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Glimmers of Economic Hope Emerge, But Tough Road May Remain

May 5, 2009 at 6:20 PM EST
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Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday that the economy should pull out of a recession and start growing again later this year. Financial analysts assess where the economy stands and how new job numbers may impact the picture.
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TRANSCRIPT

GWEN IFILL: First, the economy. The head of the Federal Reserve sounded a note of cautious optimism today about brightening prospects for a recovery. NewsHour correspondent Kwame Holman reports.

KWAME HOLMAN: The economy could begin to turn around before the year is out; that’s what Fed Chairman Ben Bernanke told members of a House Senate economic panel.

BEN BERNANKE, Federal Reserve chairman: We continue to expect economic activity to bottom out, then to turn up later this year. Key elements of this forecast are our assessments that the housing market is beginning to stabilize and that the sharp inventory liquidation that has been in progress will slow over the next few quarters.

The recent data also suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, maybe be stabilizing.

KWAME HOLMAN: And today, another sign: a closely watched survey reported activity in hotels, hospitals, and other service industries fell again in March, but at a much slower pace.

Expectations of better times already have lifted Wall Street from its low point, but Bernanke cautioned the economy’s climb back still includes further sizable job losses.

BEN BERNANKE: Even after a recovery gets underway, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while.

We think that the unemployment rate will probably peak early in 2010 and then come down relatively slowly after that.

KWAME HOLMAN: The jobless rate currently stands at 8.5 percent. Bernanke said he does not think it will get to double digits.

The Fed chairman also spent time here before the Joint Economic Committee addressing those bank stress tests. Results are due out Thursday, and there have been reports that 10 of the 19 banks may need more capital. Committee members wanted to know where that money would come from.

BEN BERNANKE: While banks have certainly sustained substantial losses both the last few years and going forward, they have also taken significant write-downs. They have reserved. And there is substantial earning capacity.

If the banks cannot meet those standards in the private market, which is our strong preference, then they have to take government capital to meet those standards.

KWAME HOLMAN: The chairman went on to say there’s been a lot of progress in stabilizing the financial system, and he credited federal action.

BEN BERNANKE: We’re in far better shape today than we were in September and October. And while I know there are many critics of the TARP — and I understand the criticisms, and there are many issues — I do believe the availability of that capital helped us dodge what would have been a truly cataclysmic collapse of the global banking system.

KWAME HOLMAN: Bernanke went from the hearing to a private lunch with Republican senators, but some of them voiced doubts about what they heard.

SEN. JOHN ENSIGN, R-Nev.: A lot of the things he said about their assumptions in the economy sounded a little more like kind of a rosy scenario to a lot of us. So whether that kind of a recovery is going to happen or not, I think, is a big question.

KWAME HOLMAN: The nation’s top two leaders used their lunchtime today to make a symbolic gesture toward small business.

U.S. PRESIDENT BARACK OBAMA: All right. I’m going to have just your basic cheddar cheeseburger.

KWAME HOLMAN: President Obama and Vice President Biden traveled to a burger shop across the Potomac River in Virginia. They ate there and took more food back for White House staffers.

'Cautious optimism'

Hugh Johnson
Johnson Illington Advisors
The reason that they've been optimistic or buying stocks is because a lot of indicators that tend to tell us other indicators that tend to tell us where the economy is going are starting to improve or look a little bit better.

GWEN IFILL: Are there glimmers of hope out there? Jeffrey Brown looks at that.

JEFFREY BROWN: "Cautious optimism," that's how we characterized Fed Chairman Ben Bernanke's remarks today. But should we -- and, more importantly, should he -- emphasize the "optimism" or the "caution"?

We update the economic outlook now with Greg Ip, the U.S. economics editor at the Economist magazine, and Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, New York.

Well, Hugh, I'm going to resist the temptation to ask you about burgers and stock markets, but the stock markets have certainly been more upbeat recently. So tell us: What are they seeing? What's the good news that they're seeing?

HUGH JOHNSON, Johnson Illington Advisors: Well, I think that you're absolutely right. And not only is the stock market up, but keep in mind that investors collectively tend to be a fairly good leading indicator of the economy or tell us where the economy is going.

The reason that they've been optimistic or buying stocks is because a lot of indicators that tend to tell us other indicators that tend to tell us where the economy is going are starting to improve or look a little bit better.

There's a lot of technical stuff, but a couple of easy ones are consumer expectations, for example. They've been up for two months in a row. And that tends to tell us where consumer spending is going. It's very, very good to see expectations up.

Another one is the money supply, which is sort of technical, but it's been growing very rapidly. And it's obviously money that makes both the economy and the markets go.

Those are indicators that tell us where we're going, and they're sort of what we now call green shoots. They seem to be pointing to a sort of economic spring, and they seem to be pretty good signs. And that's why investors are starting to become very, very upbeat.

Positive signs in housing market

Greg Ip
The Economist
Consumer spending actually rose in the first quarter. It was still a very weak quarter, but the main reason why it was, was because companies were slashing their inventories, because they had too much stuff on their shelves.

JEFFREY BROWN: Greg Ip, green shoots, I hadn't heard that one before. Stay on the positive side for us. What signs of life do you see?

GREG IP, The Economist: Well, there are several positive things to look out for there, Jeff. One of them is that the housing market, where all this trouble began, is actually showing signs of not just having hit bottom, but creeping upwards a little bit. One index of home sales in March rose surprisingly.

Look at the number of people filing their first claim for unemployment insurance. That number is still very high, but it's started to come down a bit. So perhaps a little bit of a reduction in the number of people losing their jobs.

And let's look at the consumer. Consumer spending actually rose in the first quarter. It was still a very weak quarter, but the main reason why it was, was because companies were slashing their inventories, because they had too much stuff on their shelves.

That's actually a positive sign going forward. Companies can only reduce their inventories so far. And after a certain point, they have to start increasing their production. And we might be at that point very soon.

JEFFREY BROWN: All right, so now the "but." I'll start with you, Greg Ip, because a lot of the numbers we hear -- it's not so much that they're positive. It's just that they're less terrible than they have been before.

GREG IP: Absolutely right. It felt really terrible. It's just not quite as terrible as it was.

JEFFREY BROWN: Exactly.

GREG IP: I mean, for example, on Friday, we will get a report on employment in the month of April, and it will probably tell us that another 500,000 jobs were lost, making this by far, in percentage terms, the worst recession in at least 40 or 50 years. And so that should dispel any notion that we're out of this yet.

And a lot of the indicators do suggest -- for example, we had today an index on service sector activity, which suggested that the sector was still contracting. It was just contracting at a slower rate.

And so we still need more evidence that not only has the contraction slowed, but it's actually stopped and that it will turn up. I think we'll get to that.

Like Chairman Bernanke of the Fed said, I think the odds are that the economy will be growing by the second half of the year. We still, however, don't have the solid evidence of that.

Concerns over bank lending

Hugh Johnson
Johnson Illington Advisors
I think right at the top of the list of things that worry me is that it's hard to make the case that the economy is going to expand, an economy which essentially grows on money and credit, when bank lending is slowing.

JEFFREY BROWN: Hugh Johnson, what worries you when you look -- what worries you the most when you look out there?

HUGH JOHNSON: There are a lot of things that worry me. Obviously, some of the things that Greg said, especially the employment conditions, the loss of 500,000, 600,000 jobs a month is very worrisome.

I think right at the top of the list of things that worry me is that it's hard to make the case that the economy is going to expand, an economy which essentially grows on money and credit, when bank lending is slowing. It's still not the case. I'm not convinced that banks are in a strong enough financial position that they're willing to start to increase their lending.

And unless we start to see bank lending start to improve, it's going to be very hard to make the case for an expanding economy. I think we're a long way from that point, and that's the number-one thing that worries me.

JEFFREY BROWN: Well, Greg, speaking of banks, what we're all waiting for now later this week is the results of the so-called stress tests. Now, we're starting to get hints, reports every day.

Do you sense the administration sort of letting this out slowly in a way to kind of manage the way the information comes out to -- well, for example, to prevent a disastrous number at the end or disastrous information?

GREG IP: Well, the administration had to deal with two conflicting perceptions. One was that there were fears that the banks were all insolvent and that, therefore, you basically had to run for your lives. And the other was that their stress tests were somehow a cakewalk that would give everybody a pass.

JEFFREY BROWN: You mean, making it too easy so -- right.

GREG IP: Exactly, yes, you know, everybody is above average. What you've seen is leaks to the effect that maybe half the 19 large banks that they tested are going to have to raise additional capital somehow.

And what's positive is that, as that news has leaked out into the market, is that the stock market has taken it in stride. In fact, bank stocks are up. And that suggests that that news is not much worse than people were expecting.

And if that sort of constructive attitude in the market is maintained, banks will be able to raise that private capital. But -- and there's always a "but" -- like Hugh said, the fact that the banks are still solvent and able to raise capital is one thing, but whether they're actually able to expand loans -- which is necessary for a healthy, growing economy -- is another.

And like Hugh, I'm a little bit worried that we don't have a banking system that that is sufficiently healthy for that.

Psychology of the markets

Greg Ip
The Economist
I think the bigger risk for the Obama administration comes six months to a year from now when the economy may have stopped shrinking, but unemployment will still be high and, in fact, possibly still rising.

JEFFREY BROWN: Hugh, what about this notion of managing expectations and psychology in the markets, whether it's looking at the situation of banks or all these other numbers you're talking about, the way that the administration has to kind of walk a fine balance, and Chairman Bernanke today?

HUGH JOHNSON: Well, you've got to sort of exercise leadership so you want to be, to some extent, a little bit optimistic or upbeat. But at the same time, you don't want to raise expectations, expectations that the economy is going to turn around, say, in the current quarter or sooner and that the recovery is going to be strong, because there's nothing worse than raising expectations too high and then having to deal with the disappointment if the economy isn't as good as you've led those expectations to believe.

I think they're doing a pretty good job. Both the president and Chairman Bernanke, especially Chairman Bernanke, is really kind of telling it like it is. He's saying, yes, it looks as though we're headed towards a recovery in the economy, but a lot could go wrong along the way, so be optimistic, but don't be overly optimistic. And I think that's both credible and the right tone.

JEFFREY BROWN: Do you see things that they have to be careful about when it comes to tone?

GREG IP: Yes. If they're too optimistic, they will sound disconnected from the situation that ordinary people face. But if they're too pessimistic, they'll be accused of talking down the economy and hurting confidence. I do think that they're basically getting the balance right.

I think the bigger risk for the Obama administration comes six months to a year from now when the economy may have stopped shrinking, but unemployment will still be high and, in fact, possibly still rising. And people by that point will be very impatient in wanting to see more in terms of results from all the fiscal stimulus and the money that's been poured into the banking system.

And, by that point, Obama will no longer be able to say, "Hey, this is the mess that I inherited." It will be his mess. And he will not have a lot of other tricks up his sleeve that he can throw at this economy. That, I think, will be the real challenge for expectations management.

JEFFREY BROWN: And a last word from you, Hugh Johnson. Does that sound right to you?

HUGH JOHNSON: Yes, it does. It sounds to me like I think we can expect the economy maybe to start to grow, but it's going to be at a slow pace. And the president's going to have to deal with that.

And another issue is the Federal Reserve is going to have to deal with the economy maybe expanding at the end of the year, but we may be seeing signs of higher inflation. Then what are they going to do?

So it's going to get a little bit tougher in the fourth quarter of this year and the first quarter of 2010. That's when we've got to start to see good results, positive results. So we'll see.

JEFFREY BROWN: All right, Hugh Johnson and Greg Ip, thank you both very much.