Jobs report aside, Bernanke sees rosier second half of 2011

McClatchy NewspapersJune 7, 2011 

WASHINGTON — Shrugging off last week's dismal May jobs report, Federal Reserve Chairman Ben Bernanke said Tuesday that he expects the U.S. economic recovery to revive later this year as headwinds from outside factors will ease.

Speaking to an international monetary conference in Atlanta, Bernanke said that high energy prices and spillover effects from the devastating natural disaster in Japan have hurt U.S. growth since April.

But these headwinds, which help explain the weak 54,000 jobs added in May, are likely to "dissipate in coming months" and "growth seems likely to pick up somewhat in the second half of the year," the chairman said.

"Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers," Bernanke said.

In a highly unusual move, the chief executive of J.P. Morgan Chase, the strongest U.S. bank, confronted Bernanke during a question and answer session. Jamie Dimon read off a long list of regulatory and market fixes to the problems that brought the global financial system to its knees in 2008, then complained about a 3 percent global tax being considered on large banks.

"Has anyone bothered to study the cumulative effect of these things," Dimon asked in a rare public confrontation with the world's most powerful central banker, asking "is this holding us back" from a more robust economic recovery?

Bernanke shot back that the financial regulations being put in place are the "most comprehensive reform since the 1930s" and are warranted given the several financial crisis the global system has suffered through in recent years.

Private-sector economists in recent weeks have scaled back their growth projections, which had been as high as 3.5 percent for the year, and many are now projecting an annual growth rate of 3 percent or less. That would suggest hiring is likely to be tepid, and that there'd be insufficient economic activity to bring down the jobless rate, now 9.1 percent.

Appearing with German Chancellor Angela Merkel at the White House on Tuesday, President Barack Obama also suggested that the recent spate of weak economic indicators is likely to be transitory.

"I'm not concerned about a double-dip recession. I am concerned about the fact that the recovery that we're on is not producing jobs as quickly as I want it to happen," Obama said. "Prior to this month, we had seen three months of very robust job growth in the private sector. And so we were very encouraged by that. This month you still saw job growth in the private sector, but it had slowed down. We don't yet know whether this is a one-month episode or a longer trend."

Obama singled out gasoline prices as weighing on consumer psychology and family budgets.

Bernanke signaled clearly that he plans to keep interest rates low, and that there aren't yet signs that the U.S. economy can stand on its own feet without what the Fed calls "accommodative" policies to spark lending and investment.

The chairman ended his speech with a caveat.

"Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," he warned.

Bernanke spent much of his speech attempting to knock down suggestions that anything but supply and demand accounts for the surge in the price of oil and other commodities.

Acknowledging that the price of benchmark West Texas Intermediate crude is up nearly 40 percent over the past 12 months, Bernanke said that corn and wheat prices have doubled over the same period, and aluminum and copper prices are up by a third.

A recent McClatchy investigation linked the rise in crude prices to increases in speculative trading by financial players who never intend to take possession of oil and other commodities. Some 70 percent of contracts for future oil delivery are now bought by financial speculators — largely big investment banks and hedge funds — who never take delivery of the oil. They just flip the contract for a quick profit.

Bernanke insisted Tuesday that the price spikes are due to strong increases in global demand_ especially in the developing world, where economic growth averaged 7 percent a year from 2002 to 2008_ and the lack of commensurate increases in supply.

"For example, world oil consumption rose by 14 percent from 2000 to 2010; underlying this overall trend, however, was a 40 percent increase in oil use in emerging market economies and an outright decline of 4-{ percent in the advanced economies," he said. "In particular, U.S. oil consumption was about 2 1/2 percent lower in 2010 than in 2000, with net imports of oil down nearly 10 percent, even though U.S. real GDP rose by nearly 20 percent over that period."

And supplies aren't keeping up, Bernanke said, pointing to the OPEC oil cartel.

"Indeed, OPEC's production of oil today remains about 3 million barrels per day below the peak level of mid-2008. With the demand for oil rising rapidly and the supply of crude stagnant, increases in oil prices are hardly a puzzle," Bernanke said.

OPEC members meet Wednesday among reports of split ranks, with some members wanting to boost production and others, such as Iraq, seeking higher prices.

A recent report by McClatchy, based on secret State Department cables, showed that during the peak of production in 2008, the Saudis were complaining that they were ratcheting up production, but that there were not buyers, because the price was driven by speculators, not oil users.

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