NEW YORK – Economic recovery has begun, but growth will be “relatively subdued” from now “through the medium term,” Federal Reserve Bank of Atlanta President and Chief Executive Officer Dennis P. Lockhart said today.
“The potential sluggishness of the recovery partly reflects certain unique characteristics of this recession,” Lockhart said at a conference in Georgia today, according to prepared text of his remarks, which was released by the Fed. “It was led by a crisis in banking and capital markets that was triggered by a sharp and persistent reduction in valuations of residential real estate assets.”
The 3.5% growth in third quarter gross domestic product was spurred by real consumer spending, which, in turn, was fueled by the "cash for clunkers" program, Lockhart acknowledged. “In addition, federal outlays grew rapidly, and the pace of inventory liquidation slowed. Accompanying positive GDP news, inflation measures remained relatively subdued.”
Housing prices appear to have bottomed and sales are rising, both good news for the economy. Some financial markets have stabilized, Lockhart said, “and risk spreads have normalized.”
On the down side, much of the improvement in the economy can be attributed to government-sponsored stimulus. “A second reason to strike a note of caution about the economic picture is that both the data and anecdotal descriptions of ground-level reality are quite mixed,” he said. “Data on foreclosures, unemployment, personal income, and bank failures continue to disappoint. Also, nonresidential construction continues to decline, and state and local government budgets remain severely constrained.”
Lockhart noted that when he speaks to “business contacts about industry conditions and the outlook for their businesses,” the topics remain: “weak top-line sales, continuing inventory liquidation, reticence regarding capital expenditures, and reluctance to hire.”
Turning to the recession, Lockhart said trouble in real estate resonated to the rest of the economy via credit markets. “The housing downturn triggered a crisis on Wall Street that soon became a recession on Main Street, and, as job losses mounted and delinquencies rose, fed back again to financial markets,” he said. “Also, personal consumption retrenched because of the real estate price shock, tighter credit, and fear of job loss hitting close to home.”
He continued, “Despite marked improvements in financial markets from a year ago and improved flow of private capital to banks in recent months, the banking system has not fully recovered—far from it. Bank credit losses are still climbing, and many banks are still capital constrained. It almost goes without saying that recovery of the banking system is crucial to the recovery of the overall economy.”
While the commercial real estate sector “is very worrisome for parts of the banking industry, I don't see it posing a broad risk to the financial system,” Lockhart said. “Nonetheless, CRE could be a factor that suppresses the pace of recovery. As the recovery develops, the CRE problem will be a headwind, but not a show stopper, in my view.”
With the economy growing, Lockhart said, “the overall objective of economic policy should be to bring about a durable recovery and an environment that reduces unemployment as quickly as possible while containing inflationary pressures. The process of achieving this objective will necessarily involve judicious removal of government supports and the normalization of monetary policy. As policymakers consider these decisions, attention to the state and trends in the commercial real estate sector will be essential.”
