NEW YORK – The year-and-a-half-old economic recovery has momentum heading into 2011, but could be restrained by uncertainty, which continues told hold back spending, ongoing credit market repair and “consumer spending and the interplay between household finances and the housing market,” according to Federal Reserve Bank of Atlanta President and Chief Executive Officer Dennis P. Lockhart.
As for the $600 billion Treasury securities purchase plan, Lockhart said, “I made the decision to support that policy, and I remain comfortable with that decision. I saw these purchases as support for a shaky recovery and insurance against serious downsides.”
While the recovery has been “bumpy,” it managed to hold on despite hitting “an air pocket” in the middle of 2010, after “inventory rebuilding, a pickup in international trade, and the satisfaction of deferred demand on the part of businesses and individuals that had been put on hold during the recession” played out, he added.
Anecdotally, he said, there was an acceleration of growth in the last quarter of 2010, and the employment report suggests a modest pace of economic growth. While this growth was not as strong as that at the end of 2009, Lockhart said, “but in my view the economy seems to have gained durable momentum as we begin 2011.”
However, there are “three powerful constraining forces in our economy,” Lockhart said in remarks prepared for delivery to the Rotary Club of Atlanta, a speech which was not given because of inclement weather. “The three headwinds are (1) the general psychology of uncertainty holding back consumer spending and business investment, (2) consumer spending and the interplay between household finances and the housing market, and (3) the ongoing process of credit market repair.”
Uncertainty entails the economy in general, regulation, and even the health-care legislation, which “was often cited as a bar to hiring,” Lockhart said. “Another big uncertainty was how the country’s fiscal problems will be resolved through the political process. Related to that was uncertainty regarding extension of the Bush tax cuts. Also, starting in the second quarter, the European sovereign debt crisis raised the sense of fiscal and financial uncertainty once again at a global level.”
Public debt concerns in the U.S., including balancing state and municipal budgets, “together with the effect of state and municipal spending cuts, is a downside risk to an improving economy.”
Uncertainty will persist and restraint economic activity in 2011, but will be less of a burden than in 2010. “The past year has brought progress in dispelling uncertainty, but much remains to be done,” Lockhart said.
As for the second headwind, the housing sector’s impact on household finance, Lockhart said, home sales are likely to improve only slightly as the economy expands, although home building nationally may start to grow and be a positive contributor to the economy.
Lockhart said “four major factors” block a housing market turnaround: “stricter mortgage underwriting standards, foreclosures continuing at a high level, elevated inventories of unsold homes, and slow employment and income growth.”
The last headwind, the condition of the banking system and credit markets, is urgent “Because credit functions as fuel for economic activity and investment, the repair of credit markets is key to a solid recovery and longer-term economic growth.”
“Conditions in the banking system today are mixed,” he said. “On the one hand, many banks have raised new capital, repaid government support, and seen the pace of write-offs come down. On the other hand, the FDIC still lists 860 problem institutions, and more bank failures can be expected in 2011.”
But, Lockhart concluded, “today’s headwinds to a significant degree reflect structural adjustments that will, in the longer term, place the U.S. economy on a stronger footing. The preconditions for strong future growth are reduced uncertainty, improved consumer and household finances, and healthy credit markets.”
Also, while the headwinds will be a restraining factor, growth will occur, with gross domestic product (GDP), personal incomes, and jobs improving in 2011.
“Finally,” he said, “I acknowledge the potential that economic performance this year could surprise me on the upside. Businesses, for example, are sitting on lots of cash. Cash accumulation is not something that can continue forever, particularly in the case of public companies. It may not take much weakening of headwinds to unleash some of the economic forces that thus far have been bottled up.”
