Fed's Bernanke: Elements in Place for U.S. Recovery

Federal Reserve Board Governor Ben Bernanke said Friday financial factors should not be a headwind to an increasingly robust recovery, with many businesses seemingly in position to boost spending and hiring.

"My sense is that the household and banking sectors are in good financial shape," Bernanke told a conference sponsored by St. Cloud State University's Center for Economic Education.

"Though financial problems exist, they should not in themselves restrain the building economic recovery," he added.

While financial conditions were mixed in the corporate sector, he said, the problems were concentrated in just a few industries and that many firms were now in good shape.

"At such time that they feel they are ready to begin hiring and investing again, these firms should be financially capable of doing so," Bernanke said. "A number of factors suggest that investment and hiring should pick up in the months ahead."

A collapse in business spending on plants and equipment led the U.S. economy into recession in 2001 and a pick-up is seen as crucial for a broad-based, sustainable recovery.

Bernanke, echoing a report that Fed Chairman Alan Greenspan delivered to Congress earlier this month, said the prospect of a war against Iraq was playing a big role in holding back business spending.

"The enormous uncertainty regarding the situation in Iraq and other foreign hot spots still continues to cast a heavy pall on firms' planning for the future," he said.

"That uncertainty will have to be significantly reduced, I think, before we can get a real sense of the strength of the underlying economic forces driving the nascent recovery."

Bernanke downplayed the concerns of some economists who view a hangover from the 1990s investment-spending boom as the key reason businesses have stayed on the sidelines.

"I believe that whatever significant (investment) overhang remains is localized in a few industries ... and is probably not a major negative factor for investment in the broader economy at this juncture," he said.

"As uncertainty diminishes, investment should increase."

While business spending plummeted during the recession, consumer spending never dropped, in large part because inflation-adjusted incomes continued to rise even as plunging stock markets decimated portfolios.

Bernanke said income growth should continue to underpin consumer spending and that the drag from the loss of stocks' wealth, which has been offset to a degree by rising home prices, looked set to diminish.

"The largest part of the negative wealth effect created by the fall in stock prices is probably behind us," he said.

In addition, he expressed confidence the sharp home-price gains of recent years did not reflect an unsustainable bubble.

"For the nation as a whole, the rise in house prices appears to have closely tracked economic fundamentals -- including rising household incomes, high rates of household formation and historically low mortgage rates," he said.

He also said rising debt loads and an increase in bankruptcies did not mean consumers were overextended. The level of debt reflected, in part, a rise in home ownership and an increase in mortgage lending stemming from historically low interest rates, while the expansion of the so-called subprime lending market had led to the rise in bankruptcies, he said.

"The bottom line is the consumer seems in pretty good shape for this stage of the business cycle," Bernanke said, although he added a significant increase in unemployment could cause consumers to retrench.

"At this point, however, the labor market, while not nearly as robust as we would wish, appears at least to be stable," he added.

As for banks, he said weak demand, not a tightening of credit standards, was likely the biggest factor behind a reduced volume of business loans.