Bernanke likely to give less dour take on economy

[May 05, 2009]  WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke will provide Congress with a fresh assessment of the country's fragile economic health that probably will note some recent improvements, but still warn that it will take time -- perhaps years -- for the economy to get back to normal.

At the same time, Bernanke is likely to face tough questions by lawmakers at a hearing Tuesday before Congress' Joint Economic Committee about the Fed's multitrillion-dollar efforts to bust through credit clogs and get banks lending more freely again to people and businesses.

Lawmakers worry that the Fed's lending programs, as well as the government's bailout of insurance giant American International Group and taxpayer aid to Citigroup, Bank of America and others, will encourage companies to take excessive risks because Uncle Sam will clean up their messes.

Moreover, the panel's chair, Rep. Carolyn Maloney, D-N.Y., and other lawmakers, have pushed the Fed to be less secretive. Some have called for the Fed to disclose the identity of banks and investment firms that draw loans from its emergency lending program and what collateral they put up for them.

The Fed chief also is likely to be prodded for details about how 19 large banks fared on "stress tests." Results, to be released Thursday, should shed light on which banks may need government support if the recession were to take a turn for the worse.

On the economic front, there have been some glimmers of hope that the recession is letting up.

Economic reports out Monday showed that construction spending and pending home sales both fared better than expected in March, and that gave stocks a big lift. The S&P 500, considered Wall Street's most important indicator, bounded up 3.4 percent Monday and erased the last of its losses for 2009. And the Dow Jones industrials shot up more than 200 points and had their first finish above 8,400 since Jan. 13.

Last week, Bernanke and his colleagues said they detected signs the recession is loosening its firm grip, an observation likely to be repeated at Tuesday's hearing.

Although the economy is still contracting, "the pace of contraction appears to be somewhat slower," Fed policymakers said last week in deciding not to take any new steps at that time to shore up the economy.

The economy's rate of decline topped 6 percent in both the final three months of last year and in the first three months of this year. It marked the worst six-month performance since the late 1950s.

However, in the current quarter, analysts are predicting the economy won't shrink nearly as much -- anywhere from a pace of 1 percent to 3 percent. As President Barack Obama's economic stimulus package of tax cuts and increased government spending takes hold, some think there's a chance the economy will start growing again in the third quarter. Others, though, think that's more likely to happen in the final quarter of this year.

Economists believe the worst of the recession is past in terms of lost economic growth -- barring any new shocks. Still, the Fed warned last week that "economic activity is likely to remain weak for a time."

And, even though spending by American consumers has shown signs of "stabilizing, " the Fed said that ongoing job losses, tanking home values and hard-to-get credit will weigh on consumers.

More Americans also will be pushed into the ranks of the unemployed in the months ahead.

The jobless rate is expected to jump from 8.5 percent in March to 8.9 percent in April as employers continue to slash hundreds of thousands of jobs. The government releases that report on Friday.

Unemployment is expected to hit 10 percent by the end of this year and will probably rise a bit more into early next year before it starts to slowly drift down. Companies won't feel inclined to ramp up hiring until they are confident that any economic recovery has staying power. Economists said the the unemployment rate isn't likely to return to normal -- meaning around 5 percent -- until 2013.

[Associated Press; By JEANNINE AVERSA]

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