U.S. Economy Improving, but Vulnerable, Says Bernanke

The U.S. economy continues to improve at a moderate pace, but future growth is threatened by an “exceptional increase” in the national deficit, said Federal Reserve Chairman Ben Bernanke today in Congressional testimony urging legislators to make curbing the nation’s debt a “top priority.”

“Over the past two and a half years, the U.S. economy has been gradually recovering from the recent deep recession,” said Bernanke to the Congressional Budget Committee. “The outlook remains uncertain, however, and close monitoring of economic developments will remain necessary.”

Bernanke’s assessment of the national economy runs counter to the popular view. Few Americans feel that the economic downturn is over, and the majority does not expect the economy, job market or housing sector to improve significantly in the next six to 12 months, according to recent monthly surveys by Millionaire Corner. Of the 1,282 participants in our January poll, less than 8 percent said they believed the economic downturn had ended. More than 47 percent said a lower unemployment rate would signal a turnaround, and 30 percent said they would take an improving housing market as a sign of economic recovery.

In his remarks before Congress today, Bernanke repeated his now-familiar refrain, describing the pace of the recovery as “frustratingly slow.” Faster growth hinges on consumer spending, unemployment, the housing market, the business sector and global economic conditions, particularly stability in Europe.  

The “ability and willingness of households to spend” will be key to determining the pace of economic expansion this year, said Bernanke. Consumer sentiment has improved from the depressed levels reported this summer, said Bernanke, but remain at historically low levels in the face of stagnating wealth and income.

Household spending, in turn, hinges on the job market, which does appear to have improved “modestly” over the past year, said Bernanke, noting that private employers have added about 160,000 jobs per month in 2011 and the unemployment rate fell by about 1 percentage point.  Nevertheless, said Bernanke, “We still have a long way to go before the labor market can be said to be operating normally. Particularly troubling is the unusually high level of long-term unemployment.”

More than 40 percent of the unemployed have been jobless for more than six months, noted Bernanke, twice the number of chronic unemployed in the recovering of the previous decade.

The housing sector continues to struggle in the current economic environment, but the business sector has been a “relative bright spot,” said Bernanke, noting that manufacturing production has grown 15 percent since the depths of the recession and that spending on equipment, software and other capital improvements has increased briskly.

The U.S. economy faces risks from slowing global growth, restrained in part by the fiscal crisis in Europe, but faces a more serious challenges posed by the widening U.S. budget gap, said Bernanke, noting that the federal deficit has averaged 9 percent over the last three fiscal years. “Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences,” said Bernanke. The chairman urged congress to strengthen the U.S. economy by making it a “top priority” to stabilize or reduce the federal debt a “top priority.”