Federal Reserve Chairman: Economic Contraction May Be Slowing

Federal Reserve Chairman Ben Bernanke presented testimony before the Budget Committee of the U.S. House of Representatives on current economic and financial conditions and the federal budget on June 3.  Enclosed below are his remarks on the economic condition of the U.S.

Economic Developments and Outlook
The U.S. economy has contracted sharply since last fall, with real gross domestic product (GDP)

Ben Bernanke

having dropped at an average annual rate of about 6 percent during the fourth quarter of 2008 and the first quarter of this year. Among the enormous costs of the downturn is the loss of nearly 6 million jobs since the beginning of 2008. The most recent information on the labor market–the number of new and continuing claims for unemployment insurance through late May–suggests that sizable job losses and further increases in unemployment are likely over the next few months.

However, the recent data also suggest that the pace of economic contraction may be slowing. Notably, consumer spending, which dropped sharply in the second half of last year, has been roughly flat since the turn of the year, and consumer sentiment has improved. In coming months, households’ spending power will be boosted by the fiscal stimulus program. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions.

Activity in the housing market, after a long period of decline, has also shown some signs of bottoming. Sales of existing homes have been fairly stable since late last year, and sales of new homes seem to have flattened out in the past couple of monthly readings, though both remain at depressed levels. Meanwhile, construction of new homes has been sufficiently restrained to allow the backlog of unsold new homes to decline–a precondition for any recovery in homebuilding.

Businesses remain very cautious and continue to reduce their workforces and capital investments. On a more positive note, firms are making progress in shedding the unwanted inventories that they accumulated following last fall’s sharp downturn in sales. The Commerce Department estimates that the pace of inventory liquidation quickened in the first quarter, accounting for a sizable portion of the reported decline in real GDP in that period. As inventory stocks move into better alignment with sales, firms should become more willing to increase production.

We continue to expect overall economic activity to bottom out, and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast. Final demand should also be supported by fiscal and monetary stimulus, and U.S. exports may benefit if recent signs of stabilization in foreign economic activity prove accurate. An important caveat is that our forecast also assumes continuing gradual repair of the financial system and an associated improvement in credit conditions; a relapse in the financial sector would be a significant drag on economic activity and could cause the incipient recovery to stall. I will provide a brief update on financial markets in a moment.

Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.

In this environment, we anticipate that inflation will remain low. The slack in resource utilization remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation.

To read his entire testimony click here.

African American Recession Job Losses Surpass 1 million, Obama Annouces Training Initiative for Unemployed

By Hopeton Hay

The April unemployment data released May 8th revealed continuing job losses in the economy with African Americans suffering disproportionately.   African Americans have lost over 1 million jobs since the recession began according to my analysis of the latest data available from the U.S. Bureau of Labor Statistics.  From an industry perspective, health care remains the one industry sector that continues to record consistent monthly job increases while manufacturing, professional and business services, and the construction industries recorded the highest job losses in April.  Meanwhile, President Obama announced a new initiative to facilitate access to raining for the unemployed on May 8.

African American Unemployment

When the recession started in December of 2007 there were 1,561,000 unemployed African American according to seasonally adjusted employment data from the Bureau of Labor Statistics (BLS). The April 2009 employment report from the BLS,  released May 8, indicates there were 2,673,000 unemployed African Americans in April.

The April unemployed figure was 340,000 higher than March, the largest one month increase in African American unemployed since at least February 1972.  Monthly data on African American employment is available through online reports on the BLS web site only as far back as January 1972.  African Americans represented more than 60 percent of the total increase in the number of unemployed, which was 563,000 for the entire nation.

African American unemployment rate dramatically increased from 13.3 percent in March to 15 percent in April, its highest rate since June of 1986. During the same time period, Hispanic unemployment dropped slightly from 11.4 percent to 11.3 percent, and white unemployment rose from 7.9 percent to 8 percent.  Overall unemployment grew from 8.5 percent to 8.9 percent in April.

Industry Employment Changes in April

The health care industry continues to provide consistent growth in job opportunities.  Health care employment grew 17,000 in April and has averaged 17,000 new jobs a month in 2009, down from an average monthly job growth of 30,000 in 2008.

The federal government employment grew 66,000 in April, largely due to the increase in employment by the Census Bureau for the 2010 census.

Other industries experienced significant job losses in March led by the manufacturing industry with a loss of 149,000 jobs, professional and business services lost 122,000 jobs, the construction industry lost 110,000 jobs, and retail lost 47,000 jobs.

Obama Announces Job Training Initiative for Unemployed

With the release of the April unemployment figures, President Obama announced new steps to help the unemployed obtain retraining and education “for the jobs and industries of tomorrow” at a press briefing May 8th.

President Barack Obama

“First, we’ll open new doors to higher education and job training programs to recently laid-off workers who are receiving unemployment benefits.  And if those displaced workers need help paying for their education, they should get it — and that’s why the next step is to make it easier for them to receive Pell Grants,” said Obama.

“I’ve asked my Secretary of Education, Arne Duncan, and my Secretary of Labor, Hilda Solis, to work closely with states and our institutions of higher learning and encourage them not only to allow these changes, but to inform all workers receiving unemployment benefits of the training programs and financial support open to them.  And together, the Department of Education and the Department of Labor have created a new website called opportunity.gov — I’ll repeat that, opportunity.gov — to help workers discover and take advantage of these opportunities,” said Obama.

Hopeton Hay is editor and publisher of the Economic Perspectives blog and chairman of the Economic Development Committee of the Texas NAACP.

U.S. Economy Shrinks In First Quarter But Consumer Spending Rises

By Dr. Christian E. Weller

It’s a rare occasion when the economy declines by 6 percent or more in any given quarter. This has only happened four times before this recession since 1947, when the Bureau of Economic Analysis started to collect these data. And, this is the first time that the U.S. economy has shrunk by more than 6 percent for two consecutive quarters since the Bureau of Economic Analysis began collecting these data. Yet that is exactly where we are today. According to estimates released by the Bureau of Economic Analysis, the economy shrank by an annual rate of 6.1 percent in the first quarter of 2009, after falling 6.3 percent in the fourth quarter of 2008.

Christian Weller

Using absolute figures helps to illustrate this point. In the first quarter of 2009, the U.S. economy generated $84 billion less in economic resources than in the third quarter of 2008, before the latest contractions of the Bush recession started and before the impact of inflation is accounted for. This is a deep hole that needs to be filled before an expanding economy can once again generate enough jobs to reduce the highest unemployment rate in more than a quarter century.

It’s hard to find a silver lining amid this tale of economic woe, but one does exist. Consumers started to increase their consumption again in the first quarter of 2009, largely before the American Recovery and Reinvestment Act became law. In that period, consumption expanded at an annual rate of 2.2 percent. This is even more surprising since Americans also increased their personal saving rate to 4.2 percent at the same time, up from 3.2 percent at the end of 2008 and the highest personal saving rate in more than a decade, since the third quarter of 1998.

This silver lining may become brighter in the next few months and quarters, since the economic stimulus was largely aimed at getting consumers back on their feet. Specifically, lower taxes and more government transfers helped to boost personal after-tax incomes and consumption spending in the first quarter of 2009. Lower taxes for families and more transfer spending in the form of higher unemployment benefits, among other factors, are also at the heart of the American Recovery and Reinvestment Act of 2009. Consequently, consumer spending could see further gains in the coming months and quarters and thus help to stabilize growth and jobs.

I could twist the numbers further to show that there is another silver lining, but this next indicator falls into the category of “bad news disguised as good news.” The U.S. trade deficit fell precipitously in the first quarter of 2009 to 2.4 percent of gross domestic product, down from 3.8 percent in the fourth quarter of 2008 and its lowest level in exactly 10 years.

This sharp decline, though, should not be cause for celebration. It simply means that U.S. imports dropped much more sharply—by 34.1 percent in the first quarter of 2009 due to the very weak U.S. economy—than U.S. exports, which dropped by 30.0 percent at the same time. In fact, this was the largest decline in U.S. exports in exactly 40 years, since the first quarter of 1969. Much of the decline in imports was due to lower oil prices, which hovered around $40 per barrel for much of the first quarter of 2009, but which have also increased to an average near $50 per barrel in April 2009. Not only is the shrinking trade deficit actually a sign of a very weak U.S. economy, it may also be short lived.

The rest of the new figures are outright bad news. All sectors, including the federal government, which until now had been expanding, contracted in the first quarter of 2009. Business investment fell by 37.9 percent in the first quarter of 2009, the largest decline on record. In particular, commercial construction dropped by 44.2 percent, far exceeding the previous record contraction of 33.2 percent in the fourth quarter of 2001, when business investment suffered from the double onslaught of a recession and terrorist attacks.

The staple of bad news, the residential housing sector, also provided yet another disappointing quarter. It contracted by 38.0 percent, its largest drop in this housing market decline so far and its unprecedented 13th decline in a row. In inflation-adjusted terms, spending on residential real estate was at its lowest level since the end of 1991.

Finally, there is government spending. Federal, state, and local governments all reduced their consumption and investment spending in the first quarter of 2009. Federal government spending fell by 4.0 percent, while state and local government spending dropped by 3.9 percent in the first quarter. Again, these figures reflect a period before the economic stimulus from the American Recovery and Reinvestment Act of 2009 had become a reality. The government sector will likely see a quick turnaround, since state and local governments are already getting some money to maintain or even increase their spending, especially in health care and education.

The need for government intervention to help stabilize the economy should be apparent by now. The mixture of tax cuts and spending increases in the American Recovery and Reinvestment Act should help to maintain the resurgence in consumer spending and provide a turnaround on government spending at the local, state, and federal level. With more consumption and government spending, businesses may ultimately have an incentive again to increase their investments, too. Yet given the severity of the crisis, it will take some time until growth will be strong enough to support a sustained reduction in unemployment

Christian Weller is a Senior Fellow with the Center for American Progress and an Associate Professor for Public Policy at the University of Massachusetts-Boston. The Center for American Progress is a nonpartisan research and educational institute dedicated to promoting a strong, just and free America that ensures opportunity for all.

African American Adult Male Unemployment in January Highest Since 1984

NOTE: For the latest post on African American unemployment click the following link:  African American Unemployment Rates in February & March Highest Since 1993, Overall Unemployment Rises to Highest Since 1983

The latest unemployment statistics released by the U.S. Bureau of Labor Statistics on February 6

indicate that the recession is continuing to have a disproportionate impact on African American adult males (20 years of age and older).  African American adult male unemployment increased sharply from 13.4 percent in December 2008 to 14.1 percent in January 2009, its highest rate since August 1984.  Since the recession began in December 2007, African American adult male unemployment has grown 5.9 percentage points, more than twice as much as it has for African American adult females, adult white females, and adult white males.  The table below illustrates the changes.

From December 2008 to January 2009, the number of unemployed African American adult males increased 60,000 from 1,069,000 to 1,129,000.  African American adult female unemployment grew  from 8.9 percent in December 2008 to 9.2 percent in January 2009.  The number of unemployed African American adult females increased 24,000 from 804,000 in December 2008 to 828,000 in January 2009.

The unemployment rate for all African Americans (16 years and older)increased from 11.9 percent in December 2008 to 12.6 percent in January 2009 according to data released by the U.S. Bureau  of Labor Statistics.    The number of African Americans unemployed increased from 2,122,000 to 2,245,000; an increase of 123,000.

During the same time period overall unemployment increase from 7.2 percent in December 2008 to 7.6 percent in January 2009.

African American Unemployment in December 2008 Highest Since 1993

NOTE: For the latest post on African American unemployment click the following link: African American Recession Job Losses Surpasses 1 million, Obama Announces Training Initiative for Unemployed

By Hopeton Hay

African American males unemployment reached 13.4 percent in December of 2008, its highest level since March of 1993 according to data released by the U.S. Bureau of Labor Statistics (BLS). Since the recession began in December 2007, unemployment for African American males has risen at a much faster rate than African American females, white males and white males.  It has risen 5.3 percentage points since December 2007. During the same time period unemployment has risen2.6percentage points for white males, 1.9 percentage points for African American females, and 1.6 percentage points for white females as exhibited in the chart below.

Overall African American unemployment in December 2008 was 11.9 percent, the highest since April 1994.  The number of African American unemployed increased by 117,000 from November 2008 to 2, 122,000 in December 2008.

Overall unemployment for the U.S. was at 7.2 percent in December 2008, the highest level seen since January 1993.

The one bright spot in the unemployment data is the health care industry according to a statement from Keith Hall, Commissioner of the Bureau of Labor and Statistics.  “The only major private industry sector that continued to add a significant number of jobs was health care.  Employment in this industry rose by 32,000 over the month and by 372,000 over the past 12 months,” said Hall.

Educational Attainment Impacts Racial Disparities in Unemployment

One of the causes of the large disparity in unemployment rates for African Americans, especially males, may be the lower level of educational achievement.  An analysis of unemployment data from BLS reveal an inverse correlation between the level of educational achievement and the unemployment rate.  In 2007 for example, the average unemployment rate  was 3.0 percent for African Americans with a bachelors degree or higher, while it was 7.3 percent for African Americans with only a high school diploma, and no college.

Unfortunately, the percentage of African Americans 25 years or older with a bachelors degree or higher lagged far behind whites according to data from the U.S. Census Bureau 2007 American Community Survey.  Only 15.8 percent of African American males in 2007 had bachelor degrees  compared to 31.9 percent of white males.  Among females, 18.5 percent of African Americans had bachelors degrees and 29.2 percent of whites.

Because African Americans families have median income and wealth far below the average American, it is much more difficult to finance the cost of college. Thus public policies that increase the level of funding to subsidize the cost of college for low to moderate income families can play a critical role in reducing unemployment in the African American community.

Because African Americans families have median income and wealth far below the average American, it is much more difficult to finance the cost of college. Thus public policies that increase the level of funding to subsidize the cost of college for low to moderate income families can play a critical role in reducing unemployment in the African American community.