Bernanke, new economic data predict a long road to full recovery

The economic story for the past nine months has been strikingly consistent: steady growth, but with the job market still in the dumps. That isn't likely to change anytime soon, if the latest data and analysis from leading policymakers are correct.

Federal Reserve Chairman Ben S. Bernanke forecast a "moderate economic recovery" in congressional testimony Wednesday but added that he expects that "a significant amount of time will be required" to restore the millions of U.S. jobs lost over the past two years. Economists at the International Monetary Fund agree: Their just-released forecast for the world economy projects high joblessness in the United States and the rest of the industrialized world for another two years.

But even against those modest expectations for the job market, there was new evidence that the expansion continued to tick along. The Commerce Department said Wednesday that retail sales rose a better-than-expected 1.6 percent in March, showing that consumers are gradually returning to stores. And a periodic Fed report known as the beige book said that economic activity "improved somewhat" across most of the country in recent weeks.

That mixed picture underscores the remaining weakness in the economy and shows why the Fed is likely to keep interest rates very low for an "extended period," an idea that Bernanke restated in response to a question during his appearance before the Joint Economic Committee.

Indeed, despite a recent spate of positive economic data, including the new retail numbers and payroll gains in March that were the best in three years, Bernanke's assessment was subdued, suggesting that he has not dramatically upgraded his expectations for the economy in recent weeks.

"Significant restraints on the pace of the recovery remain," Bernanke said, "including weakness in both residential and nonresidential construction and the poor fiscal condition of many state and local governments."

Real estate activity has been a drag on growth for years now, but Bernanke had not previously emphasized the role that state budget cuts could have on overall economic activity.

Bernanke gave no hints that he is inclined to raise the Fed's target interest rate above its current level, near zero, anytime soon.

Some Fed officials have signaled greater eagerness to raise rates, fearful that if the central bank moves too slowly, inflationary pressures could reach a dangerous level.

There were few signs of such pressures, however, in Wednesday's new data. The Labor Department said that the consumer price index, a closely watched barometer of inflation, rose 0.1 percent in March. Excluding food and energy prices, the CPI has risen 1.2 percent over the past year, well below the Fed's long-term inflation target.

The Federal Open Market Committee, the Fed's policymaking group, meets April 27 and 28 and is all but certain to leave its target interest rate unchanged, along with language stating that it expects to leave rates very low for an "extended period."

The beige book further supports that idea. Since the last meeting of Fed policymakers in mid-March, "vehicle sales improved in a number" of Fed districts, "tourism conditions also improved," and "manufacturing activity increased."

That conforms with the March retail sales report. Much of the 1.6 percent gain in total sales came from a strong 6.7 percent increase in auto sales. But there were gains in other categories, too: Home goods stores reported a 1.5 percent increase in sales for March, clothing stores rose 2.3 percent, and restaurants were up 0.3 percent.

Still, analysts expressed caution, noting that consumer spending cannot continue rising solidly unless the job market improves.

"I don't think it suggests that the consumer is necessarily in great shape," Wells Fargo economist Adam York said. "You just can't keep growing indefinitely unless you can get some help from the labor market."

The beige book report was slightly more positive on employment than it had been recently, stating that "while overall labor markets remained weak, some hiring activity was evident, particularly for temporary staff."

In his testimony, Bernanke also returned to a topic he discussed in a speech last week, the nation's fiscal imbalances, urging Congress and the administration to chart a path toward a more sustainable budget in the medium to long term. He has taken a more assertive tone on that issue since being confirmed for a second four-year term as Fed chairman in January.

"Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance," Bernanke said, adding that developing such a plan could keep long-term interest rates low and thus boost economic growth more immediately.

Staff writer Howard Schneider contributed to this report.