Fed chief says US economic recovery is not truly established

07 June 2011 22:54  [Source: ICIS news]

WASHINGTON (ICIS)--Federal Reserve Board chairman Ben Bernanke on Tuesday said that while the US economy is improving at a moderate pace, it is well below potential “and we cannot consider the recovery to be truly established”.

In a speech before the annual International Monetary Conference, Bernanke said that US economic growth so far this year “looks to have been somewhat slower than expected”.

He noted that US gross domestic product (GDP) growth in the first quarter this year fell to 1.8% compared with the stronger 3.1% gain seen in the last three months of 2010.

“Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers,” he said.

In his first public address since last week’s workforce report - which showed US unemployment increased to 9.1% in May - the US central bank leader noted that “the jobs situation remains far from normal”.

“Particularly concerning is the very high level of long-term unemployment - nearly half of the unemployed have been jobless for more than six months,” he said, adding that the “jobs market remains quite weak and progress has been uneven”.

While the US business sector “generally presents a more upbeat picture”, Bernanke said, much of those gains were attributed to strong growth of demand in foreign markets.

In contrast, he said, “virtually all segments of the construction industry remain troubled”, especially in the residential sector where tight credit, “uncertainties about job prospects and the future course of house prices have deterred potential buyers”.

“The depressed state of housing in the US is a big reason that the current recovery is less vigorous than we would like,” Bernanke said.

Looking forward, the Fed chairman said that much depends on consumer confidence and spending.

“As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters,” he said.

While household incomes have increased recently, consumers “are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still high unemployment, all of which have taken a toll on consumer confidence”, he said.

Bernanke said that despite recent increases in food and fuel prices, “there is not much evidence that inflation is becoming broad-based or ingrained in our economy” and that he expects inflationary pressures “will prove transitory”.

Consequently, he said the Fed was likely to maintain its record-low interest rate of 0%-0.25% “for an extended period”.

“Until we see a sustained period of stronger job creation,” he concluded, “we cannot consider the recovery to be truly established.”

The Fed chief's remarks appeared to be more subdued than the upbeat outlook he gave before the Senate Banking Committee in early March, when he said there was evidence that "a self-sustaining recovery in consumer and business spending may be taking hold".

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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