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Atlanta Federal Reserve President Dennis Lockhart said Tuesday that the overall objective of economic policy should be to bring about a durable recovery, reduce unemployment and corral inflationary pressures.
Speaking at the Urban Land Institute's Emerging Trends in Real Estate conference in Atlanta, Lockhart said that an economic recovery had been underway since the summer, and cited gross domestic product growth and a rise in consumer spending as positive signs of improving conditions.
"The third quarter gross domestic product (GDP) growth number was 3.5 percent, the first increase in real GDP since mid-2008 and the largest gain since 2007," he said in prepared remarks. "The primary contributor to this gain was real consumer spending, which rose at a 3.4 percent rate, largely because of the 'cash for clunkers' program."
Lockhart added that the housing market also appears to be improving, as home prices in certain markets have bottomed out and begun to rise, and many markets have show increases in house sales.
The Atlanta chief did add, however, that the country should remain cautious about recovery because temporary government programs - such as the $787 billion stimulus package - are still in various stages of execution, and economic data on unemployment and bank failures remains disappointing.
"Data on foreclosures, unemployment, personal income, and bank failures continue to disappoint," he said. "Also, nonresidential construction continues to decline, and state and local government budgets remain severely constrained."
Lockhart went on to say that the economy's growth past the current quarter and into the medium term would be subdued, citing weaknesses in the banking industry.
"Despite marked improvements in financial markets from a year ago and improved flow of private capital to banks in recent months, the banking system has not fully recovered-far from it," he said. "Bank credit losses are still climbing, and many banks are still capital constrained."
Lockhart added that weakened banks have hurt small businesses due to tightening credit and loan standards, and, in turn, contributed to the current unemployment rate of 10.2 percent, the nation's highest since 1983.
"In this recession...small firms have accounted for about 45 percent of net job losses per our most recent data through the end of 2008," he said.
He added that the unemployment trend might not reverse itself until sometime next year and that net job gains will come very slowly.
Touching on commercial real estate, Lockhart said that the sectors problems ($3.5 trillion of outstanding debt) would not pose a risk to the financial system, but could suppress the pace of recovery due to small banks - carrying almost half of total CRE loans.
"I don't see it posing a broad risk to the financial system," he said. "Nonetheless, CRE could be a factor that suppresses the pace of recovery. As the recovery develops, the CRE problem will be a headwind, but not a show stopper, in my view."
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