Bernanke Says The Economy Remains Vulnerable

The economy is not as bad as expected, but recovery far from complete.

August 27, 2010, 9:45 AM

Aug. 27, 2010— -- The jobs picture is disappointing but the economic recovery is moving at a "modest pace," Federal Reserve Chairman Ben Bernanke said this morning after the government revised downward its figures for growth of U.S. goods and services in the second quarter.

But the second-quarter revision of gross domestic product to 1.6 percent from 2.4 percent is not quite as bad as economists expected. Bernanke, speaking at the Kansas City Federal Reserve Symposium in Jackson Hole, Wyoming, acknowledged "the task of economic recovery and repair remains far from complete."

The Fed is ready to step up its efforts if the economy deteriorates, he said. It will also be vigilant looking for deflationary signs. Falling prices are generally a bad sign for the economy, leading to lower investment and layoffs by corporations.

The jobs picture, which appears to be improving with a small decline in the unemployment rate, is attributable more to reduced labor force participation than to job creation, he said. Initial claims for unemployment insurance remain high. The recovery of output and employment has slowed in recent months, to a pace weaker than projected earlier this year.

"We have come a long way, but there is still some way to travel," Bernanke said, adding, "Central bankers alone cannot solve the world's economic problems."

Still, Bernanke says the preconditions for a pickup in growth in 2011 appear to remain in place. Banks are in better shape and appear more willing to lend. Consumers are reducing their debt and building savings, returning household wealth-to-income ratios near to longer-term historical norms. He anticipates businesses' investment in equipment and software will continue to grow at a healthy pace.

Stocks picked up with today's GDP report and Bernake's speech.

"There are a couple of encouraging signs," said Paul Ashworth, an analyst at Capital Economics. "The second quarter wasn't as bad as the headline GDP figure looks, but unfortunately, that doesn't mean the third quarter is going to be any better."

Bernanke indicated that he is not out of medicine for what ails the economy. His solutions include conducting additional purchases of longer-term securities and reducing the interest paid of excess reserves.

Despite slower-than-expected growth in consumer spending, continued weakness in residential and nonresidential construction, Bernanke said, it is reasonable to expect some growth in 2011 and beyond. He said broadly financial conditions, including monetary policy, are supportive of growth, and banks are beginning to loosen purse strings.More importantly, American households have come back to reality and are more prudent with their money. As the expansion strengthens, firms will resume hiring, and inflation, which has been tame for some time, has a low risk of either a significant increase or decrease from current levels, said Bernanke.

That said though, he added, "The economy remains vulnerable to unexpected developments."

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