Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday that the economic decline may be slowing and that the housing market has shown signs of reaching a bottom.
However, the Fed chief warned that the labor market remains a possible source of concern, and that stabilization of the economy is still at a fragile stage.
Speaking before the Joint Economic Committee of the U.S. Congress, Bernanke said, The recent data...suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing.
This followed news last week that the economy declined at a pace of 6.1% in the first 3 months of this year - only slightly better than the 6.3% rate of contraction seen in the final months of 2008.
But Bernanke noted that consumer spending rose in the January-to-March period, after a sharp drop in the second half of last year. Also, the Fed chief said that spending power will be boosted by the stimulus package that Congress has put in place.
Bernanke added that the housing market has also shown some signs of bottoming. He said sales of previously-owned homes have been fairly stable since late last year, while sales sales of new homes have firmed a bit in the most recent data.
Though Bernanke noted that home sales remain weak and may have been boosted lately by foreclosure-related transactions, his assessment that there are signs of stability in the sector could provide an important confidence boost for those who say that the housing market needs to turn around before real economic growth can begin again.
Big bets on mortgage-related assets lay at the heart of the financial turmoil of the last year, as a drop in home prices made many investments tied to the housing market nearly impossible to sell - a fact that weighed on the balance sheets of banks and pushed many of the country's biggest financial companies toward collapse.
But Bernanke said that financial markets too have shown signs of improvement, helped by the massive rescue efforts authorities have launched since the crisis became acute last September.
The Fed chairman said that the short-term funding market is one of the markets that have begun to function better recently. This includes the interbank markets, where banks exchange currencies, and the commercial paper market, where large corporations sell very short-term bonds to help them facilitate day-to-day operations.
Bernanke said that companies have been using the Fed's lending programs less as financial markets have improved.
Despite signs of stabilization in the housing sector and in the financial markets, Bernanke noted that the job market remains a source concern.
The most recent information on the labor market--the number of new and continuing claims for unemployment insurance through late April--suggests that we are likely to see further sizable job losses and increased unemployment in coming months, Bernanke said.
This Friday, the government will release the latest report about the employment situation, with another sharp drop in payrolls expected. The report is expected to show job losses of more than 600,000 again, following the 663,000 decline seen in March.
The Fed chief also warned that business investment appears to remain extremely weak and credit conditions for consumers are still tight, other headwinds that could hold an economic recovery in check.
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