Financial Update (First Quarter 2010)

Lockhart Describes a Forked Economic Road

The nation's economy is in the early stages of a fragile recovery that could go one of two ways: a traditional sharp rebound following a deep recession, or a more gradual comeback with slow progress on unemployment, Atlanta Fed President Dennis Lockhart said in a recent speech in Augusta, Ga.

photo of Fec Chairman Dennis Lockhart

Variables remain in play
While warning that numerous uncertainties could affect events, Lockhart said he and Atlanta Fed economists are forecasting a recovery on the tepid side. "Our outlook gives weight to some challenges facing the economy and the banking sector that we believe may constrain recovery," the Reserve Bank president remarked during a visit to the Augusta Metro Chamber of Commerce.

The slower-recovery narrative, Lockhart continued, would entail fundamental shifts in business and consumer practices. Such a shift might mean that companies learned from the recession that they can operate permanently with less inventory and fewer workers. For their part, consumers have already reduced their spending and increased saving.

"And even if consumers wanted to resume prerecession spending habits, the consumer finance industry, in this narrative, will not accommodate previous levels of consumption," Lockhart said. "In this narrative, growth continues, but at a very modest pace, and unemployment is very slow to recede."

Key points to survey
To determine which of these routes the economy takes, Lockhart said he will be closely watching three factors:

  • Business inventories: If businesses significantly replenish their stocks, growth could be much stronger this year than the Atlanta Fed expects.
  • General uncertainty and its impact on business investment: Continued uncertainty surrounding issues such as commercial real estate, health care, regulation, and the federal deficit could continue to limit investment. "Because of the cloud of uncertainty, my forecast does not include much further improvement of capital spending in 2010," Lockhart said.
  • The labor market: If the benefits of earlier cost and job cuts reach their limits, businesses might step up hiring.

February 26, 2010