Janet Whitman, Financial Post
NEW YORK -- Stock-market investors may have cheered Ben Bernanke's plan to keep benchmark interest rates at next to zero for at least the next several months but his pledge is also a signal the U.S. economy remains in rough shape.
Just how precarious the country's nascent economic recovery is was highlighted by a slew of data released this week: U.S. banks posted their sharpest drop in lending last year since 1942, sales of new homes plunged to their lowest level on record last month, already gloomy consumer confidence took a surprise dive this month, and hundreds of community banks could be forced to close their doors because of their exposure to souring commercial loans.
U.S. unemployment, meanwhile, is expected to remain stuck for the rest of this year at around a 26-year high of 10%.
Speaking before U.S. lawmakers at a hearing in Washington, D.C., Wednesday, Mr. Bernanke, the chairman of the U.S. Federal Reserve, said the economy still needs to be shored up by record-low interest rates.
"Notwithstanding the positive signs, the job market remains quite weak," he said as he delivered his semi-annual report to U.S. Congress. "Of particular concern, because of its long-term implications for workers' skills and wages, is the increasing incidence of long-term unemployment; indeed, more than 40% of the unemployed have been out of work six months or more, nearly double the share of a year ago."
Stocks surged on the news, relieved that borrowing to fuel leverage and company borrowing and investment would remain cheap for some time to come while rock bottom rates makes equities a more attractive bet than bonds.
The Dow Jones Industrial Average gained 91.75 points to 10,374.16, ending two days of losses. Toronto's main stock index ended virtually unchanged at 11,521.83.
Although perhaps a boon for stocks for now, the gloomy backdrop raises the question whether the U.S. economy can stand on its own two feet or faces the threat of a "double dip" recession as the hundreds of billions of dollars in government stimulus wears off.
"There's enough stimulus in the pipeline to keep the economy bumbling along for a while, but we haven't solved any of our main problems," said Joshua Shapiro, chief U.S. economist with MFR Inc. "There's still way too much leverage in this economy and how do you get out of that without further massive pain?"
Mr. Shapiro doesn't expect the economy, which emerged from its recession about seven months ago, to slip into a recession again this year or next. But he expects overall economic growth to slow in 2011 compared to this year. Beyond that, he said, the outlook is murky.
John Ryding, chief economist with RDQ Economics, said he's not anticipating another recession, but added that growth is likely to be so sluggish and employment so high that it might feel like a recession to many Americans.
"Jobs probably will start to be created in March and beyond, but the rate won't be fast enough to make significant inroads on the unemployment rate," Mr. Ryding said.
"It's going to feel like a recession in the labour market."
Tackling America's massive deficit will also be a major factor as the economy recovers.
"It would be helpful for the current situation if the Congress and the administration ... could provide a plan which shows how the deficit will fall to 2.5%-3% level, at least, over the next 10 years," Mr. Bernanke told lawmakers Wednesday. "I don't know exactly which programs, what taxes, what changes you would make. That's certainly up to Congress. But a concerted effort to do that would be, I think even a strong effort, would probably be good for confidence."
Some economists worry that lawmakers won't be able to find a solution to the debt problem.
"I think it's going to be very difficult for politicians to come to grips with this," said Mr. Shapiro of MFR. "The political cycle is two years or less. The temptation is to deny reality and go for temporary fixes."
