Bernanke: US Economy should grow again later in 2009

The housing market has shown some signs of bottoming, said the Federal Reserve Chairman.

Ben Bernanke 88 224 (photo credit: )
Ben Bernanke 88 224
(photo credit: )
The US economy should pull out of a recession and start growing again later this year, Federal Reserve Chairman Ben Bernanke said Tuesday. But in testimony to Congress's Joint Economic Committee, he 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 of 5.1 million jobs. The unemployment rate "could remain high for a time, even after economic growth resumes," Bernanke said. But while some economists believe unemployment could hit 10 percent by the end of this year, the Fed doesn't share that view. The unemployment rate will probably climb "somewhere" in the 9% range, Bernanke said. "The loss of jobs is one of the most distressing aspects of this whole episode," he said. Even with all the cautionary notes, Bernanke 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. "We expect that the recovery will only gradually gain momentum." Recent data suggest the recession may be loosening its grip on the country, Bernanke said. "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. 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. Its service sector index came in at 43.7 in April, up from 40.8 in March. Any reading below 50 indicates the service sector, where most Americans work, is contracting. Meanwhile, business investment remains "extremely weak," and conditions in the commercial real-estate market are "poor," the Fed chief 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 US exports. They have been falling sharply, a key factor behind the drag on US manufacturing, he said. Private analysts are predicting the economy won't shrink nearly as much as it had been - anywhere from a pace of 1% to 3% - in the current quarter. As Obama's economic stimulus package of tax cuts and increased government spending takes hold, analysts think the economy could start growing again in the third or forth quarter of this year. The economy's rate of decline topped 6% in both the final three months of 2008 and in the first quarter of this year. It marked the worst six-month performance since the late 1950s.