Fed chairman says US economy decelerating, new recession looms

17 July 2012 18:10  [Source: ICIS news]

WASHINGTON (ICIS)--Federal Reserve Board Chairman Ben Bernanke on Tuesday warned Congress that the US economy is decelerating, risks are mounting, and unless federal policies change quickly, the nation will slip into a new recession early next year.

In delivering his regular semi-annual economic report to Congress, Bernanke told the Senate Banking Committee that US commercial activity slowed still further in the first half of this year, and second-quarter GDP growth is likely to be even less than the anaemic 1.9% expansion reported for the first quarter.

Bernanke, head of the US central bank, said that US jobs growth had slowed significantly in the second quarter and is not likely to improve anytime soon.

The US unemployment rate rose slightly in May to 8.2% after trending down in the fourth quarter last year and the first few months of this year. That rate held steady in the June jobless report.

“Given that [GDP] growth is projected to be not much above the rate needed to absorb new entrants to the labour force,” he said, Fed economists “now have the unemployment rate at 7% or higher through the end of 2014.”

Bernanke cited the three-month slowdown in consumer spending, saying that “households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low”.

In addition, he noted that the US manufacturing sector has begun to contract – the first negative growth in production since the end of the 2008-2009 recession – and business spending on equipment also has decelerated since the first quarter, with further weakness in business investment likely ahead.

While the long-depressed housing sector has seen some modest signs of improvement, Bernanke said, the crucial home-building industry still faces headwinds posed by worried would-be buyers, still tight lending terms and the ongoing inflow of foreclosed properties that continues to divert demand from new construction.

Despite recent efforts by European leaders and EU institutions to contain the eurozone sovereign debt epidemic, Bernanke said that “Europe’s financial markets and economy remain under significant stress, with spill-over effects on financial and economic conditions in the rest of the world, including the US”.

“Moreover, the possibility that the situation in Europe will worsen further remains a significant risk to the outlook,” Bernanke added.

Lastly, the Fed chairman warned that unless Congress takes prompt action to avoid them, major income taxes increases and mandated federal spending cuts scheduled for the end of this year will push the US economy over a “fiscal cliff”.

“If the full range of tax increases and spending cuts were allowed to take effect,” he said, “a shallow recession would occur early next year.”

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

By: Joe Kamalick
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