Bernanke sees signs of recovery amid positive cues

Federal Reserve Chairman Ben Bernanke has warned that another shock to the financial system would jeopardise the prospects of a recovery this year that the central bank had forecast.

He said that a relapse in the financial conditions would be a significant drag on economic activity and could trigger forces that would stall any recovery. He was speaking in testimony to the congressional Joint Economic Committee. He went on to add that there were signs that the economic contraction was slowing with the housing market showing signs of a bottoming out after a three-year slump.

His remarks come in the wake of Fed statement pointing to a modest improvement in the outlook since March but an economy that would remain weak for some time.

But he projects the economy would remain subdued with number of jobs losses increasing into next year, credits still remaining tight for some time and inflation remaining subdued for the time being. These factors will still continue to drag consumer and business confidence with deflated household income and slow down in business spending, which will be slow to bounce back, Federal Reserve Chairman Ben Bernanke.

The country will manage to pull out of its current recession and begin to grow, but even after a recovery gets under way, the rate of economic growth activity is likely to be slow, he added.

"We expect the recovery to gradually gain momentum and economic slack will diminish slowly."
Bernanke emphasisied that there were still some worrying aspects and one should not be too upbeat, stressing that there's were still plenty of room where things could go wrong.

He said the recent gross domestic product report, showing a 6.1 per cent contraction in the economy in the first quarter was disappointing but added that the contraction would moderate considerably in the near term and recover later this year with businesses looking to replace their liquidated inventories. (See: US GDP shrinks by 6.1 per cent in FQ ) Unemployment which is currently at 8.5 per cent is likely to climb somewhere in the range of 9 per cent, he added.

However, he added that the US housing market downturn of recent years may now be nearing its bottom.

Consumer spending grew in the first quarter of this year and household spending capacity is expected to improve with the government's recent $787 billion stimulus package, he said (See: US Congress approves $787 billion stimulus plan)

However, in contrast to the better news in the household sector, the available business investment data remain extremely weak," he cautioned.

There has been a steep drop in demand for equipment and software products as well as in the offtake of business loans as per loan-officer surveys indicating demand for business loans is weakening.

"The shredding of jobs is one of the most distressing aspects in this whole episode," he said.
Bernanke said his forecast for the economy was based on the continuing recovery of the financial system.

He added that the Fed would post information on its lending programmes pertaining to number of borrowers, concentration of credit among borrowers, ratings of collateral and certain credit details on contracts with private firms. He said that the central bank would continue to furnish more information through its web site.

Meanwhile, a private survey has reinforced evidence that the recession is slowing. The Institute for Supply Management said that its index of non-manufacturing businesses making up about 90 per cent of the economy rose to 43.7, the highest level it reached since October. A sub- 50 index signifies contraction.

Bernanke said that the government expects the economic activity to bottom out before turning up later in the year.

According to analysts, Bernanke's comments reflect a more positive outlook than during his last appearance a couple of months back in February. Despite the positive economic view, US stock markets slipped, giving shedding Mondays' gain, while prices for government debt rose modestly.

Economists, however expect the job market to depress further after the sharpest contraction in gross domestic product in 50 years. Job losses last month are estimated to be around 610,000 with unemployment rate increasing to 8.9 per cent according to a survey.

Bernanke said the Federal Reserve's stress test which is to assess the capital needs of the 19 largest banks with assets of more than $100 billion would give a true picture of the banks' financial positions, which is expected to be released on Thursday.

The US is undertaking the stress tests to measure how the banks would perform under adverse economic conditions and to make plan for additional capital buffer to protect against losses in the midst of any future problems. The move is to ensure weaker banks which need a bigger buffer, need to be pushed to strengthen themselves and raise the money from private sources or face government intervention. They can ask for government help within the six months making them viable if economic conditions worsen.

Bernanke in reply to the delay in releasing the stress test which was due on 7 May, said, "It's a very complicated process, a very extensive and detailed exercise. We have taken information back to banks, not to negotiate, but to work out communication problems."

Earlier in its April 24 statement, the Fed recorded that regulators were assessing whether the banks could withstand a 3.3 per cent annualised contraction in the economy in 2009.

Bernanke said an expected 'gradual repair' of the financial system underpinned his forecast. He said that in the event of a relapse in financial conditions the economic recovery could stretch beyond expectations in the forecast.

But Bernanke and some members of the committee hold the view that the measures taken by the Federal Deposit Insurance Corp and the Treasury Department have contributed significantly to making an economic recovery possible.

But Republican members of the panel said they were worried about the huge increase in the Fed's balance sheet could create an untenable situation by the end of the year. Fed has expanded its balance sheet by 127 per cent.