Bernanke says recovery is around the corner
Federal Reserve Chairman Ben S. Bernanke didn’t sway the markets much Tuesday with his cautious optimism about an economic recovery later this year, and he downright chilled U.S. workers with his prediction of “further sizable job losses” to come.
In his most positive view of the economy since the financial crisis began, Bernanke told Congress that the deep recession was easing.
But he warned that growth would be slow and unemployment would continue to rise, dashing any hopes that last month’s jobless figures, to be released Friday, would be less than dismal. Economists expect that nationwide unemployment last month shot up close to 9%, which would be the highest in 26 years.
“The most recent information on the labor market . . . suggests that we are likely to see further sizable job losses and increased unemployment in coming months,” Bernanke said. “The loss of jobs and the deterioration of the labor market is one of the most distressing aspects of this whole episode. We’ve already seen about 5 million jobs lost.”
Bernanke said the Fed’s forecast of an end to the recession was tied to “continuing gradual repair of the financial system.” A key to that repair is the health of major U.S. banks, which are undergoing special government stress tests to determine whether they can withstand worse-than-expected economic conditions.
Government officials on Tuesday privately briefed executives from the nation’s 19 largest banks amid reports that about 10 of them need to raise more money. Bernanke would not reveal the results, which the Fed will disclose Thursday, but said many of the banks should be able to raise it publicly instead of turning to government bailout funds.
With uncertainty about the looming stress tests results and April jobless numbers, Bernanke’s comments did little to move the stock market. The Dow ended Tuesday relatively flat, down 16 points, after rocketing up 214 points Monday.
In giving his more optimistic economic forecast, Bernanke cautioned that an end to the recession didn’t mean the pain for U.S. workers was close to over. Unemployment rates would continue to remain high even after the recession has officially ended, he told the Joint Economic Committee.
Bernanke’s comments came as a survey of economists by Bloomberg News found that the median estimate for April unemployment was 8.9%. The unemployment rate in March was 8.5%. But it was significantly higher in many states, including California, where the figure was 11.2%.
The new numbers will be a key data point for Wall Street as well as anxious Americans wracked by their own job losses or fears the ax will fall soon.
“We’re probably going to take another big hit on the unemployment numbers,” said Gary Schlossberg, senior economist for Wells Capital Management in San Francisco, who predicted that April’s unemployment rate would go at least as high as 8.8%.
Economists are concerned about a lengthy lag between the technical end of the recession, which will occur when economic growth turns positive again, and a turnaround in employment. During the last two recessions, job losses continued even after the recession ended. For example, the early-1990s recession ended in March 1991, but the unemployment rate did not peak until June 1992, Schlossberg said.
“It could go to 10%, maybe a little more than that by the summer of next year,” he said. “Hopefully that will be the peak.”
Economist Mark Zandi of Moody’s Economy.com predicted the April unemployment rate would jump to 9% and said Bernanke needed to temper his optimism about the end of the recession with the reality facing many Americans.
“He knows that it’s going to be a very bad report . . . and there probably will be a couple three more difficult reports ahead,” Zandi said.
White House Press Secretary Robert Gibbs said administration officials expected that it would be “quite some time before we see a lessening of the pace in job loss” and that Friday’s report would show that several hundred thousand people were thrown out of work last month. Zandi predicted the figure would be 625,000, but could be as high as 725,000.
“This president understands that even as we’re seeing . . . some good data and some glimmers of hope and progress, he won’t be satisfied until we begin to create jobs and really get this economy moving again,” Gibbs said.
Bernanke’s testimony amplified on his comments in March that the recession would end this year if government rescue actions succeeded. He was more upbeat and detailed, offering fewer qualifications. His forecast built on assessments by top economic officials in the Obama administration that the recession was showing signs of ending.
“We continue to expect economic activity to bottom out, then to turn up later this year,” Bernanke said, noting that the Fed believes the housing market is beginning to stabilize. “We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly.
“In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes,” Bernanke said.
He said unemployment would probably peak early next year at less than 10% and then come down slowly after that.
The nation’s economic activity has decreased sharply in each of the last two quarters. But Bernanke said there was “a bit of good news” in the data from the first three months of this year, noting that about half of the annualized 6.1% decline in gross domestic product came from businesses accelerating the liquidation of their inventories.
“As inventories are worked down, then firms will be able to increase their production to meet what looks to be some stabilization in final demand,” he said.
Although businesses will be slow in hiring workers to rebuild their inventories, that slower growth should continue to keep inflation low, Bernanke said.
“It’s very hard for serious inflation to take off when you have this kind of slack in the economy,” he said.
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