Bernanke: Recovery Later This Year

Federal Reserve Chairman Ben Bernanke said Tuesday in prepared testimony that the economy is showing some signs of stabilizing and is likely to rebound later this year, and that the rate of inflation should stay low. But he also said that the road to recovery remains scattered with obstacles.

Bernanke said that current labor market data suggests that we will continue to see "further sizable job losses and increased unemployment in the coming months."

Consumer spending grew in the first quarter after dropping sharply in the second half of last year. Bernanke said that "households' spending power will be boosted by the fiscal stimulus program" in the near future, but that spending will be kept in check by the weak labor market, consumers' difficulty in gaining credit, and the loss of wealth and home equity among households over the past two years.

He said that the housing market has finally begun to show signs of bottoming after a three year decline. More affordable prices and historically low mortgage interest rates - about 4.8% for a conforming 30 year fixed - have been bringing out new buyers and helping to stabilize existing homes sales since late last year. New home sales have been up a bit and builders are seeing a decrease in their inventories of unsold new homes.

While residential housing appears to be steadying, businesses are still having troubles and continue to reduce spending and investment while liquidating their inventories. The commercial real estate sector is doing poorly, Bernanke said, as business property vacancy rates are rising while the prices for these properties fall.

Commercial real estate credit conditions also remains tight. The Fed announced last Friday action to help restart the commercial mortgage-backed securities (CMBS) market - in June, recently issued CMBS will be eligible collateral for the Fed's Term Asset-Backed Securities Loan Facility (TALF).

The Fed chief said that economic conditions abroad will continue to weigh on U.S. export production - which has been a key factor in the decline of manufacturing production, dropping steeply since last fall. Bernanke said that indicators imply "quite tentatively" that the decline is moderating overseas as well, and as they have been here at home, investor sentiment and the financial markets abroad are improving "somewhat."

He said, "We continue to expect economic activity to bottom out, then to turn up later this year." But he also cautions that his forecast assumes "continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall."

Bernanke also expects the recovery will only gradually gain momentum. He believes businesses will remain cautious about taking on new expenses - including the hiring of new employees - and so the job market is likely to be difficult and the unemployment rate quite high for some time after.



Source:
Federal Reserve Board