RTTNews - Cleveland Federal Reserve President Sandra Pianalto offered a mixed outlook Thursday, predicting that while the economy is likely to begin a recovery in the second half of 2009, the recovery will likely be slow and unemployment will remain high.
Speaking at the INVESTKentucky Conference in Louisville, Pianalto predicted that the end of the official recession would not translate into a return to normal growth. Rather, it will take time to achieve a full recovery.
Once the recession ends, we may be tempted to hope that the economy will take off at a full gallop, but that is not likely to happen because of some long-standing imbalances within our economy, the Cleveland Fed president said.
In terms of unemployment, Pianalto echoed Fed Chairman Ben Bernanke's testimony before Congress Wednesday, predicting that the labor markets will continue to see job losses long after GDP turns positive.
It could take a long time before the unemployment rate returns to levels we think of as normal, and we might even need to revisit our definition of normal, she warned.
The extremely painful deleveraging of the economy, especially with housing and consumer credit, will likely spark a more savings conscious consumer base, Pianalto said.
Faced with an astounding loss of trillions in household wealth in the wake of the stock market losses and housing crisis, Americans have no choice but to save as they work to recoup their losses, she said.
As people come to grips with the fact that their finances are more uncertain than they had ever thought they would be, they are not likely to resume spending at the pace they once did, she said, adding that consumer spending will likely never again make up the 70 percent of GDP that it did in December 2007.
However, increasing their savings is something that Americans need to do, several top officials have suggested. Earlier this week, Treasury Secretary Timothy Geithner spoke in China of the challenges facing the U.S. and China.
Specifically, he stressed that the saving rates in the U.S. will need to increase, while in China consumers will need to spend more and save less in order to achieve a balanced and sustainable global recovery.
The damage of these imbalances will hold back the pace of our recovery, Pianalto warned.
Households are now saving more, and we cannot look to the rest of the world to finance so much of our spending, she said. Similarly, we cannot expect the current elevated level of federal borrowing to continue indefinitely.
She added, however, that she is convinced that if we can make progress in addressing these imbalances, we will increase our prospects for greater prosperity over the longer term.
Pianalto is not a voting member of the Federal Open Market Committee in 2009.
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