Published: Thursday June 10, 2010 MYT 7:56:00 AM
WASHINGTON: The European debt crisis is likely to have only a "modest" impact on the U.S. economic recovery as long as Wall Street stabilizes, Federal Reserve Chairman Ben Bernanke told Congress on Wednesday.
Testifying before the House Budget Committee, Bernanke struck a more confident tone that the recovery will remain intact despite problems in Europe as well stubbornly high unemployment and a fragile housing market here at home.
"The economy ... appears to be on track to continue to expand through this year and next," Bernanke said.
However, the pace of the expansion - 3.5 percent this year by the Fed's estimate - won't be strong enough to quickly bring relief to the 15 million Americans who are unemployed.
The unemployment rate now at 9.7 percent would likely see only a "slow reduction," Bernanke warned.
Fears have grown in recent weeks that the recovery could be derailed.
One worry is if Europe's debt crisis turns into a broader financial contagion, crimping lending in the United States and around the globe.
The situation has spooked investors, sending Wall Street into periodic nosedives.
Another worry is that hiring in the United States by private companies could stall.
That fear was stoked by a government report last Friday, showing that job creation at private companies in May slowed sharply, with businesses adding only 41,000 new jobs, the fewest since the start of the year.
However, Bernanke said signals suggest that the economy will keep on plodding ahead as massive government stimulus fades.
Consumers and businesses have picked up the baton from the government and are spending sufficiently to keep the recovery on track, he said.
Still, spending by consumers is much more subdued than in the early stages of past economic recoveries.
That's why economic growth is expected to be only modest this year, rather than blistering.
"It appears ... that the recovery has made an important transition," Bernanke told lawmakers.
While it can't be entirely ruled out that the country could slide back into a "double dip" recession, Bernanke predicted that the "economy will continue to recover at a moderate pace."
Channeling the anxiety many ordinary people feel about the recovery, the panel's chairman, Rep. John Spratt, D-S.C., said: "Too many Americans continue to feel the effects of this recession and wonder when ... relief is going to come."
Discussing the European crisis, Bernanke also struck a confident tone that the United States would get through the fallout without much damage.
"If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest," Bernanke said.
Stock portfolios are taking a hit from a rattled Wall Street and weaker economic prospects in Europe probably will sap demand for U.S. exports.
Although such negative forces "will leave some imprint on the U.S. economy," Bernanke said there are other more positive forces that will help out the United States.
They include low mortgage rates as investors flock to the safety of U.S. Treasurys, and lower prices for oil and other globally traded commodities, Bernanke said.
The Fed has pledged to hold rates at record lows to nurture the recovery.
Many economists believe the Fed will hold rates near zero when it meets next on June 22-23.
And, economists viewed Bernanke's remarks on Wednesday as bolstering their beliefs that the Fed won't start to boost rates until next year - or possibly 2012- given the European crisis and high unemployment.
"We will take the actions necessary to ensure stability and continued economic recovery," Bernanke said.
Bernanke said European leaders are showing a firm resolve to fight the crisis and restore confidence in financial markets.
The Fed will remain "highly attentive" to developments abroad and their potential impact on the U.S. economy, Bernanke said.
On another topic, Bernanke said the Fed and other regulators intend in the next few weeks to tell banks to take steps to make sure their pay practices aren't spurring excessive risk-taking by executives and other employees.
A Fed review found that many banks have not modified their compensation practices in the wake of the 2008 financial crisis, Bernanke said.
One of the problems that contributed to the crisis was compensation practices that emboldened reckless behavior.
The Fed chief also urged Congress and the White House to come up with a plan to whittle down record federal budget deficits.
Failing to do so could hurt the economy in the long run, Bernanke said. That's because it can lead to higher interest rates for Americans to buy homes, cars and other things, and make it more expensive for Uncle Sam to service its debt payments.
At some point, "things will come apart," he warned.
"We should be planning now" for a deficit-reduction blueprint, Bernanke said, adding that Europe's debt problem is a sobering reminder of the need for countries to get their fiscal houses in order.
But he added that radical reductions in spending or big hikes in taxes right now wouldn't be prudent because the U.S. recovery is fragile.
And, "more assistance" may be needed, he said. Bernanke didn't provide details, although Congress is moving closer to extending unemployment benefits.
The nation's red ink hit a record $1.4 trillion last year.
The recession took a big bite out of tax revenues, while spending rose to stimulate the economy and provide relief to struggling Americans.
Meanwhile a Fed survey found a modest recovery is spreading
For the first time since the beginning of the recession, economic growth - modest and fragile, but growth nonetheless - has spread to every corner of the U.S.
A survey released Wednesday found economic activity was improving across all 12 regions of the nation tracked by the Federal Reserve.
It was the first clean sweep in the report since 2007.
Metal producers in Chicago and St. Louis cranked out more steel. Makers of drugs and medical equipment in the Northeast did better business.
And sales of summer clothes were strong in fashion-conscious New York.
Still, the pace of growth in most parts of the country was described as modest.
That's a sign that companies probably won't starting hiring again anytime soon in great enough numbers to bring down the unemployment rate.
"It's kind of like having more people sign up to run in the Boston Marathon but no one is running very fast," said Brian Bethune, economist at IHS Global Insight.
"You have more people in the race, but they are all running slowly."
Fed chief Ben Bernanke sounded a similar note in testimony Wednesday before Congress, telling lawmakers that the economy will probably plod ahead in the coming months, producing limited growth.
Bernanke said the debt crisis in Europe, which has rattled the U.S. stock market since April, was unlikely to seriously harm the American recovery as long as Wall Street stabilizes.
He also predicted only a slow reduction in the unemployment rate, which stands at 9.7 percent, slightly lower than its quarter-century high.
The Fed's region-by-region survey, traditionally known as the Beige Book, provides a unique snapshot of the nation as viewed from what you might think of as the economic trenches.
The central bank's 12 regional arms have their people fan out to gather information from businesses and talk to local economists and experts on the markets.
The result is a much more intimate look at the overall economy than broad statistics provide.
At the low point of the recession, all 12 regions reported shrinking economic activity.
This time around, the survey found that manufacturing was picking up, retail sales and housing were growing, and tourism was improving. Housing was helped by a tax credit for homebuyers that expired in April.
Commercial real estate, on the other hand, was weak. And while shoppers spent more freely, they stayed focused on the necessities, not big-ticket buys.
The Fed report backed up other recent signs that the job market is slowly improving. More people quit their jobs in the past three months than were laid off - a sharp reversal after 15 straight months in which layoffs exceeded voluntary departures.
Some of the quitters are leaving for new jobs, while others have no firm offers, but their newfound confidence about landing work is a good sign for the economy.
"The hangover is kind of over," said David Adams, vice president of training at Adecco, a national staffing agency.
"It's really starting to move toward a market where the employee can have a lot more confidence making a move."
The last Beige Book report showed economic conditions improving in every part of the U.S. but one, the Fed's St. Louis region.
The new report has the heartland area joining the rest of the country, helped by strong metal production.
In the Fed's Atlanta region, which includes much of the Southeast, businesses reported modest improvements, but they expressed uncertainty about the economic fallout from the oil spill in the Gulf of Mexico and record flooding in Tennessee.
The survey will figure into the deliberations when Bernanke and his colleagues meet later this month.
They are expected to leave interest rates near record lows to keep encouraging the fragile recovery.
Inflation isn't much of a problem for the economy right now. Companies are hesitant to jack up prices when shoppers are so cautious, and employers aren't handing out hefty pay raises, either.
Economists predict it will take at least until the middle of this decade to recoup the more than 8 million jobs wiped out by the recession and bring unemployment down to a more normal 5.5 percent to 6 percent. - AP
http://biz.thestar.com.my/news/story.asp?file=/2010/6/10/business/20100610075607&sec=business
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