WASHINGTON, DC-At the last session held at the Urban Land Institute’s
 annual conference last week, former Federal Reserve Bank chairman
Donald Kohn ticked off the many headwinds still facing the US economy:
consumers are saving and not spending; banks cannot lend at the levels
government would like because the demand is simply not there; the
recession proved to be deeper than many had initially thought; and,
finally, the worst problem of all--the ongoing overhang of housing.

But there are a few bright spots, he also said--one of which is waiting for fundamentals
to improve. He also noted that the high unemployment dragging down the recovery is
a function of the business cycle, and not a major structural
component.

To be sure, Kohn said, there is a structural element to the current
9.5% unemployment rate. “We are seeing less residential construction and less activity in the financial sector,” he said. “And these jobs won’t come back anytime soon.”

However, the losses are not baked into the economy going
forward, as many economists have feared. “My judgment is that the
losses due to structural changes are not a major reason for
unemployment,” Kohn related. He estimated that 5% of the unemployment rate is a
result of “real slack” in the economy that will eventually recover.

Kohn had more good news to deliver: the headwinds the recovery is
facing, although still severe, are starting to diminish. “We are
seeing signs of this now,” he told the audience. “Households are increasing their net worth and banks, according to the latest Fed survey, are easing up on their
lending criteria a bit.” Productivity growth is also easing, Kohn said, which
means the demand for workers is more in line with the demand for
goods and services.

Most intriguingly, Kohn said, businesses have showed
a real uptick in their investments in equipment and capital purchases
in the last quarter. In fact, he noted, “That is rising substantially and is something we may see
reflected in household spending in the upcoming quarters.”

 

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