Thursday, September 4, 2008

S.F. Fed president: Economic outlook 'subpar' despite Q2 gains

Silicon Valley / San Jose Business Journal - September 4, 2008

S.F. Fed president: Economic outlook 'subpar' despite Q2 gainsSilicon Valley / San Jose Business Journal

Reduced consumer spending, shrinking exports and the ongoing housing downturn are expected to reduce U.S. economic growth and raise the unemployment rate in the coming quarters, San Francisco Federal Reserve Bank President Janet Yellen said Thursday.

This despite the 3.3 percent growth the U.S. registered in the second quarter.

"While one might be tempted to interpret the recent strong numbers as a sign that things are turning around, there are three important reasons to think that the strength will not hold up, and that economic performance will be decidedly subpar in the second half of the year," Yellen said in prepared remarks for a speech she delivered in Utah.

"Overall, I anticipate that real GDP growth in the second half of this year will come in below growth of potential output, which implies that the unemployment rate will rise."

On the spending side, Yellen noted that consumer spending increased just a bit in the second quarter, despite the issuance of more than $100 billion in tax rebates. She said there are few signs spending will be able to increase in the near term.

Regarding exports, she said the new-found strength of the dollar and the likelihood of slower overseas growth suggests that "we can no longer count on exports as an important source of strength."

And Yellen said housing is still a drag on the U.S. economy and could get worse in the coming months, as a slower economy could lead to more mortgage delinquencies, more inventory on the market, and even more depressed prices.

She said new home sales are showing "tentative signs of stabilizing," but said more declines are likely.

"Even though the rate of decline of house prices has shown signs of moderating, it still appears that these prices will keep heading down for some time," she said, noting the high home price to rent ratio and the large inventory of unsold homes.

"My guess is that market functioning will improve in 2009, but things could get worse before they get better."

Yellen was more optimistic on inflation, as she predicted headline and core prices would moderate by next year in large part because of the slowing economy.

"Overall inflation over the past year has been unacceptably high," she said. "But, the prognosis going forward is favorable."

More specifically, she predicted that both headline and core inflation would fall to "just over" 2 percent by next year. Headline inflation was running at a 4.25 percent annual pace as of July, while core inflation was 2.5 percent, "which is somewhat above the range that I consider consistent with price stability."

Yellen also said the Fed has seen no signs that rising prices have led to demands for higher wages, or the dreaded "wage-price spiral" that plagued the late 1970s.

"Outside of a few booming sectors such as energy, we hear no reports of escalating wage pressures even though higher food and energy prices have eroded the real incomes of American workers," she said.

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