- The Washington Times - Wednesday, September 16, 2009

Federal Reserve Chairman Ben S. Bernanke came close to declaring the recession over Tuesday, but warned that economic growth will remain too sluggish to quickly restore the nearly 7 million jobs lost since 2007.

He made the remarks as a string of positive economic news helped lift stock indexes to new highs for the year. Retail sales surged last month at the fastest pace in 3 1/2 years, reflecting a boost from the “cash for clunkers” auto trade-in program and a stronger-than-expected jump in back-to-school spending.

Mr. Bernanke stressed in off-the-cuff remarks to the Brookings Institution that while the signals are encouraging, growth is likely to be too slow to generate many jobs once recovery takes hold.

“Even though from a technical perspective the recession is very likely over at this point, it’s going to feel like a very weak economy for some time, as many people will still find that their job security and their employment status is not what they wish it was,” he said.

The massive job losses and resulting strain on consumer spending keep the darkest cloud hovering over the economy. Consumers, who generate about 70 percent of economic activity, remain cautious because of job and income losses, sharp cutbacks in credit availability, and falling home values.

Government officials have expressed hope that “cash for clunkers” and the government’s first-time homebuyer’s tax credit would jump-start consumer spending, but economists warn that the economy could fall back into recession when such temporary stimulants are removed.

“Its up to the consumer to prevent the U.S. economy from slipping back to recession,” said Bernard Baumohl, chief international economist at the Economic Outlook Group. “For this recovery to accelerate from meager growth to a genuinely palpable expansion, we have to see a revival in consumer spending.”

The 2.7 percent jump in retail sales reported by the Commerce Department on Tuesday provided a hopeful sign on that front. While the 10.6 percent surge in auto sales - the biggest in eight years - had been expected, what surprised economists was the strength in other areas. Excluding auto sales as well as sales at gas stations, which were lifted by a rise in gas prices, the report showed a solid 0.6 percent rise in sales at all other retailers.

Especially strong gains were reported at retailers that benefit from back-to-school spending: electronics, sporting goods, clothing and general merchandise stores. Still, sales have dropped so far in the past year that even with August’s uptick in spending, activity at retailers remains more than 5 percent below year-ago levels.

Brian Bethune, chief U.S. financial economist at IHS Global Insight, said the “great leap forward” in retail sales last month suggests that consumer spending during the summer quarter grew at a healthy 2.5 percent rate after falling by 1 percent in the second quarter. Sales were probably helped by sales tax holidays in several states, including California, Texas and Florida, he said.

“The various fiscal stimulus measures, including the ‘cash-for-clunkers’ program, are playing a pivotal role in jump-starting the economy in the third quarter of 2009, and that should create enough initial momentum to keep the recovery in motion,” he said.

He added, however, that such programs will not have a lasting impact.

“We should not be looking for consumer spending to be a major driver of the recovery beyond the current quarter,” he said.

Mr. Bernanke put himself squarely among the majority of economists who think the recovery will be sustained after the current growth spurt as various sectors of the economy slowly come back to life. In recent weeks, manufacturing and housing have shown signs of turning upward, providing an initial impetus to growth.

While growth most likely is resuming this summer, the Fed chairman cautioned that it will be held back by the difficulties facing consumers, as well as spending cutbacks by businesses and government. Other “headwinds” include the slow withdrawal of government stimulus measures, continuing losses on loans at banks and cutbacks in the credit available to consumers and businesses, he said.

As a result, Mr. Bernanke said, he expects the economy to grow no faster next year than its average rate, which economists estimate is about 2.5 percent.

“The arithmetic is that, unless the economy grows significantly faster than its long-term growth rate, it’ll be relatively slow in creating jobs,” he said. “The unemployment rate would tend to come down very slowly,” he said, which would be a “very serious concern” for the Fed.

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