>Whither the patchy US recovery?

Last week, US share prices rose on continued expectations of an economic recovery. On

Friday, however, the Goldman Sachs news and fresh doubts about the strength of the economy

sent the stock market lower.

On the policy front, Fed chairman Ben Bernanke testified before the US Congress. He noted

that while the economy was experiencing a gradual rebound, numerous problems remained,

including the real estate market and the credit crunch.

The Fed also released its Beige Book survey of regional economic conditions last week. While

the general tone of the report pointed to a modest recovery, many districts were characterized

by a mixture of strong and weak data. In some districts, even the report’s authors seemed

unable to determine whether the economy was advancing or retreating. In my view, this

suggests that the US recovery is still patchy at best.

* Bernanke far more cautious on economy than market participants

Turning first to Mr. Bernanke’s testimony, the Fed chairman adopted a cautious tone compared

with the market’s strong expectations for recovery. He began by saying that the 5.6% GDP

growth reported in 2009 Q4 (q-q annualized) was a sign that the inventory adjustment that

followed the Lehman crisis had finally ended and that production was once again expanding.

However, the flip side of this view is that the recovery in production may be only a temporary

phenomenon that will end once manufacturers complete their inventory buildup. In other words,

the economy could stall again unless private final demand picks up. The Fed chairman

specifically pointed out this possibility in his testimony.

Mr. Bernanke also argued that the economy has been supported by demand from a very large

fiscal stimulus, but that private demand will become more important as the stimulus winds down

between now and end-2010. In a sense, this was a warning that we should not expect the

existing demand structure—which is reliant on government spending—to persist.

A look at the seven-page manuscript for Mr. Bernanke’s speech shows only the first page and a

half devoted to positive economic news, while most of the remaining 5 1/2 pages deal with

potential risks and appropriate responses. I think Mr. Bernanke is being careful not to take too

optimistic a view of the current situation.

While noting that the jobs situation is finally improving, for example, the Fed chairman

expressed serious concerns about the fact that, as of March, a record 44% of the unemployed

had been without jobs for more than six months.

Historically, people unemployed for more than six months experience a significant deterioration

of vocational skills and face severe difficulties in finding their next job.

* Bernanke has begun to talk about decline in private loan demand

Mr. Bernanke also argued that a key cause of the continued drop in US bank lending to both

individuals and businesses is falling loan demand, which he attributed to the weak economy and

to the fact that many borrowers are in such a poor financial position that they are no longer able

to borrow.

I was hoping to see a more direct acknowledgement that soft loan demand was attributable to

impaired private-sector balance sheets. Nonetheless, the Fed’s latest Senior Loan Officer

Opinion Survey, referred to by the chairman in his testimony, highlights a continued decline in

corporate loan demand. Although the scale of the decline has eased compared to before,

survey respondents still indicated that demand for commercial and industrial loans had

weakened over the past three months

To read the full report: US RECOVERY