Federal Reserve Chairman Ben Bernanke said on Tuesday the worst recession since the 1930s is probably over, although he cautioned that pain — especially for the nearly 15 million unemployed Americans — will persist.
Mr. Bernanke said the economy likely is growing now, but he warned that won’t be sufficient to prevent the unemployment rate, now at a 26-year high of 9.7 per cent, from rising.
“From a technical perspective, the recession is very likely over at this point,” Mr. Bernanke said in responding to questions at the Brookings Institution. “It’s still going to feel like a very weak economy for some time because many people will still find that their job security and their employment status is not what they wish it was.”
The recession, which started in December 2007, has claimed a net total of 6.9 million jobs.
With expectations for a lethargic recovery, the Fed predicts that unemployment will top 10 per cent this year. The post-World War II high was 10.8 per cent at the end of 1982.
Some economists say it will take at least four years for the jobless rate to drop down to a more normal range of 5 per cent.
Even if the economy logs “moderate” growth in 2010, unemployment is likely to stay elevated, Mr. Bernanke suggested.
“Unfortunately, unemployment will be slow to come down. It will come down but it may take some time,” he said. “Obviously, that’s a very serious concern.”
Drugmaker Eli Lilly said on Monday that it will cut 5,500 jobs over the next two years, 14 per cent of its work force, as it restructures the company into five units.
Still, Mr. Bernanke’s declaration that the recession likely ended marked his most optimistic assessment yet of the economy. And his remarks came on the same day that the government report that retail sales jumped 2.7 per cent in August, the most in more than three years.
All that helped to lift stocks on Wall Street. The Dow Jones industrial averaged gained nearly 57 points to 9,683.41, its highest finish since Oct. 6.
Last month, Mr. Bernanke told a Fed conference in Wyoming that economic activity appears to be “levelling out” after declining sharply at the end of last year and into the beginning of this year. He also said that the global economy was just “beginning to emerge” from recession.
Mr. Bernanke’s speech to at Brookings was identical to the one he delivered at the Fed conference.
Analysts predict the U.S. economy is growing in the current quarter, which ends on September 30, at an annual rate of 3 to 4 per cent. It shrank at a 1 per cent pace in the second quarter, much slower than in previous quarters.
Mr. Bernanke said the economy is coping with “ongoing headwinds,” including hard-to-get-credit for consumers and businesses, and households saving more, spending less and trimming their debt. Those forces can weigh down the recovery, he said.
Other analysts worry that falling house prices could hamper the broader rebound, especially if they cause consumers to tighten their belts.
While many on Wall Street have been encouraged by early signs of stabilization in U.S. home prices and hope the housing market may have hit bottom, others aren’t so sure.
Deutsche Bank analyst Karen Weaver on Tuesday predicted that national home prices won’t stop sliding until next summer and likely will fall another 10.5 per cent from this summer’s levels. Bigger declines are expected in cites like New York, Salt Lake City, Fort Lauderdale, Florida, and Baltimore.
Against that backdrop, Michael Williams, dean of Touro College’s Graduate School of Business, disagreed with Bernanke’s assessment that the recession probably ended. Williams maintains that troubles in both the residential and commercial real-estate markets are prolonging the downturn.
Mr. Williams believes the economy is still shrinking and won’t turn around until later next year. “This recession lingers,” he said.
Meanwhile, Mr. Bernanke said he is optimistic that Congress will enact a revamp of the nation’s financial rule book to prevent a future crisis from happening.
“I feel quite confident that a comprehensive reform will be forthcoming,” Mr. Bernanke said.
President Barack Obama on Monday urged Congress to enact legislation this year.
“This has just been too big a calamity and too serious a problem” over the past year, with the near meltdown of the U.S. financial system, for Congress not to take action, Mr. Bernanke added.
He spoke one year after Lehman Brothers filed for bankruptcy, the largest in U.S. history. Its collapse roiled financial markets worldwide, nearly halted the flow of credit and almost brought down the entire U.S. financial system.