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Bernanke more optimistic, sees growth in 2009

JEANNINE AVERSA   05/ 5/09 07:03 PM ET   AP

Congress Bernanke

WASHINGTON — Federal Reserve Chairman Ben Bernanke gave his most optimistic prediction yet Tuesday about the end of the recession, saying he expects the economy to start growing again this year _ although the comeback could be weak and more jobs will disappear even after a recovery takes hold.

The Fed chief told Congress' Joint Economic Committee that he saw hopeful signs, including firmer home sales, a revival in consumer spending and some improvement in lending conditions for banks, businesses and individual borrowers.

"We continue to expect economic activity to bottom out, then to turn up later this year," Bernanke said.

Previously, Bernanke has suggested the recession could end this year if the government managed to stabilize the financial markets. This time, he said not only that he expects an end to the recession this year end but also a return to growth.

For that to happen, he said, the banking system must continue to stabilize.

"A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall," Bernanke said.

Barring such a setback, Bernanke suggested the worst of the recession _ for lost economic activity _ has passed. Economists say the recession started in December 2007, then hit with force in the fall of last year when the financial crisis intensified.

He suggested that even in a recovery, economic activity would probably still be below normal, which some economists say is around a 2.5 percent growth, and "only gradually gain momentum."

More than 5 million jobs have vanished in the recession, and the Fed chief predicted "further sizable job losses" in the coming months. The unemployment rate stood at 8.5 percent in March, a quarter-century high.

By year's end, some economists believe the jobless rate could hit 10 percent, but the Fed stops short of that figure. Bernanke said the unemployment rate would probably climb somewhere in the 9 percent range.

Among signs cited by Bernanke that the recession may be loosening its grip: The housing market has shown some signs of bottoming, and consumer spending, which collapsed in the second half of last year, came back to life in the first quarter.

While tax cuts from the economic stimulus plan and a sense that the economy is no longer in free fall may help people feel freer to spend, rising unemployment and shattered nest eggs may give them second thoughts.

"Bernanke is sending the message that things are looking better," said Brian Bethune, economist at IHS Global Insight. "At the same time that he's saying, `We're coming out of this,' he also is cautioning, `Let's not make the mistake of being too optimistic that we lose momentum on efforts to stabilize the financial system.'"

Bernanke took heat before Congress for the Fed's decision not to hasten the implementation of new rules to protect Americans from abusive credit card practices, as some lawmakers had requested. The Fed's rules take effect in July 2010.

Rep. Elijah Cummings, D-Md., said many Americans burned by the recession have watched banks and other companies get bailed out and feel like: "Hey, we're on fire, too. What about us?"

In the latest sign the downturn could be easing, activity in the services sector contracted at a slower pace in April, the Institute for Supply Management reported Tuesday.

Meanwhile, business investment remains "extremely weak," and conditions in the commercial real estate market are "poor," the Fed chief said.

There have been tentative signs that the declines in other world economies are moderating, which could help sales of U.S. exports. They have been falling sharply, a key factor behind the drag on U.S. manufacturing, he said.

In the U.S., the economy shrank at faster than a 6 percent annual rate late last year and early this year, the worst six-month performance since the late 1950s. Analysts think it is still shrinking and could start growing in the third or fourth quarter.

Bernanke provided no details about how the 19 large banks forced to undergo government "stress tests" have fared. The results, due out Thursday, will detail which banks could need more government help if the recession gets even worse.

Once the results are released, banks will have to develop plans for how to raise enough capital to meet higher government requirements for bank reserves, perhaps by selling assets. They will have six months to carry them out.

Responding to concerns about secrecy in the government's lending and bailout programs, Bernanke said the Fed will start providing information on the number of borrowers under each plan and details on loans and collateral. But he did not say the Fed would disclose who is borrowing, as lawmakers have suggested.

Striking a lighthearted note, Bernanke said that after the economic crisis has ended, "I look forward to a long period of boredom."

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Filed by Julie Satow  |