NEW YORK – Weakness in the banking sector is deterring recovery in the labor markets, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said today.
While stating he is optimistic about the economy, especially about growth and inflation, Kocherlakota said he is concerned about labor market weakness: the 9.7% national unemployment rate and only 41,000 private-sector jobs created in May.
“Unemployment is always slow to recover after recessions. However, its recovery seems likely to be even slower than usual this time, because of weakness in the banking sector,” he told the Metropolitan Economic Development Association, according to prepared text of his remarks, which were released by the Fed. “Bank lending continues to be highly subdued. In part, the low level of bank lending can be attributed to low loan demand. However, it is also attributable to ongoing difficulties in the banking sector. Some banks have asset quality problems. Most face significant uncertainty about the ultimate impact of proposed regulatory changes. These difficulties in the banking sector are likely to persist for the next year or even two.”
With banks not loaning money to small businesses, which he called “an important source of job creation during economic recoveries,” they offer fewer opportunities for employment and “slower job creation for our country.”
Kocherlakota said these factors make it unlikely that the national unemployment rate will slip to 9% before the end of 2010 or below 8% by the end of 2011.
However, he termed the labor market woes “short-term,” and said, “In the longer term, I have great confidence in the resilience of American entrepreneurs and their ability to create jobs.”
European woes will “have only a modest impact on the pace of our recovery,” he said the two ways the difficulties could affect the U.S. -- lower demand for U.S. products, and credit risk to banks holding European debt -- are both small.
