The economy should bottom out and begin to rebound later this year, Federal Reserve Board chairman Ben Bernanke told the congressional Joint Economic Committee yesterday.
“We continue to expect economic activity to bottom out, then to turn up later this year,” Bernanke said, according to a prepared text released by the Fed yesterday. “Key elements of this forecast are our assessments that the housing market is beginning to stabilize and that the sharp inventory liquidation that has been in progress will slow over the next few quarters. Final demand should also be supported by fiscal and monetary stimulus. An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall.”
Recent economic data suggest contraction may be slowing, and “some tentative signs that final demand, especially demand by households, may be stabilizing,” the Fed chief said. He pointed to growth in consumer spending, which should be boosted by the fiscal stimulus program, and consumer sentiment. But the weakness in labor markets, housing and equities will continue to restrain spending somewhat, and consumer credit conditions remain tight, he said.
Housing has shown signs of hitting bottom, Bernanke testified, but business investment remains “extremely weak.”
“An important influence on the near-term economic outlook is the extent to which businesses have been able to shed the unwanted inventories that they accumulated as sales turned down sharply last year,” he said.
“Some progress has been made; the Bureau of Economic Analysis estimates that an acceleration in inventory liquidation accounted for almost one half of the reported decline in real GDP in the first quarter. As stocks move into better alignment with sales, a reduction in the pace of inventory liquidation should provide some support to production later this year.”
