Overall economic activity is expected to bottom out and then turn up later this year, according to Federal Reserve Board chairman Ben Bernanke.

“Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast,” Bernanke told the House Budget Committee yesterday, according to prepared text of the remarks released by the Fed.

“Final demand should also be supported by fiscal and monetary stimulus, and U.S. exports may benefit if recent signs of stabilization in foreign economic activity prove accurate. An important caveat is that our forecast also assumes continuing gradual repair of the financial system and an associated improvement in credit conditions; a relapse in the financial sector would be a significant drag on economic activity and could cause the incipient recovery to stall.”

The forecast is based on recent economic data, which, he said, suggest a slowing in the pace of economic contraction.

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