The economy, which has been losing momentum all year, slowed to a near crawl in the second quarter.
At such a weak pace, the nation’s 9.5 percent unemployment rate could climb and pass 10 percent later this year or early next year, some analysts say. With economic conditions worsening, there’s the danger that consumers and businesses will turn even more cautious in their spending, causing the economy to stall, or worse, slip into reverse.
Mr. Bernanke said the prospect of high unemployment for a long period is a central concern for the Fed. He also made clear that he is determined to prevent the United States from slipping into a deflationary spiral.
Deflation is a widespread and prolonged drop in wages, the prices of goods and services and in the value of stocks, houses and other assets. The country’s last serious episode of deflation was in the 1930s. Keeping interest rates super low and taking unconventional to lower rates on mortgages and other debt is a way to nip any deflationary forces.
Japan’s deflation problems and stagnant growth caused the country to suffer what many refer to as a “lost decade” in the 1990s. It is still fighting deflation now even as it has kept its key interest rates near zero like the Fed.
Although most economists believe the odds are relatively low that the United States will slide into deflation, it can’t be ruled out given the economy’s weak growth, they say.
Despite the economy’s recent slowing, Mr. Bernanke, however, continues to believe there will be “some pickup” in growth in 2011, but not enough to substantially drive down unemployment and reduce the vast ranks of the unemployed.
“We have come a long way, but there is still some way to travel,” Mr. Bernanke said.
The Commerce Department said Friday the nation’s gross domestic product — the broadest measure of the economy’s output — grew at a 1.6 percent annual rate in the April-to-June period, . That’s down from an initial estimate of 2.4 percent last month and much slower than the first quarter’s 3.7 percent pace.
The lower estimate for economic growth and Mr. Bernanke’s comments follow a week of disappointing economic reports. The housing sector is slumping badly after the expiration of a government homebuyer tax credit. And business spending on big-ticket manufactured items such as machinery and software, an important source of growth earlier this year, is also tapering off.
The economy has grown for four straight quarters, but that growth has averaged only 2.9 percent, a weak pace after such a steep recession. The economy needs to expand at about 3 percent just to keep the unemployment rate from rising.
Business investment in new machinery, computers and software drove much of the growth last quarter, increasing nearly 25 percent.
But much of that spending involved the purchase of imported goods. Imports surged 32.4 percent, the most since 1984. That overwhelmed a 9.1 percent increase in exports.
Consumers spent a bit more in the second quarter than previously calculated. Their spending rose at a 2 percent annual rate, above the 1.6 percent estimated last month and slightly higher than the first quarter’s 1.9 percent. The revised estimate was largely due to higher electricity and natural gas usage, the Commerce Department said.
Economists expect many other supports for economic growth to fade. Federal government spending and the housing sector bolstered the economy last quarter, but housing has slumped again and will likely drag growth down in the third quarter. The impact of the federal government’s $862 billion stimulus package is also projected to taper off this year.