NEW YORK – The economy has hit a soft patch, according to New York Federal Reserve Bank President William Dudley, with ‘disappointing” economic growth so far this year, but it should be only “transitory.”
Gas and food price spikes, combined with supply disruptions from the earthquake and tsunami in Japan, and severe weather and flooding in parts of the United States were major contributors to economic softness.
“All three suggest that the soft patch may not persist,” Dudley told the Brooklyn Chamber of Commerce Friday, according to prepared remarks released by the Fed. “However, we continue to monitor the data for signs of more persistent weakness, whether related to the interaction of housing and consumption or some other factor.”
The high prices for gas and food caused a slowdown in real consumption growth and hobbled consumer confidence.
Dudley suggested that second quarter growth “will also be subpar.”
On a positive note, “many fundamentals have improved since last year. In particular: Financial conditions have improved, albeit gradually, which makes it easier for larger, well-established firms to borrow and invest.”
And, despite a poor May showing, the labor market seems “more solid” than a year ago.
“Consequently, I anticipate that economic growth will pick up enough in the second half of 2011 to sustain a moderate economic recovery,” Dudley said.
“Even though I expect a moderate economic recovery to be sustained, the recent disappointing data suggest that downside risks to the outlook have increased,” he said. “Let me list some of them for you: As I mentioned earlier, high oil and commodity prices have further strained many families that already had tight budgets. The renewed decline in home prices could dampen consumer spending and housing activity more than I expect. The recent slowing of consumer spending growth could prompt businesses to limit hiring and investment. Finally, aggressive near-term government spending cuts or tax increases could slow economic growth at least in the short- to medium-term. I would emphasize, however, that a credible plan for long-term fiscal consolidation is sorely required and would have many economic benefits.”
While “these issues bear watching,” Dudley said, “I still believe that they remain risks rather than the most likely outcomes.”
Core inflation remains below what the Fed would like, but Dudley said he expects “headline inflation to decline to a level closer to our longer-run objectives.”
