It seems that prospects for the U.S. economy are unlikely to improve significantly in the coming weeks. In the wake of weak retail sales, poor foreign trade and disappointing unemployment figures, forecasts for economic growth have been cut by independent economists.
The Senate Banking Committee was also provided with a dim outlook from Federal Reserve Chairman Ben Bernanke during his report to Congress.
Bernanke stated that: ‘The U.S. economy has continued to recover, but economic activity appears to have slowed somewhat during the first half of this year.’
He went on to cite the continuing European debt crisis as one of the principle threats to a U.S. recovery: ‘Europe’s financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United States.’
The Fed has bought 2.3 trillion dollars of mortgage and government related debt, as well as holding overnight borrowing costs near zero with the aim of lowering long-term interest rates. But even with these recovery injections given by the Fed, weak overall growth has meant unemployment remaining persistently high, with a slim likelihood of it falling below 7% in the next year. Bernanke stated that seasonal factors could no longer be used to explain soft hiring and that any improvement to the situation would probably be ‘frustratingly slow’.
He went on to say that the deteriorating state of the labour market will prevent the 8.2 per cent national jobless rate from experiencing any rapid progression. Average job creation has dropped by 151, 000 between the first and second quarters.
Although mention was made to lower oil prices helping to bring inflation under control and positive developments in the housing sector, concerns about economic growth were also voiced. Bernanke pointed out that after a 2.5% GDP gain for the second half of 2011, in the second quarter of 2012 growth had slowed to less than 2% with the second quarter experiencing an even smaller gain.
Bernanke was vague in what steps will now be taken. Despite referring to many stimulus possibilities, such as quantitative easing, he stressed that all options contained an element of risk.
He stated that ‘We are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labor market.’
Bernanke went on to urge Congress to take immediate action to aid the economy. He said that addressing the nation’s fiscal challenges would be the best support they could offer, but went on to say it must be done in such a way that recovery was protected from further harm: ‘In no way am I saying that we shouldn’t be making strong efforts to achieve long-term sustainability. It would be better to make that plan soon but to have the effects come in more gradually to allow the recovery the air it needs in the short-term.’
Bernanke expressed how essential it was to stop the weak economy from drifting into recession. He felt that the next years scheduled spending cuts and tax hikes should be avoided.