The sense of freefall for the U.S. economy is likely to end in the middle of the year, though the road to recovery could take some time, Lawrence Summers, U.S. President Barack Obama's top White House economic policy aide, said on Thursday.
I think the sense of a ball falling off the table -- which is what the economy has felt like since the middle of last fall -- I think we can be reasonably confident that that's going to end within the next few months and you will no longer have that sense of freefall, said Summers, director of the White House National Economic Council.
The recovery is likely to be slowed by substantial downdrafts in the economy.
Economies don't go from losing 600,000 jobs a month to a terribly happy path overnight, Summers said in remarks to the Economic Club of Washington, noting that there are still substantial strains in credit markets.
The economy lost 663,000 jobs in March, leaving the economy down 5.1 million jobs since the start of the downturn in December 2007.
The decorated economist said it remained unclear how long it would take for the economy to return to strong, sustained growth, though he did cite anecdotal signs of improvements in credit markets that would allow inventory cycles to return to normal.
The U.S. unemployment rate, at a quarter century high of 8.5 percent, is likely to edge higher because unemployment typically lags an economic rebound and needs the economy to grow at a rate of 2.5 percent to remain stable.
Even if we got a return to positive growth, an economy that was growing at 1 percent would be an economy with rising unemployment. I don't think we can hold out the prospect we'll stabilize at the current level, he said, deliberately declining to provide a forecast for peak unemployment.
The economy contracted at a 6.3 percent annual rate in the fourth quarter of last year, the steepest pace since 1982.
Summers said policy-makers needed to be wary of risks for both inflation and deflation, adding that near term deflation risks were part of the reason for the Obama administration's strong fiscal stimulus efforts and programs to support credit markets.
I don't think the concern about deflation in the nearer term is one that can be entirely discounted, he said.
Asked about the ability of the world's largest economy to sell its debt going forward, the former Treasury secretary said the United States benefits from the fact that the U.S. dollar is regarded as a safe currency and should protect its status.
On days when the markets are suggesting increased uncertainty, increased doubt about the global economy....those are days almost always when Treasury bond prices rise, Summers said.
So it's important to remember how fortunate we are as a country to have a currency and a bond market that is seen in every way as a source of strength and it's a huge responsibility for us to keep it that way.
China has suggested that some thought should be given to letting some other measure of value be considered as the world's reserve currency, an idea the Obama administration has greeted coolly.
Summers called on U.S. trading partners to boost demand because the United States cannot be the single engine of economic growth for the world economy.
It's clear that that can't be the growth paradigm going forward, Summers said.
Partway into his talk, two protesters rushed on to the stage and unfurled a pink banner behind Summers emblazoned with the words We want our money back!
The Code Pink activists called on Summers to resign because of revelations earlier this month that he received $5.2 million during the past year from hedge fund D.E. Shaw.
Summers sat silently until security ushered them out of the hotel ballroom.
(Reporting by Corbett B. Daly, David Lawder and Glenn Somerville; Editing by Chizu Nomiyama)