JACKSON HOLE, Wyo. (MNI) – The following is the second section of
the text of the remarks of Federal Reserve Chairman Ben Bernanke
prepared for his Jackson Hole address Friday morning:

On the one hand, this finding suggests that households,
collectively, are even more cautious about the economic outlook and
their own prospects than we previously believed. But on the other hand,
the upward revision to the saving rate also implies greater progress in
the repair of household balance sheets. Stronger balance sheets should
in turn allow households to increase their spending more rapidly as
credit conditions ease and the overall economy improves.

Household finances and attitudes also bear heavily on the housing
market, which has generally remained depressed. In particular, home
sales dropped sharply following the recent expiration of the homebuyers
tax credit. Going forward, improved affordability–the result of lower
house prices and record-low mortgage rates — should boost the demand
for housing. However, the overhang of foreclosed-upon and vacant housing
and the difficulties of many households in obtaining mortgage financing
are likely to continue to weigh on the pace of residential investment
for some time yet.

In the business sector, real investment in equipment and software
rose at an annual rate of more than 20 percent over the first half of
the year. Some of these gains no doubt reflected spending that had been
deferred during the crisis, including investments to replace or update
existing equipment. Consequently, investment in equipment and software
will almost certainly increase more slowly over the remainder of this
year, though it should continue to advance at a solid pace. In contrast,
outside of a few areas such as drilling and mining, business investment
in structures has continued to contract, although the rate of
contraction appears to be slowing.

Although most firms faced problems obtaining credit during the
depths of the crisis, over the past year or so a divide has opened
between large firms that are able to tap public securities markets and
small firms that largely depend on banks. Generally speaking, large
firms in good financial condition can obtain credit easily and on
favorable terms; moreover, many large firms are holding exceptionally
large amounts of cash on their balance sheets. For these firms,
willingness to expand–and, in particular, to add permanent employees —
depends primarily on expected increases in demand for their products,
not on financing costs. Bank-dependent smaller firms, by contrast, have
faced significantly greater problems obtaining credit, according to
surveys and anecdotes. The Federal Reserve, together with other
regulators, has been engaged in significant efforts to improve the
credit environment for small businesses. For example, through the
provision of specific guidance and extensive examiner training, we are
working to help banks strike a good balance between appropriate prudence
and reasonable willingness to make loans to creditworthy borrowers. We
have also engaged in extensive outreach efforts to banks and small
businesses. There is some hopeful news on this front: For the most part,
bank lending terms and conditions appear to be stabilizing and are even
beginning to ease in some cases, and banks reportedly have become more
proactive in seeking out creditworthy borrowers.

Incoming data on the labor market have remained disappointing.
Private-sector employment has grown only sluggishly, the small decline
in the unemployment rate is attributable more to reduced labor force
participation than to job creation, and initial claims for unemployment
insurance remain high. Firms are reluctant to add permanent employees,
citing slow growth of sales and elevated economic and regulatory
uncertainty. In lieu of adding permanent workers, some firms have
increased labor input by increasing workweeks, offering full-time work
to part-time workers, and making extensive use of temporary workers.

Besides consumption spending and business fixed investment, net
exports are a third source of demand for domestic production. The
substantial recovery in international trade is a very positive
development for the global economy; for the United States, improving
export markets are an important reason that manufacturing has been a
leading sector in the recovery. Like others, we were surprised by the
sharp deterioration in the U.S. trade balance in the second quarter.
However, that deterioration seems to have reflected a number of
temporary and special factors. Generally, the arithmetic contribution of
net exports to growth in the gross domestic product tends to be much
closer to zero, and that is likely to be the case in coming quarters.

Overall, the incoming data suggest that the recovery of output and
employment in the United States has slowed in recent months, to a pace
somewhat weaker than most FOMC participants projected earlier this year.
Much of the unexpected slowing is attributable to the household sector,
where consumer spending and the demand for housing have both grown less
quickly than was anticipated. Consumer spending may continue to grow
relatively slowly in the near term as households focus on repairing
their balance sheets. I expect the economy to continue to expand in the
second half of this year, albeit at a relatively modest pace.

Despite the weaker data seen recently, the preconditions for a
pickup in growth in 2011 appear to remain in place. Monetary policy
remains very accommodative, and financial conditions have become more
supportive of growth, in part because a concerted effort by policymakers
in Europe has reduced fears related to sovereign debts and the banking
system there. Banks are improving their balance sheets and appear more
willing to lend. Consumers are reducing their debt and building savings,
returning household wealth-to-income ratios near to longer-term
historical norms. Stronger household finances, rising incomes, and some
easing of credit conditions will provide the basis for more-rapid growth
in household spending next year.

Businesses’ investment in equipment and software should continue to
grow at a healthy pace in the coming year, driven by rising demand for
products and services, the continuing need to replace or update existing
equipment, strong corporate balance sheets, and the low cost of
financing, at least for those firms with access to public capital
markets. Rising sales and increased business confidence should also lead
firms to expand payrolls. However, investment in structures will likely
remain weak. On the fiscal front, state and local governments continue
to be under pressure; but with tax receipts showing signs of recovery,
their spending should decline less rapidly than it has in the past few
years. Federal fiscal stimulus seems set to continue to fade but likely
not so quickly as to derail growth in coming quarters.

Although output growth should be stronger next year, resource slack
and unemployment seem likely to decline only slowly. The prospect of
high unemployment for a long period of time remains a central concern of
policy. Not only does high unemployment, particularly long-term
unemployment, impose heavy costs on the unemployed and their families
and on society, but it also poses risks to the sustainability of the
recovery itself through its effects on households incomes and
confidence.

Maintaining price stability is also a central concern of policy.
Recently, inflation has declined to a level that is slightly below that
which FOMC participants view as most conducive to a healthy economy in
the long run. With inflation expectations reasonably stable and the
economy growing, inflation should remain near current readings for some
time before rising slowly toward levels more consistent with the
Committee’s objectives.

At this juncture, the risk of either an undesirable rise in
inflation or of significant further disinflation seems low. Of course,
the Federal Reserve will monitor price developments closely.

** Market News International **

[TOPICS: M$$CR$,M$U$$$,MMUFE$,MGU$$$,MFU$$$]