Before Federal Reserve Chairman Ben Bernanke could even take the podium at a high level annual symposium in Jackson Hole, WY, the business world was rocked with the realization that a large portion of the economic growth reported this spring was little more than a mirage.
Fueling panic that a double-dip recession may be moving from a longshot to an even-money possibility, the Commerce Department unveiled its revision of second-quarter gross domestic product (GDP) statistics, and it wasn't pretty. Commerce's revision revealed GDP growth tracked at just 1.6%, more than one-third off the 2.4% pace reported initially for the quarter and less than half of the growth rate present in the first-quarter.
Driving the lackluster growth numbers, at a time that in previous years had been predicted as the turning point to a robust economic rebound period, is the growing imbalance in trade. Commerce confirmed that imports spiked by the largest total in about 26 years during the latest quarter, and the overall trade imbalance sits at its worst ratio since just after World War II. The most positive impact on GDP numbers, however, came from business sector investments, up by more than 20%, in areas such as equipment and infrastructure. Granted, such an increase is part and parcel with procrastination by companies slow to make needed replacements during the bleakest point of the economic downturn.
Still, Bernanke himself held up business sector investment as a positive during his speech at Friday's Federal Reserve Bank of Kansas City Economic Symposium. However, he did note such increases might slow through year's end, though staying at a "healthy pace," and noted that investment in the commercial real estate area is one of the two most dangerous obstacles preventing better economic growth. The other is employment numbers.
"Although output growth should be stronger next year, resource slack and unemployment seem likely to decline only slowly. The prospect of high unemployment for a long period of time remains a central concern of policy. Not only does high unemployment, particularly long-term unemployment, impose heavy costs on the unemployed and their families and on society, but it also poses risks to the sustainability of the recovery itself through its effects on households' incomes and confidence."
Bernanke defended the Fed's policies, including keeping interest and borrowing rates near historically low levels, and noted that inflationary and deflationary pressures have yet to creep into the economic picture enough to date to change course. He also reiterated that the Fed's Federal Open Market Committee would continue to help prop up a near-term rebound, slight or stout, in any way possible. Still, striking a balance on economic policies remains difficult for the Fed at present, in part because of the differing needs of the various sectors. Even within the business sector, there is a bit of a tale-of-two-cities conundrum to address:
"Generally speaking, large firms in good financial condition can obtain credit easily and on favorable terms -- moreover, many large firms are holding exceptionally large amounts of cash on their balance sheets For these firms, willingness to expand--and, in particular, to add permanent employees--depends primarily on expected increases in demand for their products, not on financing costs. Bank-dependent smaller firms, by contrast, have faced significantly greater problems obtaining credit, according to surveys and anecdotes. The Federal Reserve, together with other regulators, has been engaged in significant efforts to improve the credit environment for small businesses...There is some hopeful news on this front: For the most part, bank lending terms and conditions appear to be stabilizing and are even beginning to ease in some cases, and banks reportedly have become more proactive in seeking out creditworthy borrowers."
Bernanke later went on to predict the economic recovery will continue and do so at a better pace in 2011 -- but he also called any economic forecast "inherently uncertain" citing the surprises and volatility of recent years.
(Editor's Note: See more coverage and analysis in next week's eNews, out Sept. 2nd).
Brian Shappell, NACM staff writer