Federal Reserve national assessment: Things will be fine, unless they’re not

In comments at the recent Federal Reserve Economic Forum in Oklahoma, George A. Kahn provided a sobering assessment of the national and international economy, a picture somewhat offsetting robust and strongly positive analysis of trends in Oklahoma from Chad Wilkerson (another Fed economist) and several state officials.

Reviewing the history of recent years, he noted the Great Recession was preceded by easy access to credit and low savings rates. Then came the collapse of equity prices in housing and the worse economic crisis since the Great Depression.

The current sluggish uptick in activity is “not a typical recovery,” Kahn said. Economic growth and some modest national improvements have not produced a recovery in labor markets, for example.

The Vice President and Economist based at the Kansas City branch of the Federal Reserve detailed how the housing sector has never truly regained pre-Recession strengths, and that many households are still trying to rebuild balance sheets.

This year, significant supply disruptions came after the Japanese tsunami, along with the U.S. “debt ceiling debacle,” and subsequent lowering of the U.S. credit rating by Standard & Poors.

Despite challenges, Kahn and other economists anticipate moderate growth in the coming year. Still, consumers are hesitant and confidence is low. Another stimulus jolt in spending from Washington is unlikely.

Kahn nonetheless reflected the American economy is resilient, and there is pent-up demand for production and labor, and demand for goods and services. Credit is available, exports are improving, and business sectors outside housing are better.

In masterful understatement, Kahn at one point reflected, in his speech before Oklahoma City business and financial leaders at the downtown Petroleum Club, “Putting all these factors together in a forecast is quite challenging.”

Real gross domestic product (GDP) grew by 1.9 percent in the third quarter, and could reach 2.1 percent in the fourth quarter. Growth of 2 ½ percent is expected next year, but there will probably be little change in the national unemployment rate. It now stands at 9.1 percent, and is unlikely to be better than 8.7 percent by next fall.

Among potential tripwires for the economy, the “European sovereign debt crisis” is perhaps most notable. Large banks in the United States are exposed, through trade, to Europe’s problems. If a full-blown debt crisis unfolds there, and exports decline, major stress could follow on both sides of the Atlantic.

Kahn noted that European nations are not in agreement as to how to counter problems in their region. Kahn carefully observed, “Inadequate response cannot be ruled out.”

Back in the States, if unemployment benefits are not extended, economic stress will increase, Kahn believes. He noted, “Domestic political bickering could call into question whether the U.S. will stay on track.”

In the near-term comes the Congressional “Super Committee” deadline of November 23 deadline, for recommending debt reduction. The Congressional deadline for action is December 23.

Kahn noted fragility is fed by concerns over inflation in energy, food and commodity prices. Inflationary factors in recent months have been a source of concern for business planners, yet that “should be temporary,” Kahn said.

Kahn believes policy at the Fed helped stabilize the economy and set a stage for recovery, but economic growth is considerably weaker than expected. New Fed actions should keep pressure on for low long-term interest rates.

However, Kahn said, “Monetary policy alone cannot take all the actions necessary. Policy makers must do their part.” Kahn stood by a projection of moderate growth for 2012.

In brief, the knowledgeable analyst’s overview might be summarized this way:

Things will be fine, unless they’re not.