Federal Reserve Sees Recession Ending Later This Year, But Recovery Could Be Slow
Federal Reserve Chairman Ben Bernanke gave testimony before Congress today on the economic outlook for the country. He sees the economy growing once again at the end of the year but acknowledges that a recovery could take quite some time.
The U.S. economy has contracted sharply since last autumn, with real gross domestic product (GDP) having dropped at an annual rate of more than 6 percent in the fourth quarter of 2008 and the first quarter of this year. Among the enormous costs of the downturn is the loss of some 5 million payroll jobs over the past 15 months. The most recent information on the labor market–the number of new and continuing claims for unemployment insurance through late April–suggests that we are likely to see further sizable job losses and increased unemployment in coming months.
We could very well see another 2 to 3 million more job losses to in the months ahead which may offset the benefits of this year’s stimulus payments on consumer spending. Last year’s stimulus only had a seasonal effect for a few months but the employment picture wasn’t as bad, the pace of job losses have accelerated since November.
The mortgage securities market may take even longer to recover and the Fed will likely keep up efforts to spur the return private investment which has been pretty much nonexistent since the subprime collapse. While it seems that the housing market has finally bottomed out, with no easy way for banks to rollover their loans, credit may continue to be scarce.
Of course much of the Fed’s outlook hinges on the state of the financial system and much of that will depend on how capable banks are to absorb losses in the next few months and how much of a lifeline the government will continue to extend to it. The results of the stress test has been pushed back but for now it seems that most of the largest banks have adequate capital reserves.
Despite the Fed’s optimism it could take a long time for the economy to create new jobs to replace the ones lost in the last year and half. It may very well take 2 to 3 years for the economy to recover fully, even in the best case scenarios.
