WASHINGTON: Federal Reserve chief Ben Bernanke said Wednesday that stagnant wages and unemployment were holding back the US economy, chilling a surge in optimism that came after the government raised its estimate for fourth quarter growth.
The Fed chief warned of sluggish growth in 2012 as fretful consumers keep their wallets zipped, though he admitted a disconnect between the data showing strengthening in the manufacturing sector and, at the same time, still-weak consumer sentiment.
“The fundamentals that support spending continue to be weak,” Bernanke said in semi-annual testimony to Congress.
“Real household income and wealth were flat in 2011, and access to credit remained restricted for many potential borrowers. Consumer sentiment, which dropped sharply last summer, has since rebounded but remains relatively low.”
The picture appeared at odds with the Commerce Department’s revision of its growth estimate for the last three months of 2011 to a peppy 3.0 percent from an initial estimate of 2.8 percent.
But that came after a dismal third quarter, and Bernanke said the economy this year was likely to expand “at a pace close to or somewhat above” the more tepid average of 2.25 percent for the full second half of 2011.
He also played down expectations of a continued sharp rebound in jobs, saying the Fed expected unemployment would decline only slowly from the current official rate of 8.3 percent.
The new data and Bernanke’s testimony gave meat to both President Barack Obama’s Democrats and rival Republicans as the White House race picks up pace with a focus on Obama’s economic record since the disastrous 2008-2009 recession.
Senior Republican congressman Jeb Hensarling blasted Bernanke for his characterization of the recovery under Obama as “modest.”
“The true unemployment rate is 15.4 percent,” he said.
“Half of all Americans are now classified by the Census Bureau as either low income or in poverty, and one in seven now have to rely on food stamps.”
Bernanke pointed to an apparent contradiction in economic data -- on one hand showing a promising rise in production and some areas of consumption, and on the other, still-depressed consumer activity and still-slow job creation.
Still, he said, the key issues were still high unemployment, stagnant wages and the depressed housing market.
“Unfortunately, many potential (home) buyers lack the down payment and credit history required to qualify for loans,” the Fed chief said.
“Others are reluctant to buy a house now because of concerns about their income, employment prospects, and the future path of home prices.”
After the sharp fall in the jobless rate in the last six months, to 8.3 percent in January from 9.1 percent in August, Bernanke said the Fed expects unemployment “to continue to edge down only slowly” this year.
“Long-term unemployment is still near record levels, and the number of persons working part time for economic reasons is very high,” he said.
Economists said Bernanke was not ready to embrace the trickle of more positive data on the economy in recent weeks.
“Today’s testimony shows (the Fed) is unconvinced of the recovery’s sustainability,” said BBVA Research in an analysis.
But some said that he was being typically cautious, and that the new fourth-quarter growth estimate suggested a rosier picture for households than the Fed chief painted.
“The upside surprise came in higher estimates for consumer spending on services,” said Nigel Gault, chief US economist at IHS Global Insight.
“Household incomes have been doing better than we thought, giving consumers a bigger cushion to cope with the headwind from rising gasoline prices,” he said.
Meanwhile Bernanke played down the most recent worry of rising oil prices, which has become a political issue as the campaign for the November presidential election picks up.
The rise of gasoline prices is “likely to push up inflation temporarily,” he said.
But, in the longer term. inflation is expected to “remain subdued.” US markets took the Fed chief’s sober views to heart. The Commerce Department data sparked a solid opening jump in stocks, but Bernanke’s cold water brought them lower.
The Dow closed down 0.41 percent at 12,951.61, while the S&P 500 ended off 0.48 percent at 1,365.66.