Fed's Lockhart: Economy Recovering, Weaknesses Still Remain

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Atlanta Federal Reserve President Dennis Lockhart said Wednesday that the U.S. is clearly showing signs of an economic recovery, but that substantial issues still remain. He warned that high inventories threaten a housing market that is being propped up by government programs, and pointed out that the labor market remains weak.

Speaking at the University of South Alabama, Lockhart said the vital signs of the economy were mixed, stressing that although an optimistic view of the economy is warranted, it should be recognized that it is still relying on the support of government programs.

"I agree with all who are declaring that a technical recovery is underway," he said in prepared remarks. "We are technically in recovery when a contracting economy gives way to growth. But even vigorous growth off a low bottom does not necessarily bring back prior activity levels for some time. By most estimates, it will be the second half of 2010 before the 2007 levels of national output are reached."

The Atlanta Fed chief went on to outline the weaknesses that still remain in the economy, paying particular attention to the housing market. He stressed that a recovery in this area is essential to an economic turnaround.

"The housing market has begun to improve as measured by sales volumes, prices, and new home starts," he said. "Yet, new and existing house inventories remain high, suggesting a weak residential construction outlook. And house sales are being supported by two government programs."

Earlier in the day, new industry data showed that mortgage application volume slipped last week. The Mortgage Bankers Association said total volume was down 2.8 percent, despite mortgage interest rates falling to their lowest levels since May.

In his remarks, Lockhart also said that the unemployment rate, which is currently at 9.7 percent, is likely to rise again before it begins to fall.

"The consensus among forecasters is something approaching a jobless recovery," he said. "The administration's stimulus program has helped soften the pace of job loss. But a recent inquiry of Southeast state budget officials, conducted by the Atlanta Fed, suggested much of the benefit, in infrastructure construction at least, has been front-ended in 2009 and early 2010."

Lockhart also gave the Fed credit for helping to stabilize the economy after last year's financial crisis, lauding the actions the regulator - along with the Treasury Department - took to stem "financial market dysfunction."

Commenting on the prospects of recovery beyond near-term growth, Lockhart said he and other members of the Atlanta Fed would remain cautious about assuming strong medium-term growth.

"To elaborate, I see as uncertain the time required for the housing market to return to health, the potential commercial real estate drag on the financial system, the sustainability of recovery in the absence of government supports, and the resurgence of private demand," he said.

Speaking on inflation at the end of his speech, the Atlanta chief said that inflationary pressures were "well contained," concerns over the growth the reserves in the Fed's balance sheet are exaggerated and that the regulator is more than capable of exiting the current monetary policy when it becomes necessary.

"When the time comes, I am confident the Fed has the tools to reverse the assumed monetary stimulus and exit the policies put in place in reaction to the financial crisis and the recession," he said.

Atlanta Federal Reserve President Dennis Lockhart said Wednesday that the U.S. is clearly showing signs of an economic recovery, but that substantial issues still remain. He warned that high inventories threaten a housing market that is being propped up by government programs, and pointed out that the labor market remains weak. (Market News Provided by RTTNews)