By Steven K. Beckner
He went on to note that “there are sectors that remain in a very
depressed condition-housing, for example.” Indeed, he said “recent
numbers suggest a sharp slowdown of residential real estate market
activity with the expiration of the homebuyer tax credit.”
Lockhart called near 10%, “stubbornly high” unemployment “the most
sobering aspect of current economic reality.”
He said “the past few weeks … have seen a slight retrenchment
from the mind-set of optimism and growing confidence that prevailed
earlier in the year.”
Not only have the data been more discouraging, he said, but there
is a “heightened sense of uncertainty and risk surrounding the outlook.”
Lockhart said the “cone of uncertainty” which firms project forward
in making their forecasts and plans has recently “splayed wider.” He
blamed four factors, starting with the European sovereign debt crisis
and the liquidity pressures it has put on European banks.
“Our financial system here in the United States has rather small
and manageable direct exposure to the Greek government and the other
sovereign borrowers,” he said. “But as the situation has evolved,
exposure to European banks as well as foreign and local corporations in
the affected countries has complicated the estimation of risk.”
“The concern is that continuing and possibly escalating financial
market pressures will be transmitted through interconnected banking and
capital markets to our economy,” he continued. “There is also the
potential effect on our export markets of a stronger dollar and weaker
European economies.”
Fiscal tightening by state and local governments is “a second
source of uncertainty,” he said, estimating a $144 billion collective
budget gap that will need to be closed by “spending less and taxing
more.”
Lockhart said commercial real estate remains a third source of
uncertainty.
“Banks across the country, especially small and regional banks, are
heavily exposed to the commercial property sector and face a heavy
docket of loan restructurings that may require sizable write-downs…,”
he said. “Views vary on how severe a problem is developing and whether
it will require an organized comprehensive resolution effort to avoid
widespread damage to the economy.”
Finally, Lockhart cited the oil spill. Although its impact has so
far “been mostly local and regional,” he said it presents “two main risk
factors for the national economy-the impact on energy supplies and
transportation.”
“The economic effect at the national level has been limited,” he
said. “I’m prepared to believe, however, that this relentless
environmental disaster is an additional factor holding back consumer and
business confidence. The spill disheartens us all and, I believe, makes
the public a little more reticent to assume a smooth recovery path.”
Meanwhile, Lockhart downplayed inflation risks even more than he
has in the past, seeming to elevate the possibility of deflation, or at
least intensified disinflation.
“(N)o matter the measure, it’s difficult to discern much
broad-based price pressure today,” he said. “Recent retail price trends
have evidenced further disinflation, the intermediate condition between
rising inflation and deflation.”
“Commodity prices have fluctuated up and down in response to global
supply and demand, but again it’s hard to interpret the rise of some
commodity prices as a broad-spectrum, one-directional phenomenon,” he
said.
Lockhart also said “the measures we have of forward-looking
inflation expectations are stable and relatively low. Surveys of
households about their inflation concerns have shown little upward-or,
for that matter, downward-tendency over the past few years. Inflation
predictions that are priced into some government bonds also don’t seem
to signal a problem.”
He said “very few firms have much in the way of pricing power in
the current economy” due to “the weight of excess capacity … . (B)oth
the hard data and the consensus of the Atlanta Fed directors and many
other business contacts point to considerable slack at work.” Although
percent of capacity use in manufacturing has risen, “the current share
is quite low and still about 8 percentage points under pre-recession
levels.”
Meanwhile, he said “the high level of unemployment has limited
workers’ negotiating power.”
“To sum up, I don’t see inflation as much of a current worry,” he
continued. “If anything, there is a small risk of deflation that must be
monitored.”
“Limited inflation allows focused attention to recovery and
growth,” he added.
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** Market News International **
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