

He said that the Fed has “some additional policy options that we could consider, especially if the economic outlook were to deteriorate further”.

He added that the central bank “will do all that it can to ensure continuation of the economic recovery”.

However, he also indicated that the Fed’s ability to influence the nation’s $14,000bn (€11,000bn) economy is limited.

“For a sustained expansion to take hold, growth in private final demand - notably consumer spending and business fixed investment - must ultimately take the lead,” he said.

Consumer spending accounts for as much as 70% of all US economic activity.

While consumer spending and business investment have improved over the last year, Bernanke said, “the pace of that growth recently appears somewhat less vigorous than we expected”.

“Importantly, the painfully slow recovery in the labour market has restrained growth in labour income, raised uncertainty about job security and prospects and damped confidence,” he said.

“Incoming data on the labour market have remained disappointing,” he added.

“Private sector employment has grown only sluggishly, the small decline in the unemployment rate is attributable more to reduced labour force participation than to job creation, and initial claims for unemployment insurance remain high,” he said.

“Firms are reluctant to add permanent employees, citing slow growth of sales and elevated economic and regulatory uncertainty,” he said.

Despite those sobering data sets and the uncertain outlook, Bernanke said that “I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace”.

“The preconditions for a pickup in growth in 2011 appear to remain in place,” he said, citing improving bank balance sheets, increased consumer savings and some easing of credit conditions.

“Although output growth should be stronger next year,” he said, “unemployment seems likely to decline only slowly” and there is a prospect of high unemployment “for a long period of time”.

“We have come a long way, but there is still some way to travel,” Bernanke concluded.

($1 = €0.79)

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