Wednesday, September 24, 2008; 10:46 AM
The key legs that have propped up the U.S. economy so far this year appear to be weakening, Federal Reserve Chairman Ben S. Bernanke said today, as he laid out a set of major risks and headwinds American consumers and businesses in the months ahead.
Foremost among them is the tightening of credit conditions, Bernanke told the Joint Economic Committee in his second consecutive day of congressional testimony. Bernanke repeated his call for massive government purchases of shaky mortgage assets as a move to free up lending in the nation's financial sector and keep credit flowing through the economy.
"The intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant further drag on growth," said Bernanke.
As Congress considers the Bush administration's $700 billion bailout plan to rescue the U.S. financial system that Bernanke and others say needs to be passed by Friday, Bernanke laid out a more dismal outlook for the U.S. economy.
His testimony did not signal that the Fed is poised to cut interest rates, but suggested that Fed policymakers may be more open to it at their late-October meeting than they were at their previous meeting last week, particularly if the credit crisis continues to deepen or there is new evidence that the economy is getting sharply worse.
But financial stress isn't the only area where Bernanke described trouble.
Americans' spending fell in June and July, and based on early data it looks to have fallen again in August.
"Although the retrenchment in household spending has been widespread, purchases of motor vehicles have dropped off particularly sharply," Bernanke said.
He noted that despite some signs of stabilization in home sales, sharply fewer new homes are being started, which could put further downward pressure on construction-related fields.
And while business investment held up through the first part of the year, "a range of factors, including weakening fundamentals and constraints on credit, are likely to result in a considerable slowdown in the construction of commercial and office buildings in coming quarters," the Fed chairman said. He noted that spending on business equipment and software also appear poised to fall.
Moreover, international trade has been a big driver of growth through the first part of the year, but that appears set to dissipate in the months ahead amid a slowing global economy and deterioration in world financial markets.
The one bright spot in the outlook has been falling prices for energy. But Bernanke said that the inflation outlook remains "highly uncertain," and that "the fluctuations in oil prices in the past few days illustrate the difficulty of predicting the future course of commodity prices."
