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>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
