Inflation is still a concern, but over the coming year the U.S. economy should return to a comfortable rate, Federal Reserve Board Chairman Ben Bernanke said Tuesday in a speech to the National Italian American Foundation.

According to the latest estimates by the U.S. Commerce Department, real gross domestic product grew at an annual rate of 2.6 percent in the second quarter and only 1.6 percent in the third quarter. Bernanke said fourth quarter GDP growth is expected to be in the same general range.
Much of that slowdown is attributed to softness in the residential housing sector or, as he described it, an inevitable correction after a boom during the first half of the decade. There are some indications that the rate of home buying may be stabilizing but he cautioned that the slowed pace of residential construction will likely be a drag on economic growth until inventories of unsold homes reach normal levels.
Growth in some manufacturing industries – namely those tied to housing and autos – has slowed noticeably, but the news from other sectors is much better. Production in high-tech industries has been growing rapidly, he noted. High prices for energy and other commodities have stimulated drilling and mining activity. The global economy continues to be strong, which should support continuing expansion of U.S. exports.
“Perhaps the clearest evidence of broader economic strength comes from the labor market,” he said. “Although the number of jobs in manufacturing and construction fell in October, most other sectors of the economy experienced solid job gains.” The national unemployment rate fell to 4.4 percent in October, the lowest it has been since May 2001.
Capital investment has continued to expand at a healthy pace. “Spending on nonresidential construction has been particularly robust,” he noted, and financial conditions continue to be favorable for investment spending.
Overall, economic growth is likely to be modestly below trend in the near future but return to a rate in line with productive capacity over the coming year, he said. However he warned of risks in both directions. On the downside, the correction in the housing market could be deeper than expected, which would affect employment in construction and housing-related industries and might even curb consumer spending by reducing homeowner equity. On the other hand, solid job growth, the declining unemployment rate and the healthy level of capital investment could mean that the economy is stronger than generally believed. Stronger growth could put inflationary pressures on labor and other resources.
Bernanke gave no hint as to what Fed officials might decide regarding interest rates when they meet in mid-December. Inflation has slowed significantly since earlier this year, largely because of lower energy prices. The core inflation rate (inflation excluding energy and food) is still uncomfortably high but expected to moderate gradually over the next year. Energy prices and housing costs are likely to be more neutral and modest economic growth would ease cost pressures. But a failure of inflation to moderate “could be troublesome,” he said.

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