JIM LEHRER: The chairman of the Federal Reserve had hopeful words on the U.S. economy today. Ben Bernanke said the country was starting to emerge from recession and aggressive intervention by the government was working.
Jeffrey Brown has our lead story report.
JEFFREY BROWN: The Fed chairman gave his optimistic assessment at an annual Federal Reserve symposium held in the high mountain country of Jackson Hole, Wyoming.
Mr. Bernanke said, in part, “After contracting sharply over the past year, economic activity appears to be leveling out both in the United States and abroad, and the prospects for a return to growth in the near term appear good.”
He did temper that enthusiasm with a note of caution, saying problems persist in both the credit and job markets.
But stock markets jumped on Bernanke’s remarks. The Dow gained nearly 156 points to 9,506. The Nasdaq was up 31, ending the day just under 2,021. For the week, the Dow was up 2 percent; the Nasdaq, 1.8 percent.
Data from the housing market provided an added boost. The National Association of Realtors said sales of existing homes were up for the fourth consecutive month. July sales were up 7.2 percent from June, the largest monthly gain in a decade.
Low prices and interest rates and generous federal tax credits contributed to the gains. Median home prices continued to drop, as sellers flooded markets glutted in part with foreclosed homes.
At the White House, spokesman Robert Gibbs noted the positive housing news, but said there’s still much work to do.
ROBERT GIBBS, White House press secretary: It does appear that the housing market is bottoming out a bit, which obviously was one of the reasons we got into the severity of the economic downturn that we’re in now. The president is pleased with the fact that it appears we’re making some progress in stabilizing that economy, as I’ve talked about, but won’t be satisfied until we get the economy fully back on track and that we’re growing the economy in a way that creates jobs for the millions of Americans who continue to look for work and thus far can’t find it.
JEFFREY BROWN: Indeed, the weekly jobless numbers released yesterday showed an unexpected rise in new claims for unemployment assistance. Figures out today show that 26 states saw their jobless rates climb last month.
But 17 states and the District of Columbia reported better-than-expected unemployment figures for July, due in part to seasonal hiring and the effects of the federal stimulus.
There was one more piece of economic news released just a short time ago. The Associated Press reported that the White House is now estimating the federal budget deficit will be $2 trillion higher than previously anticipated over the coming decade.
We take a look at all this now with two economists, Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C., and Philip Jefferson of Swarthmore College. He served as an economist to the Fed’s Board of Governors.
Cause for optimism in the economy?
Philip Jefferson, start with Ben Bernanke's assessment of the economy. Is there a good case for optimism?
PHILIP JEFFERSON, Swarthmore College: I think there is a good case for optimism. In addition to the housing data that you mentioned in the lead in, we also have increasing productivity. That's going to eventually cause firms to have to hire once they've squeezed all that they can out of their existing workers. Sooner or later, you're going to have to hire.
We're seeing some comeback in the auto sector as a result of Cash for Clunkers. Firms are adding workers in the auto sector. And that's good for the economy.
We see states like Michigan adding employment, New York added employment, Texas added employment. These states are anchors to their regional economies. And I think in an environment with continued low interest rates, investment will come along.
We also have our international trading partners starting to turn around in Europe and Asia. So that's going to bring in some demand. And once we get consumers thinking positively again, then I think consumers will come online, also.
JEFFREY BROWN: Well, Dean Baker, at the same time, there were these cautions. Among them was over the banks. Ben Bernanke said they still face, quote, "significant additional losses."
DEAN BAKER, Center for Economic and Policy Research: Well, the banks are going to continue to see large losses. We know that foreclosures are still running at near-record levels. That's not going to change anytime soon.
Also, they're going to take very big hits from commercial real estate, because there's a huge amount of debt in commercial real estate that's going to be coming due over the rest of this year, next year, 2011, much of which will be very, very difficult to refinance, because there's huge overcapacity in most areas of commercial real estate. So that's going to be a very big hit.
But also I think we have to keep in mind what we're talking about when we say "optimism," because it's true, the economy was falling very rapidly in the fourth quarter, the first quarter of this year. Now it's probably even growing somewhat.
But there's really not much dispute we're going to continue to lose jobs. We're likely to lose another 300,000 or 400,000 jobs in the month of August. The unemployment rate is going to continue to rise. And if you look at the projections, even the Fed's own projections, we're looking at an unemployment rate of around 10 percent for 2010.
I mean, I'd be a little more pessimistic, but even that number is not very good, and they're not projecting that we're going to get back down to a more normal unemployment rate until 2013 or even 2014. So that's not a really good picture, I think, in the minds of most people.
JEFFREY BROWN: So, I mean, it's a good reminder. It's always compared to what.
DEAN BAKER: Yes. Yes, I mean, it's certainly -- and, again, I think President Obama, he's not gotten the credit he deserves for the stimulus package. One of the main reasons the economy has turned around is the stimulus package has worked.
We stopped this freefall. We now see some signs of growth. So we still have lots of big problems, but I do give President Obama credit. We were talking about the Cash for Clunker program; that was a boost to the economy. The homebuyers tax credit, that was a boost to the economy. Important to keep in mind: Those are temporary. So we're, in effect, borrowing growth from the future with those.
Widening budget deficit
JEFFREY BROWN: Philip Jefferson, what about this news we just mentioned about the budget deficit being higher than anticipated? And we're still waiting on details on that, I should say. But if that is the case, that would clearly potentially crimp economic activity going forward, wouldn't it?
PHILIP JEFFERSON: Well, that suggests to me that there will be need for fiscal restraint in the future. However, now is not the time for fiscal restraint on the part of the government.
My colleague also mentioned the stimulus package. We're going to expect some more growth as a result of more of the stimulus from that package coming online over the next six months. And that's going to be a very positive development for the economy.
In terms of the long-term fiscal picture, the news that just came out does argue for more restraint in the future. The government is going to have to curtail spending, but now I don't think is the time to begin to implement that fiscal restraint, because there's still much more recovery that needs to take place.
And we need the jobs. We need the demand, because the consumer is not playing his or her traditional role. Businesses are still not coming online in a strong way with respect to investment. We're going to get some help from the international economy as our trading partners start to recover, so we really need the government to continue to provide demand, which is a fundamental driver for the economy.
JEFFREY BROWN: Well, Dean Baker, what does this news about the deficit tell you?
DEAN BAKER: Well, I wish we had more details on it, but what I worry is that the main reason for this increase in the deficit projections is they're projecting worse economic growth, because the last set of projections, those look relatively optimistic compared to the picture we're looking at today.
And in that case, we certainly won't want to be cutting back spending, raising taxes, because the point would be the economy is even weaker than what we had previously anticipated.
JEFFREY BROWN: But it does put up a mirror that -- or look at a crystal ball that looks worse than we thought.
DEAN BAKER: That's right. That's right. And, again, to my mind, we tend to focus on the deficit very often, which we care about, but first and foremost is the economy itself. And if the deficit is getting bigger because the economy is weaker, well, the answer then is we have to try and boost the economy first and foremost.
JEFFREY BROWN: You know, I want to ask you both about the question of psychology, because back in last year, we talked about this so much for many months. And I noticed Ben Bernanke said today -- this is a quote -- "The events of last September and October exhibited some features of a classic panic," the kind of thing we talked a lot about back then.
Does it make more sense now or is there an impact in sort of talking up the economy, which seems to be happening now? Or is it wiser for Mr. Bernanke and the administration to continue with the caution?
Dean Baker, you first.
DEAN BAKER: Well, I think there are two different issues here. One, there was this panic going back to last fall with the financial markets and financial institutions, that people almost were -- you know, it was like the Depression. People wanted the cash under their mattress. I mean, no one trusted anyone. That, thankfully, has settled down; that we want to stay settled down.
The other part of the story, people keep talking about this with consumers, that the problem is they're not optimistic enough. Consumers aren't spending -- I use this joke -- they aren't spending for the same reason homeless people don't spend. They don't have the money.
People have lost a huge amount of wealth with the collapse of the housing bubble, so the idea that somehow, if we could just get consumers to be happy, they'd go out and spend, no, that's not true. They're recognizing they don't have the wealth in their home that they thought they had, and they're adjusting accordingly, and that's probably the right thing for them to do, and we can't tell them otherwise.
JEFFREY BROWN: What do you make of the psychology question, Professor Jefferson?
PHILIP JEFFERSON: Well, I don't disagree with what your guest said just now in that the housing sector is very important in terms of psychology. There has been a lot of damage done to households' balance sheets.
But I think, as we see the housing market stabilize, American households realize that their homes are not losing as much value, I think they will start to feel a level of comfort that will make them more able and more willing to spend going forward.
So I do think we're dealing with psychology here. And I think it's very important for the spending decisions, particularly on big-ticket items. But I think that as people, households see the environment around them stabilize, the unemployment rate stops rising as severely, and they become more optimistic about the value of their homes, then they will be willing to buy.
JEFFREY BROWN: And just in our last minute, Dean Baker, we both talked about the stimulus package, the one that we already have. As you know, there's more talk about whether there should be another one. There's also talk about whether the Fed might start unwinding some of those programs. What do you look for in the coming months to tell you whether those things should happen?
DEAN BAKER: Well, I think the biggest thing is what goes on in the labor market. If we continue to lose jobs at a relatively rapid rate, if the unemployment hits 10 percent and goes somewhat higher, as I think is likely, I think there will be a real big cry for another stimulus. People are not going to put up with that.
JEFFREY BROWN: And, Professor Jefferson, what do you think?
PHILIP JEFFERSON: I think the Fed will continue to support the financial sector. I think that unwinding that we're talking about will be very deliberate. And I think, as long as the labor market is not back at full steam, I would expect to see some push for further stimulus.
JEFFREY BROWN: All right, Philip Jefferson and Dean Baker, thank you both very much.
JIM LEHRER: We'll have more on the economy later in the program.