Fed: Economy To "Bottom Out," Grow In 2009
The economy is still rocky, but Federal Reserve Chairman Ben Bernanke said today that as long as the banking system can be kept stable, he expects this recession will soon end, and that the U.S. economy will start growing again later this year.
But there will be a troubling lag between the start of recovery and the end to layoffs, reports CBS News Capitol Hill correspondent Bob Fuss.
In testimony to Congress' Joint Economic Committee, Bernanke warned that even after a recovery gets under way, economic activity is likely to be sub-par. That means businesses will stay cautious about hiring, driving up the nation's unemployment rate.
Bernanke said we are likely to see "further sizeable job losses and increased unemployment" in coming months.
The recession, which started in December 2007, already has snatched a net total of 5.1 million jobs.
Even with all the cautionary notes, the Fed chief offered a far less dour assessment of the economy.
"We continue to expect economic activity to bottom out, then to turn up later this year," he told lawmakers, based on forecasts of a stabilizing housing market and a slowing in manufacturers' inventory liquidation.
"An important caveat is that our forecast assumes continuing gradual repair of the financial system," Bernanke said. "A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall."
"The pace of contraction may be slowing," said Bernanke (left). It was similar to an observation the Fed made last week in deciding not to take any additional steps to shore up the economy.
The housing market, which has been in a slump for three years, has shown some signs of bottoming, he said. Consumer spending, which collapsed in the second half of last year, came back to life in the first quarter.
Bernanke also said the commercial real estate market is dormant, with high vacancy rates, but that the commercial market had not been hit as hard as the residential housing market.
In the months ahead, consumer spending should be lifted by tax cuts contained in President Barack Obama's larger $787 billion stimulus package. Still, rising unemployment, sinking home values and cracked nest eggs will still weigh on consumers willingness to spend freely, Bernanke said.
In the latest sign the downturn could be easing, activity in the services sector contracted at a slower pace in April, the Institute for Supply Management reported Tuesday. Its service sector index came in at 43.7 in April, up from 40.8 in March. Any reading below 50 indicates the service sector, where most Americans work, is contracting.
Meanwhile, business investment remains "extremely weak," and conditions in the commercial real estate market are "poor," the Fed chief said.
Still, Bernanke said he was hopeful that production would pick up later this year to replenish stockpiles of goods that have been slashed. And there's been tentative signs that the declines in other countries' economic activity may be moderating, which could help sales of U.S. exports. They have been falling sharply, a key factor behind the drag on U.S. manufacturing, he said.
Private analysts are predicting the economy won't shrink nearly as much as it had been - anywhere from a pace of 1 to 3 percent - in the current quarter. As President Obama's economic stimulus package of tax cuts and increased government spending takes hold, analysts think the economy could start growing again in the third or forth quarter of this year.
The economy's rate of decline topped 6 percent in both the final three months of 2008 and in the first quarter of this year. It marked the worst six-month performance since the late 1950s.
Economists predict the jobless rate will jump to 8.9 percent in April from 8.5 percent in March as employers slash hundreds of thousands more jobs. The government releases that report on Friday. Unemployment is expected to hit 10 percent by the end of this year.
On the financial front, Bernanke said there have been signs of improvements in easing some credit stresses. However, financial markets remain under considerable strain.
Bernanke didn't provide details about how 19 large banks fared on "stress tests." Results, to be released Thursday, should shed light on which banks may need government support if the recession were to worsen.
He did say that after the results are released, banks will be required to develop "comprehensive capital plans for establishing the required buffers" to protect against future losses. They will have six months to execute those plans or get help from the government.
Bernanke said there are "significant opportunities for capital raising outside government programs," and that many banks should be able to do so by selling assets or taking other steps.
Bloomberg has reported that the Fed plans to release the results of the government's stress tests to bank executives Tuesday, and they may show about 10 of the 19 largest banks in the country need additional capital to withstand a hypothetically worsening recession.
The International Monetary Fund estimated that $275 billion more in capital would be needed to cushion against further losses at U.S. banks. While refusing to provide any numbers, Bernanke said he thought the IMF's figure overestimated any additional capital needs.
Responding to lawmakers' concerns about secrecy in its lending and bailout programs, Bernanke said the Fed will start providing information on the number of borrowers under each plan, details of credit extended and information on the collateral put up for the loans.
But Bernanke didn't say the Fed would release the identity of borrowers, something lawmakers have pushed for.
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