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'US economy not out of the woods'

April 08, 2010 16:29 IST

Growth chartThe US economy is far from being out of the woods despite showing signs of improvement as many Americans are still grappling with unemployment and states are struggling to maintain essential services, a top Obama Administration official has said.

"Fortunately, today the financial crisis looks to be mostly behind us, and the economy seems to have stabilised and is beginning to grow again. But we are far from being out of the woods," Federal Reserve chairman Ben Bernanke said at the Dallas Regional Chamber.

"Many Americans are still grappling with unemployment or foreclosure, or both. Cities and states are struggling to maintain essential services. And, although much of the financial system is functioning more or less normally, bank lending remains very weak, threatening the ability of small businesses to finance expansion and new hiring," he said.

Some of the toughest problems are in the job market, Bernanke said. The unemployment rate has edged off its recent peak, but at 9.7 per cent, it is still close to its highest level since the early 1980s.

Although layoffs have eased in recent months, hiring remains very weak, Bernanke said in his speech, a copy of which was released by the Federal Reserve.

"More than 40 per cent of the unemployed have been out of work for six months or longer, nearly double the share a year ago.

"I am particularly concerned about that statistic, because long spells of unemployment erode skills and lower the longer-term income and employment prospects of these workers," he noted.

Bernanke said his best guess is that economic growth, supported by the Federal Reserve's stimulative monetary policy, will be sufficient to slowly reduce the unemployment rate over the coming year.

"If economic conditions improve, as I expect, we should see increased optimism among consumers and greater willingness on the part of banks to lend, which in turn should aid the recovery," he said.

"Meanwhile, for the near term, inflation appears to be well controlled. Productivity improvements have helped firms control costs, and little pricing power is evident. Inflation expectations, as measured in the financial markets or in surveys, appear stable," he said.

Today, the economy continues to operate well below its potential, which implies that a sharp near-term reduction in our fiscal deficit is probably neither practical nor advisable, Bernanke said.

"However, nothing prevents us from beginning now to develop a credible plan for meeting our long- run fiscal challenges.

"Indeed, a credible plan that demonstrated a commitment to achieving long-run fiscal sustainability could lead to lower interest rates and more rapid growth in the near term," Bernanke said.

Lalit K Jha in Washington
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