Wednesday, July 18, 2012

Bernanke: U.S. Economy Continues Slow Recovery

By MacKenzie C. Babb
Staff Writer
Washington - The U.S. economy is continuing to recover but appears to be doing so at a slower pace than economists expected, according to Federal Reserve Chairman Ben Bernanke.
The chairman delivered the central bank's semiannual monetary policy report to Congress July 17.
"After rising at an annual rate of 2.5 percent in the second of half of 2011, real [gross domestic product] increased at a 2 percent rate in the first quarter of 2012, and available indicators point to a still-smaller gain in the second quarter," Bernanke testified before the Senate Committee on Banking, Housing and Urban Affairs.
He said conditions in the labor market improved during the latter part of 2011 and early in 2012, with the unemployment rate falling by about a percentage point during that period to level out just over 8 percent.
Household spending has continued to increase, but the report indicates a somewhat slower rate of growth in recent months.
"Although declines in energy prices are now providing some support to consumers' purchasing power, households remain concerned about their employment and income prospects, and their overall level of confidence remains relatively low," Bernanke said.
He said the housing market has seen some modest improvements, in part because of historically low mortgage rates that are boosting new and existing home sales. Construction has also increased.
"Still, a number of factors continue to impede progress in the housing market," Bernanke said.
On the demand side, many would-be buyers are deterred by concerns about their finances or the economy in general. On the supply side, the large number of vacant homes boosted by ongoing foreclosures continues to divert demand from new construction.
After posting strong gains over the last nine months, manufacturing production and business spending have slowed to a more moderate growth rate.
"Forward-looking indicators of investment demand, such as surveys of business conditions and capital spending plans, suggest further weakness ahead," Bernanke said.
He said the United States' economic recovery continues to be held back by a number of headwinds, and currently faces two major sources of risk.
The first is the European financial and banking crisis, which Bernanke said remains a "significant risk" to the U.S. economic outlook.
"Europe's financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United States," Bernanke said.
He said that as European authorities work to resolve the crisis, the United States is focused on improving the resilience of its financial system to external shocks.
The second source of risk to the U.S. recovery, according to Bernanke, is the country's domestic fiscal situation.
He called on Congress to support the economy by addressing the nation's challenges "in a way that takes into account both the need for long-run sustainability and the fragility of the recovery." Bernanke said doing so will help reduce uncertainty and boost household and business confidence.
He said the Federal Open Market Committee, the central bank's policymaking arm, met in June to assess market conditions and make decisions intended to keep the economy running smoothly.
Committee members moved to keep the target range for the federal funds rate, or the rate banks are charged for overnight loans, exceptionally low at between 0 and 0.25 percent in order to support economic growth. The committee said it expects economic conditions will likely require continued low levels for the federal funds rate at least through late 2014.
They also voted to continue to increase the Federal Reserve's holdings of longer-term securities.
Both actions are meant to result in lower borrowing costs and easier financial conditions throughout the economy, in turn promoting more rapid economic growth.
Bernanke said that in light of its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook, the committee is prepared to take further action to promote a stronger economic recovery and sustained improvement in labor market conditions in the context of price stability.
(This is a product of the Bureau of International Information Programs, U.S. Department of State.) 

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