“Economic Recovery Will Be Moderate,” Says Vice Chairman of Federal Reserve

Donald L. Kohn, the Vice Chairman of the Board of Governors of the Federal Reserve System, gave a speech yesterday in which he said the economy appears to be recovering, but will most likely do so gradually.  The speech, which took place at the National Association for Business Economics, went into great detail about Mr. Kohn’s opinion on the state of the economy over the last year, and his forecast for its recovery.

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Slow But Steady

While the Vice Chairman was cautious in his assessment of the economy, he was optimistic, claiming that the pickup in activity over the last few months has demonstrated a return of consumer confidence and risk taking behavior, as actions by the government and the federal reserve have relieved some of the downward pressure on the economy that we have experienced since late 2007.

In reference to the housing market, Mr. Kohn said that after three years of steep declines, recent news on housing has been “encouraging, given the central role that this sector has played in the recession.” Home sales have increased since early this year; as demand has strengthened, construction of single-family homes has risen in recent months.

On Unemployment

His comments on the state of unemployment were slightly less optimistic, saying that while the rate of unemployment growth has slowed, it is not declining and could reach 10% in 2010.  He stated that the difficulty in the labor market is one of the main reasons why his predictions for the economy remain so conservative.

In addition to cutting jobs, Kohn also said that companies have been cutting costs by reducing employee compensation.  One measure of labor compensation, which measures hourly compensation in the non-farm sector, was shown to have decreased by 2.25% on average during the first half of 2009.  This increased pressure on companies to cut-costs, however, has actually had the added effect of increasing productivity, which rose sharply in the first half of the year.

The Big Picture

Perhaps most relevant were the Vice Chairman’s comments on the macroeconomic factors coming out of the 3^rd quarter of 2009, which mainly emphasized his view that the recovery from this recession will not be “V-shaped”, but instead climb gradually due to government regulations and restraints on credit lending for individuals as well as banks.  Also, consumers who remain wary of an economy that has so recently failed them are likely to change their behaviors to favor more conservative investment and higher savings percentages, and a smaller housing market will have an big effect on the investment role of businesses in the future.

A slow recovery is not necessarily a bad thing.  In fact, it could signify that rather than a quick fix, the economy has undergone some changes that will not allow a repeat of the kind of excesses that got us into this financial mess in the first place, but will slowly regain its strength in a way that is more sustainable and safer for our country’s markets.