Grim outlook for nation’s economy

MEDIA GENERAL NEWS SERVICE
Published: April 3, 2008

Ben Bernanke knows a recession when he sees one, and it’s starting to sound like that’s just what he expects to see.

A student of the Great Depression, the Federal Reserve chairman once served on the panel that unofficially determines when recessions begin and end—a finding that usually comes well after the fact.

Now, for the first time, Bernanke as Fed chief acknowledged yesterday that the U.S. could reel into recession from the powerful punches of housing, credit and financial crises. He remained coy about the Federal Reserve’s next move.

With home foreclosures swelling to record highs and job losses mounting, Bernanke offered Congress an unflinching—and more pessimistic—assessment of potential damage to the national economy.

“A recession is possible,” said Bernanke, who is under immense political and public pressure to turn things around. “Our estimates are that we’re slightly growing at the moment, but we think that there’s a chance that for the first half as a whole there might be a slight contraction.”

Under one rule of thumb, six straight months of a shrinking economy would constitute a recession, but Bernanke wasn’t getting into that. “A recession is a technical term,” he said. “I’m not yet ready to say whether or not the U.S. economy will face such a situation.”

By even mentioning the “R” word, the Fed chief, who will address the World Affairs Council of Greater Richmond on April 10, may have stirred interest in that appearance. The event, however, is sold out.

What Bernanke had to say to Congress about the economy was not news to the stock market, said Rod Smyth, chief investment strategist at the Riverfront Investment Group in Richmond.

It was the first time that Bernanke acknowledged the economy is really weak, but the Fed, by its actions in lowering interest rates, has, in a way, already been sending that message, Smyth said. “By [its] actions, the Fed has been telling you that [it] is very worried about the economy,” he said.

Major stock indexes were narrowly lower for the day.

“The market really figured out we were going into a recession in January when it really broke its long-term up trend,” Smyth said.

Whether or not the economy already has fallen into its first recession since 2001—and many economists believe it has—the housing debacle and other economic woes are a major concern for homeowners, job losers and investors. That means they’re a concern to Congress and the presidential contenders, too.

Hoping to limit damage, the Federal Reserve has been slashing interest rates since the start of the year to get people and companies spending again. “We are fighting against the wind,” Bernanke said, “at least offsetting significantly the headwinds coming from these financial factors.”

But he didn’t offer a clear signal about the Fed’s interest-rate intentions.

“In taking the historic steps he did in March, including especially those on behalf of saving Bear Stearns and of making the Federal Reserve the effective guarantor of the investment banks, [Bernanke] undertook a large-scale redefinition of the role and objectives of the institution he leads,” said Randolph Bell, president of the local World Affairs Council.

“How much, if any, of the U.S. economy’s still not entirely burst bubble [might] the Fed want . . . to protect, both in the housing and financial sectors?” is another question some are waiting for an answer to, Bell said.

Striking a hopeful note, though, he said he expects economic growth to pick up in the second half of the year and into 2009, helped by the government’s $168 billion stimulus package of tax rebates for people and tax breaks for businesses as well as the Fed’s aggressive interest rate reductions.

“Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year,” Bernanke said.

Jerry Epperson, a Richmond-based furniture analyst, said he thinks Bernanke was wise to alert Congress and Wall Street that the economy is not an easy fix.

“Just like so many things in life, if you fix one thing, something else breaks.”

Staff writer Greg Edwards and The Associated Press contributed to this report.