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Fed chief says economy should pull out of recession later this year

May 05, 2009

WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke told Congress Tuesday that the economy should pull out of a recession and start growing again later this year.

But in prepared testimony to Congress' Joint Economic Committee, Bernanke warned that even after a recovery gets under way, economic activity is likely to be subpar. That means businesses will stay cautious about hiring, driving up the nation's unemployment rate and causing "further sizable job losses" in the coming months, he said.

The recession, which started in December 2007, already has snatched a net total 5.1 million jobs.

The unemployment rate "could remain high for a time, even after economic growth resumes," Bernanke said.

Even with all the cautionary notes, the Fed chief offered a far less dour assessment of the economy.

"We continue to expect economic activity to bottom out, then to turn up later this year," he told lawmakers.

Recent data suggest the recession may be loosening its firm grip on the country, Bernanke said.

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"The pace of contraction may be slowing," he said. It was similar to an observation the Fed made last week in deciding not to take any additional steps to shore up the economy.

The housing market, which has been in a slump for three years, has shown some signs of bottoming, he said. Consumer spending, which collapsed in the second half of last year, came back to life in the first quarter.

In the months ahead, consumer spending should be lifted by tax cuts contained in President Barack Obama's larger $787 billion stimulus package. Still, rising unemployment, sinking home values and cracked nest eggs will still weigh on consumers willingness to spend freely, Bernanke said.

Business investment also remains "extremely weak," and conditions in the commercial real estate market are "poor," he said.

Still, Bernanke said he was hopeful that production would pick up later this year to replenish stockpiles of goods that have been slashed. And there's been tentative signs that the declines in other countries' economic activity may be 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.

On the financial front, Bernanke said there have been signs of improvements in easing some credit stresses. However, financial markets remain under considerable strain.

Bernanke didn't provide details about how 19 large banks fared on "stress tests." Results, to be released Thursday, should shed light on which banks may need government support if the recession were to worsen.

He did say that after the results are released, banks will be required to develop "comprehensive capital plans for establishing the required buffers." They will have six months to execute those plans or get help from the government.

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