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Banking

Atlanta Fed President Explores Fundamentals Shaping the Recovery

photo of Atlanta Fed Chair Dennis LockhartThe nation's tepid economic recovery is likely to continue in 2012, Federal Reserve Bank of Atlanta President Dennis Lockhart said in a speech January 9.

In remarks before Atlanta's Downtown Rotary Club, Lockhart said he expects gross domestic product (GDP) growth for this year of 2.5 to 3 percent without major negative shocks and slow but steady progress in bringing down unemployment. "The Atlanta Fed's outlook anticipates a moderate pace of improvement but real progress on most fronts," Lockhart said.

While he is encouraged by the improved performance of the economy, Lockhart cautioned that uncertainty continues to weigh heavily on consumers and businesses. The sovereign debt situation in Europe, he believes, will be the biggest wild card in 2012.

Fundamentals of the economy
In addition to delivering an outlook for 2012 and summarizing the economy's 2011 performance, Lockhart explored five economic fundamentals that he said are undergoing "repair and restructuring." The fundamentals that Lockhart believes are shaping today's economic performance include:

  • Household finances are improving, as evidenced by lower debt levels and higher consumption in the second half of 2011. Lockhart cautioned that the stronger consumption late in the year likely "was associated with falling savings rates, compensating for stagnating income growth. I question whether this consumer spending momentum will be sustained without a pickup in income growth."
  • Business finances are healthy, particularly at larger companies. Because of lower costs and higher productivity, big businesses are profitable and positioned to sustain decent results, Lockhart noted. However, smaller companies are generally not on as sound of a financial footing.
  • The banking and financial system has strengthened its capital position and reduced nonperforming assets, and capital markets have largely recovered from their impaired state. "Overall, much progress has been made, but the financial system is not yet back to full strength," Lockhart said. "We can't really have a healthy economy without a strong banking and financial sector."
  • Public sector finances remain severely stressed. State and local governments have made painful cuts in services and jobs and face serious long-term challenges related to pension obligations. Meanwhile, federal spending and revenues remain out of balance. "Government finances are not on a sustainable path and continue to be a weak element in the overall economic picture," Lockhart explained.
  • Finally, new business formation is a foundational economic element because start-ups account for about 10 percent of firms but generate nearly 20 percent of new jobs every year, on average. Beginning in the year the recession started, 2007, the rate of new establishment formation dropped and has rebounded slowly. Moreover, there appears to be a longer-term trend that started in the late 1990s of individual new businesses employing fewer people.

January 18, 2012

 

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