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Signs indicate recovery may be finally arriving

The end of 2011 and the start of the new year has brought a flurry of economic reports suggesting, at long last, the elusive recovery may finally be at hand. Of course, there are still reasons to remain cautious.

“Over the past two and a half years, the U.S. economy has been gradually recovering from the recent deep recession. While conditions have certainly improved over this period, the pace of the recovery has been frustratingly slow, particularly from the perspective of the millions of workers who remain unemployed or underemployed,” said Ben Bernanke, chairman of the Federal Reserve Board in testimony earlier this month before the House of Representative's Committee on the Budget.

Bernanke surprised the financial markets after the January meeting of the Fed's Open Market Committee by extending the period of low interest rates. In a statement, the Fed said it “currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

This was a major shift from the Fed's previous policy of low rates through mid-2013.

Shortly after the chairman's testimony the Department of Labor reported U.S. payrolls rose by 243,000 in January and the jobless rate fell to 8.3 percent. Both the increase in new hires and decline in the jobless rate were unexpected by most analysts and suggest the economy is gaining momentum.

“If this is the case, the Federal Reserve's statement that interest rates are unlikely to be raised until the end of 2014 or beyond might have been premature. At the same time, the economy rarely moves in a straight line and could well slow again. For example, hiring also started out last year with strength only to falter later in the spring,” said Lynn Reaser, chief economist at Point Loma Nazarene University's Fermanian Business and Economic Institute.

To be sure, the Fed is walking a line between attempts to stimulate the economy with low interest rates and ultimately fueling the fires of inflation. The ultimate consequence — growth along with inflation — will have an impact on lenders, borrowers, consumers and investors.

But, it is the fear that the trillions of dollars used by the Federal Reserve and the U.S. Treasury to stoke the economy will lead to longer-term trouble.

“Some observers feared that the Fed's aggressive actions to boost the economy would cause inflation to jump. That simply hasn't happened. The prices of oil and other commodities did jump last year in the face of strong global demand. But commodity prices have retreated notably since then and so has the overall inflation rate. And there's no sign that the public or financial markets expect inflation to rise much,” said John Williams, president of the Federal Reserve Bank of San Francisco.

The most recent readings on inflation and growth support the efforts of the Federal Reserve in its efforts to control the cost of living and foster growth.

The consumer price index was unchanged in December and for all of 2011 was up 3 percent. At the same time, the nation's gross domestic product — the sum total of all goods and service produced in the U.S. — grew in the fourth quarter of 2011 by 2.8 percent. However for the entire year the GDP was up just 1.7 percent. That compares with 3 percent in 2010.

Bernanke told Congress there were reasons for the tepid growth in 2011, citing, “supply chain disruptions stemming from the earthquake in Japan, a surge in the prices of oil and other commodities, and spillovers from the European debt crisis.”

However, another Fed official believes, as happened under the direction of Alan Greenspan's tenure at the Federal Reserve, keeping interest rates too low for too long could be a problem.

“In my view, economic conditions have modestly improved since the December meeting, especially on the unemployment front, and the downside risk of a double-dip recession that many feared in September has substantially abated. Thus, with the economy gradually improving, I saw little justification to further ease monetary policy and felt it risked undermining confidence in the process,” said Charles Plosser, president of the Federal Reserve Bank of Philadelphia, in explaining his vote to oppose the extend term of low rates through the end of 2014.

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