The Economic Outlook for the U.S. & the Euro Zone Is Grim

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Ben Bernanke

Federal Reserve Chairman Ben Bernanke presented his semi-annual report on the economy on Capitol Hill yesterday. The forecast was gloomy.

The job market is “far from normal,” household income is flat and access to credit remains too tight for many people, he said. Meanwhile, rising gas prices are likely to reduce consumer buying power and the housing market is an uneven as our economy. Unemployment is too high though it has shown improvement. The economy will continue its slow growth.

Bernanke said the central bank is prepared to do another quantitative easing but recent economic data and recent information out of the euro zone has made the situation unclear. Bernanke said they need to wait and see how things progress.

The central bank will keep monetary policy loose with interest rates artificially low for the foreseeable future. Operation Twist, the endless bailout, will continue through 2012 and seems to now be engrained in our system. It is a program to buy longer dated securities. It was extended with $267 billion in additional spending to keep interest rates low and stimulate the economy.

The Feds continue to characterize the economy as “expanding moderately,” but far too slowly for any sustainable growth.

Bernanke said improvement in the economy is weaker than expected. When asked about it, Bernanke was not clear on how to read the bad economic news here and abroad. He said he needs to make additional judgments about where the economy is going and he will consider additional asset purchases.

Bernanke said that it could be argued interest rates are too high but interest rates can’t go below zero, constraining any changes. “We have an economy where demand falls far short of the capacity of the economy to produce,” Bernanke said.

When asked about the job market, Bernanke pointed to data that shows about 43% of America’s unemployed workers have been so for six months or more. He said the most concern is for people out of work 6 months or longer who will lose skills, which adds urgency for a more normal job market. C-Span, Bernanke Semi-Annual Report

Bernanke said there is simply not enough money coming into the economy and did not make a judgment about spending and taxation.

Figures that show slowed U.S. manufacturing growth will come out in data today along with a slight increase in unemployment claims.

Also affecting us is the euro zone, who are among our most important trading partners. The failed private sector in the euro zone appears entrenched.

Chinese factories are having an increasingly tough time as a result of the world’s economies.

June is the fifth month in a row that the activity has declined, bringing down Germany and France, and putting pressure on the ECB to bailout the economy.

The euro zone economy is continually losing traction.

Spain, the eurozone’s 4th biggest economy, is failing under the weight of bad commercial loans, economic decline, and sliding real estate prices. The euro zone partners are bailing them out with loans of 100 billion euros to clean up banks and keep Spain from becoming Greece, Ireland and Portugal. Italy is also showing serious signs of slowing.

“Spain is getting too close to a point of no return when it comes to public debt,” said Alejandro Ruyra financial analyst with Kepler Research in Madrid.

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