Fed Chair Ben Bernanke said in his latest congressional testimony that we could expect a moderate recovery this year and next. What kind of a recovery will it be?

Firstly, we have to recognize how close we came to another Great Depression. In fact, this downturn is being called the Great Recession. He said in his testimony that “Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system, an event that would have had extremely adverse and protracted consequences for the world economy. Even so, the financial shocks that hit the global economy in September and October were the worst since the 1930s, and they helped push the global economy into the deepest recession since World War II.”

So given the severity of this recession, we cannot expect that a strong rebound will occur this year, as we said last week. Why? Because this is a structural recession—the worst kind of recession—where the job losses in many sectors are permanent so that new jobs in new industries must be created to replace them.

That is why Bernanke said, “The recovery is expected to be gradual in 2010, with some acceleration in activity in 2011. Although the unemployment rate is projected to peak at the end of this year, the projected declines in 2010 and 2011 would still leave unemployment well above FOMC participants’ views of the longer-run sustainable rate.”

What are the improvements? The Index of Leading Economic Indicators rose for the third consecutive month and is up 4 percent over the past six months, with 10 of its 12 indicators turning positive.

The housing indicators also continue to improve with new-home sales rising and the NAHB builders’ sentiment survey up another 2 points. Housing will continue to improve as long as the Fed keeps down interest rates. It intends to “for an extended period”, according to Bernanke. Conforming and high balance conforming fixed rates are still below 5 percent, while super jumbo ARM rates are between 5.0-5.50 percent.

One reason that consumer spending has been stable is that consumer confidence has been rising in the face of the mounting job losses. Confidence is hard to pin down, but it looks like the stock market rally is one reason with all the stimulus money injected into the markets.

The key to any recovery will still be how consumers behave. They are still paying down record debt levels, to the lowest level since 1991. Once household debt gets back to historical levels, they will begin to spend again.


“The U.S. economy contracted sharply in the fourth quarter of last year and the first quarter of this year”, said Bernanke. “More recently, the pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization.”


That is, auto, retail and new-home sales, as well as nondefense capital orders have stabilized (i.e., orders by corporations investing again in plants and equipment). Obama’s stimulus spending is having an effect, in other words.

Harlan Green © 2009