State of the Economy
We're at an ambiguous moment in the state of the economy. There's a mixture of good and bad news and a lot of people can't figure out whether things are going to get worse or are going to get better. My outlook actually has been pretty consistent over the last year or so. I have expected a slow recovery, and I have expected that unemployment will remain at relatively high levels. And I also anticipated that we would not have an upside inflation problem, that inflation would be quite subdued, and that has pretty much played out. So, my basic forecast is for a continued recovery at a slow pace, a low growth rate. And that really hasn't changed dramatically over the last few months. Some of the details of the story have come in a little differently than I expected, but the basic outlook I still hold to—and that's for a slow recovery, low inflation, and a slow improvement in the unemployment question.
Mixed Economic News
It's not unusual in the period after a recovery to have a sort of choppy transition, where you get mixed signals—some things positive, some things negative. We are in a transition from an economy that was helped last year by public stimulus, and a handoff is being made, in effect, to private demand. And in those circumstances, it's not unusual for that transition to not be smooth and not be just a straight line.
I think there's some fundamentals that are improving. For example, the banking system is getting stronger week by week, month by month. The household debt levels that households are carrying are coming down. So households are improving their basic balance sheet positions and will be in a better position to consume and help the economy in the future. Businesses are increasingly resilient. They have been accumulating cash, particularly large businesses, and are in a stronger and stronger position going forward. So, in its fundamentals, the economy continues to improve.
Earlier in the year there may have been excessive optimism and, recently, there may have been excessive pessimism about the state and the future of the economy. At the moment we're in a situation where confidence is being tested on a lot of fronts: business confidence, consumer confidence.
Monetary policy at the moment is quite stimulative and, I think, appropriately so considering the conditions that the economy is facing.
I believe that between now and early next year, in the absence of some kind of shock that comes out of the blue, we'll have several months in which confidence will gradually build, and it will help propel the recovery that I expect.