April 14, 2010 in Business, Nation/World

Bernanke confident on recovery; warns on deficit

Associated Press
 

Summary box

Recovery gaining traction: Federal Reserve Chairman Ben Bernanke expressed confidence that the economic recovery will be lasting, although it won’t be robust enough to quickly fortify the jobs market.

Risks of relapse receding: Bernanke said the odds of the country tipping back into a recession is less now.

Deficit warning: Bernanke urged Congress and the White House to come up with a plan to trim record-high budget deficits, warning they could hurt the economy in the long run.

WASHINGTON — Federal Reserve Chairman Ben Bernanke told Congress today that he has confidence the unfolding economic recovery will have staying power, although it won’t be strong enough to bring quick relief to high unemployment.

Bernanke, testifying before Congress’ Joint Economic Committee, also once again called on lawmakers and the White House to come up with a plan to whittle down record-high budget deficits.

Even though sizable deficits right now are “unavoidable” given the damage wrought by the recession, the persistence of red ink raises risks to the country’s long-term economic health, he said.

A credible plan to pare the deficit could provide the economy with benefits in the near term, including lower longer-term interest rates and increased consumer and business confidence, Bernanke told lawmakers.

“Addressing the country’s fiscal problems will require difficult choices, but postponing them will only make them more difficult,” he warned.

On the economy, Bernanke seemed slightly more optimistic that the fledgling recovery will keep on going after massive government stimulus fades later this year. Incoming economic barometers suggest that growth in demand by consumers and businesses “will be sufficient to promote a moderate economic recovery in coming quarters,” he said.

Rep. Carolyn Maloney, D-N.Y., head of the committee, welcomed the message, but said the government must remain focused on “fixing the economy, putting people back to work and helping struggling families.”

Consumers are spending again after having cut back sharply during the recession. Going forward, consumer spending should be helped by a gradual pick up in jobs, a slow recovery in household wealth from recent lows and some improvement in the ability to get loans, Bernanke said.

That assessment of consumers — whose spending accounts for 70 percent of national economic activity — also appeared more upbeat. In recent weeks, Bernanke and other Fed officials have cited a litany of headwinds facing consumers, including high unemployment, rising home foreclosures and sluggish wage growth.

Shoppers boosted retailers’ sales by a strong 1.6 percent in March, a better than expected showing, the government reported on Wednesday. That’s a promising sign that consumers will do their part to keep the recovery going.

Another government report showed that inflation remains tame. Consumer prices edged up 0.1 percent last month. Low inflation gives the Fed leeway to hold interest rates at rock-bottom levels to support the recovery. Despite a steep run-up in energy prices, inflation is under control, Bernanke said.

Fielding questions from lawmakers, Bernanke repeated the Fed’s pledge to keep interest rates at record lows for an “extended period” to aid the recovery. Rates have been at super-low levels since December 2008.

At some point when the recovery is firmly entrenched, the Fed will need to start boosting rates to prevent any inflation problems.

The soonest the Federal Reserve will begin raising short-term interest rates is the fourth quarter, according to 34 of the 44 economists polled in a new AP Economy Survey that debuted on Monday.

Businesses, meanwhile, have boosted spending on equipment and software at a solid pace and factories are benefiting from stronger demand for U.S. exports, Bernanke noted. Improved financial conditions are also helping out the economy.

However, problems still remain.

Bernanke said weakness in the housing and commercial real-estate sectors is putting “significant restraints” on the pace of the economic recovery. And, the poor fiscal conditions of many state and local governments have led to continuing cutbacks in workers, another force that will hold back the recovery, he said.

“You got some giant issues,” Sen. Sam Brownback, R-Kan., told Bernanke.

On the jobs front, Bernanke was encouraged by the 162,000 jobs added in March, the most in three years. However, the moderate pace of the economic recovery means that the 8 million-plus jobs lost by the recession won’t quickly return. Bernanke said it will take a “significant amount of time” to restore those positions. He didn’t say how long.

The unemployment rate has been stuck at 9.7 percent for three straight months, close to its highest levels since the early 1980s.

Bernanke said he is especially concerned about that 44 percent of the unemployed in March had been without a job for six months or more. “Long periods without work erode individual’s skills and hurt future employment prospects,” he said. Younger workers may be particularly hurt if the weak labor market prevents them from finding a first job or from gaining important work experience, Bernanke said.

On other topics Bernanke said:

—China should let the value of its currency rise, a move that would support U.S. exports by making them cheaper to foreign buyers.

—The Fed doesn’t see speculative bubbles forming in assets such as stocks, bonds or commodities, at this point but is closely monitoring the situation. Some worry that the Fed’s low rates will create another bubble like the one in housing that burst and threw the economy into a recession.

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