Pitching for early approval of the $700 billion bailout plan for financial institutions, US Fed Chairman Ben S Bernanke on Wednesday warned that economic growth would decline appreciably in the second half of 2008 as over 700,000 people have lost jobs in the last 10 months.
"Real gross domestic product is likely to expand at a pace appreciably below its potential rate in the second half of this year and then to gradually pick up as financial markets return to more-normal functioning and the housing contraction runs its course," Bernanke said in his testimony before the Joint Economic Committee of the US Congress.
Pointing out that the financial turmoil has already taken a toll on the labour market, he said 100,000 people lost their jobs in August alone, taking the cumulative figures to 770,000 since November last year.
"New claims for unemployment insurance are at elevated levels and the civilian unemployment rate rose to 6.1 per cent in August. Households' real disposable income was boosted significantly in the spring by the tax rebate payments, but, excluding those payments, real after-tax income has fallen this year, which partly reflects increases in the prices of energy and food," he added.
However, the Federal Reserve chief was optimistic that real GDP would expand once the financial markets return to normalcy.
Pointing out that acute "financial stress" would make lenders more cautious in extending credit to business and households, he said downside risks to the economic outlook is still a "significant concern."
The financial crisis had forced 158-year old Lehman Brothers to file for bankruptcy and led to distress sale of Merrill Lynch to Bank of America, among others.
On inflation, Bernanke said the news has been "more favourable" with oil prices coming down and the dollar going up from its mid-summer lows.
"If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year.
"Nevertheless, the inflation outlook remains highly uncertain. Indeed, the fluctuations in oil prices in the past few days illustrate the difficulty of predicting the future course of commodity prices. Consequently, the upside risks to inflation remain a significant concern as well," the Fed chief noted.
He also pointed out that even though tightened credit lines leads to slowdown in spending, production and job creation, real economic activity in the second quarter appears to have been surprisingly resilient.
"... but, more recently, economic activity appears to have decelerated broadly," he added.
According to him, global trade has provided considerable support for the US economy in the first half of the year but the outlook has deteriorated in recent months.
"The outlook for foreign economic activity has deteriorated amid unsettled conditions in financial markets, troubled housing sectors and softening sentiment. As a consequence, in coming quarters, the contribution of net exports to US production is not likely to be as sizable as it was in the first half of the year," Bernanke said.
Further, the Fed Chief said stabilisation of the country's financial system "is an essential precondition for economic recovery."
