WASHINGTON (MNI) – The following is the text of the prepared
remarks of Cleveland Federal Reserve Bank President Sandra Pianalto
Friday, to the Community Banks Association of Ohio Annual Convention in
Columbus:
The Evolving Financial Services Industry and
the Outlook for U.S. Economic Growth
When I was preparing my comments for today, I was reminded that the
Community Bankers Association of Ohio was founded in 1974 and at your
first annual meeting, you welcomed about a dozen members to the table.
Today this convention draws nearly 400 members from across the state.
What a testament to the tremendous value your organization has brought
to Ohio’s community bankers for nearly four decades.
I’m sure I don’t need to tell this audience about the critical role
that community banks play not just in our local economies, but in
America’s economy. As president of the Federal Reserve Bank of
Cleveland, I rely on input from community bankers to better understand
economic activity in my district. Your perspective matters. Community
bankers serve on the board of directors of the Cleveland Federal Reserve
Bank as well as on our branch boards in Cincinnati and Pittsburgh.
In fact, the entire Federal Reserve System values your voice. This
past year, we formed Community Depository Institution Advisory Councils
in each of our 12 Federal Reserve districts across the country. A
national council comprised of the chairs of each regional advisory panel
meets with the Board of Governors in Washington twice a year. These
councils were formed to collect information and insights on the economy,
lending conditions, regulatory matters, and other issues from the
standpoint of community bankers. And believe me-I am listening. What I
am consistently hearing from you are concerns about the many challenges
facing your industry. In the aftermath of the financial crisis and the
very deep recession, you find yourselves dealing with new regulations,
fierce competition, and tepid demand for loans in a disappointingly weak
economy.
Today, I am going to give you my perspective on some of these
challenges. Specifically, in my comments this morning, I’m going to
touch upon three related areas.
–First, I’ll share my outlook for the U.S. economy.
–Next, I’ll talk about small business access to credit.
–Finally, I’ll discuss the ongoing process of regulatory reform.
Please note that the views I’ll share with you today are my own and
do not necessarily represent the opinions of my colleagues in the
Federal Reserve System.
Economic Outlook
Let me begin, then, with a description of my outlook for the U.S.
economy.
Usually, deep recessions produce strong and fast recoveries. Based
on historic patterns, we should have experienced a roughly 10 percent
rebound in real GDP growth during the first year of our expansion.
Instead, our first four quarters of growth amounted to only a 3.3
percent gain. In fact, we are still not back to the overall level of
economic activity that we attained before the recession that began at
the end of 2007.
The unusual combination of forces that caused the recession is also
making the exact course of the recovery difficult to forecast. You might
recall that early last year, it appeared that the economy was finally
showing the first “green shoots” of growth. Yet, over the summer, dark
clouds appeared on the horizon in the form of a weakening recovery and
falling inflation leading the Federal Open Market Committee to initiate
a second round of large scale asset purchases. Early this year, once
again, the economy appeared to be strengthening, and yet once again, in
the summer, storm clouds appeared. In January, most FOMC members
projected real GDP would expand by 3 to 4 percent this year. In June,
the FOMC’s projections fell to the range of 2 to 3 percent.
Then a lightning bolt struck on Friday, July 29, when the Commerce
Department revised its estimates for economic growth going back to 2003,
and at the same time, gave us our first look at economic growth in the
second quarter of this year. The new statistics gave us two critically
important pieces of information. First, we learned that the magnitude of
the recession was worse than we had thought, and second, we learned that
growth in the first half of this year was considerably slower than we
had expected. In the period between the FOMC’s June and August meetings,
other incoming data had also been disappointing, leading the Committee
to conclude at our meeting last week that labor market conditions had
deteriorated in recent months, household spending had flattened out, and
the housing sector remained depressed. As a result, last week the
Committee indicated that it now expected a somewhat slower pace of
recovery over the coming quarters and that the downside risks to the
economic outlook had increased.
Key among the issues revealed in the latest GDP release is that
consumption growth has been exceptionally soft throughout the recovery
and was virtually unchanged in the second quarter. Consumer spending
accounts for two-thirds of GDP, so it is a key driver of economic
growth. This year, consumers are being extraordinarily cautious, and
perhaps understandably so. Those who haven’t lost their jobs have
certainly seen friends and family lose theirs. And just about every
American household has suffered losses of wealth during the past four
years. Under these conditions, it’s understandable that consumers are
focused on rebuilding their lost wealth, not on spending.
Household incomes have been growing slowly during the past two
years, and consumers are spending less of what income they are earning.
They are saving more, and they are reluctant to take on new debt. Last
month, consumer confidence fell to levels not seen since the depths of
the recession in 2009. More households expect their incomes to fall over
the next 12 months than to rise. The recent volatility we have seen in
equity markets is both an expression of worry and yet another cause for
worry about consumer spending. When I put all of these facts together, I
do not expect much of an economic boost from consumer spending anytime
soon.
Then there is the housing market, whose fortunes are closely tied
to the welfare of most households. Although the housing sector accounts
for only about 5 percent of GDP, it is very sensitive to interest rates
and normally grows rapidly in the early stages of an expansion. Not this
time, though. The housing sector remains very depressed. Home prices are
still under downward pressure, inventories of existing homes are still
very high, and foreclosures continue to be a serious national problem.
Under these conditions, many people are reluctant to buy homes out
of concern that prices may fall further, while others are reluctant to
sell because they believe they won’t receive the full value of their
homes. Also, lenders have tightened their underwriting standards, so
some who may want to buy a home are unable to do so because they can’t
secure a loan. Bottom line-there is actually less investment in housing
taking place in our economy today than there was at the bottom of the
recession. This situation is putting a severe strain on our recovery.
Business investment on equipment and software has been relatively
strong and continues to expand. Many businesses have the capacity to
spend more, but are simply hesitant to do so; they are still stockpiling
record amounts of cash. Lately, business executives have been telling me
that they are just unsure whether consumer demand will be strong enough
to justify much in the way of new job creation.
Nine million jobs were lost in the recession, and we have added
back only 2 million jobs in the past two years. Recent labor reports
have not brought any relief, either. We’re now contending with an
extremely high unemployment rate of 9.1 percent, and nearly half of
those currently unemployed have been without a job for six months or
longer. Millions more are underemployed. What’s more, the loss of income
and income security is feeding back through the system and further
impairing growth.
My latest forecast is for the economy to grow at a rate of about 2
percent this year, and about 3 percent in each of the next two years.
Our economy has to grow at about a 2 percent clip just to absorb new
labor force entrants and to keep the unemployment rate from rising. If
we’re going to dig ourselves out of the hole that we’re in and begin to
drive down the unemployment rate, we need even faster growth than that.
I think it will take a quite a few years for the unemployment rate to
fall to more typical levels, in the neighborhood of 5 percent.
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** Market News International Washington Bureau: 202-371-2121 **
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