Federal Reserve Chairman Ben Bernanke said the U.S. economy has “contracted sharply” over the past six months, and he sees “further sizable job losses” and a rising unemployment rate in the coming months.
Speaking before the Joint Economic Committee at Congress on Tuesday, the Fed chairman said the U.S. economy could return to growth later this year, provided that improvements in the financial markets continue.
“In coming months, households' spending power will be boosted by the fiscal stimulus program, and we have seen some improvement in consumer sentiment,” Bernanke noted.
Looking at the real estate market, Bernanke said housing “has also shown some signs of bottoming” after three years of decline.
“Although some of the boost to sales in the market for existing homes is likely coming from foreclosure-related transactions, the increased affordability of homes appears to be contributing more broadly to the steadying in the demand for housing,” he said.
Bernanke noted the average rate for a 30-year fixed-rate mortgages has fallen nearly 1.75 percentage points since August, and falling inventories is setting up for a recovery in housing starts.
The Fed chairman was less optimistic about business investment, however, which dragged GDP down 8.8 percentage points in the first quarter.
“Our recent survey of bank loan officers reported further weakening of demand for commercial and industrial loans,” he noted.
Further, Bernanke called commercial real estate conditions “poor.” He said vacancy rates are rising and prices are falling, resulting in fewer new projects.
“Credit conditions in the commercial real estate sector are still severely strained, with no commercial mortgage-backed securities (CMBS) having been issued in almost a year,” he said. “To try to help restart the CMBS market, the Federal Reserve announced last Friday that recently issued CMBS will in June be eligible collateral for our Term Asset-Backed Securities Loan Facility (TALF).”
Outside the U.S., Bernanke said the decline in economic activity may be moderating, adding that investor sentiment and financial activities “have improved somewhat.”
Looking ahead, the Fed chairman said the economy should bottom out and “turn up later this year,” assuming that gradual repair of the financial system continues.
“Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further,” he said. “We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly.”
Bernanke said the unemployment rate “could remain high for a time,” as businesses remain cautious about the economic outlook. However, inflation is expected to remain low, he said, noting that inflationary expectations have been stable.
In a Q&A just after his opening testimony, Bernanke was asked if there was any good news.
He responded that the Q1 growth numbers were “very negative,” but stated that the composition of growth was more heartening, as half of the decline represented the liquidation of inventories. When companies begin to build up inventories again, growth will resume.