Lockhart Foresees Sustainable Growth Despite Headwinds

Lockhart Foresees Sustainable Growth Despite Headwinds

photo of Atlanta Fed President Dennis Lockhart

After many months of uneven progress, the nation's economy seems to have gained sustainable momentum, according to prepared remarks that Atlanta Fed President Dennis Lockhart was to deliver January 10 at the Rotary Club of Atlanta. The speech was cancelled because of a winter storm.

While acknowledging economic obstacles including a still-weak housing market, Lockhart said he expects growth in gross domestic product, personal incomes, and jobs to be better in 2011 than in 2010. However, he still expects overall economic growth to remain modest.

"I acknowledge the potential that economic performance this year could surprise me on the upside," Lockhart said in the text. "Businesses, for example, are sitting on lots of cash. Cash accumulation is not something that can continue forever, particularly in the case of public companies. It may not take much weakening of headwinds to unleash some of the economic forces that thus far have been bottled up."

Housing a damper on consumer spending
In addition to the torpid housing market, constraints include continuing repair in credit markets and lingering uncertainty acting to restrain business and consumer spending. Lockhart said those constraints largely reflect structural adjustments that ultimately will strengthen the U.S. economy.

Among the most intense headwinds, in Lockhart's view, is the interplay among the housing market, household finances, and consumer spending. Individuals continue to pay down debt and spend less as home values fall, reducing the personal wealth and confidence of many homeowners. The housing market will likely improve slowly, Lockhart said, and he cited four barriers to faster improvement: stricter mortgage underwriting standards, foreclosures continuing in large numbers, too many unsold homes, and sluggish employment and income growth.

The direction of home prices will depend mainly on foreclosures. Most of the 5 million mortgages either in foreclosure or seriously delinquent will enter the market in the next couple years, on top of the existing glut of homes for sale, further depressing prices and values, Lockhart said.

Banking conditions mixed
Regarding the banking system and credit markets generally, Lockhart said credit market repair continues. He noted that during 2009, total U.S. credit shrank for the first time since the 1940s, and that during 2010, financial institutions continued to reduce risk.

"Conditions in the banking system today are mixed," he added. "On the one hand, many banks have raised new capital, repaid government support, and seen the pace of write-offs come down. On the other hand, the FDIC still lists 860 problem institutions, and more bank failures can be expected in 2011."

January 25, 2011