Federal Reserve Chairman Ben Bernanke told Congress on Wednesday that he thinks the emerging economic recovery will have staying power, but he does not expect a quick reduction in unemployment. He also called on lawmakers and the White House to devise a plan to deal with record-high budget deficits. Excerpts from his testimony before the Joint Economic Committee:
Supported by stimulative monetary and fiscal policies and the concerted efforts of policymakers to stabilize the financial system, a recovery in economic activity appears to have begun in the second half of last year. An important impetus to the expansion was firms’ success in working down the excess inventories that had built up during the contraction, which left companies more willing to expand production. Indeed, the boost from the slower drawdown in inventories accounted for the majority of the sharp rise in real gross domestic product in the fourth quarter of last year, during which real GDP increased at an annual rate of 5.6 percent. With inventories now much better aligned with final sales, however, and with the support from fiscal policy set to diminish in the coming year, further economic expansion will depend on continued growth in private final demand.
On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters. Consumer spending continued to increase in the first two months of this year and has now risen at an annual rate of about 2.5 percent in real terms since the middle of 2009. … In the business sector, capital spending on equipment and software appears to have increased at a solid pace again in the first quarter. U.S. manufacturing output, which is benefiting from stronger export demand as well as the inventory adjustment I noted earlier, rose at an annual rate of 8 percent during the eight months ending in February. (Also) financial conditions continue to strengthen, thus reducing an important headwind for the economy.
To be sure, significant restraints on the pace of the recovery remain, including weakness in both residential and non-residential construction and the poor fiscal condition of many state and local governments. … Pressures on state and local budgets, though tempered by ongoing federal support, have led to continuing declines in employment and construction spending by state and local governments.
The labor market was particularly hard hit by the recession. Recently, we have seen some encouraging signs that layoffs are slowing and that employment has turned up. … However, if the pace of recovery is moderate, as I expect, a significant amount of time will be required to restore the 8.5 million jobs that were lost during the past two years. I am particularly concerned about the fact that in March, 44 percent of the unemployed had been without a job for six months or more. Long periods without work erode individuals’ skills and hurt future employment prospects. Younger workers may be particularly adversely affected if a weak labor market prevents them from finding a first job or from gaining important work experience.
In addition to the near-term challenge of fostering improved economic performance and stronger labor markets, we as a nation face the difficult but essential task of achieving longer-term sustainability of the nation’s fiscal position. The federal budget deficit is on track this year to be nearly as wide as the $1.4 trillion gap recorded in fiscal year 2009. To an important extent, these extremely large deficits are the result of the effects of the weak economy on revenues and outlays, along with the necessary actions that were taken to counter the recession and restore financial stability. But an important part of the deficit appears to be structural; that is, it is expected to remain even after economic and financial conditions have returned to normal.
Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance. A credible plan for fiscal sustainability could yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence. Timely attention to these issues is important, not only for maintaining credibility but because budgetary changes are less likely to create hardship or dislocations when the individuals affected are given adequate time to plan and adjust. In other words, addressing the country’s fiscal problems will require difficult choices, but postponing them will only make them more difficult.
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