–Europe’s Problems Have Slowed Recovery In U.S.

By Brai Odion-Esene

ARLINGTON, Va. (MNI) – Recent economic data provides a reason to be
“cautiously optimistic” about the U.S. economy going forward, although
work still needs to be done to address the lingering effects of the
Great Recession, President Barack Obama’s top economist said Tuesday.

“The U.S. economy appears to be on the mend after suffering deep
wounds from the financial crisis and the consequent recession,” Council
of Economic Advisers Chairman Alan Krueger said in a breakfast address
to a National Association for Business Economics’ conference.

He also argued that the robust gains being seen in the labor market
are the result of more than just good weather.

“It will take more than a few years to meet challenges that have
been more than a few decades in the making — but we are making
progress,” Krueger said.

“While we still have a long way to go, there are reasons to be
cautiously optimistic about the economy going forward,” he added.

Krueger argued that while the pace of the recovery has been uneven
— with the “essential help” of the Obama Administration — the economy
is making a transition to “a more sustainable footing.”

He noted, as an example, that the recovery in the private economy
is stronger compared to the last recession and almost as strong as it
was in the early 1990s.

And although home prices have been soft in many parts of the
country, the housing market shows signs of stabilizing, Krueger said,
due in part to government policies aimed at assisting borrowers.

“Most important, because new home construction has been so weak for
years, we should now be close to the point that we’ve worked off the
excess home construction during the bubble years,” he said.

Krueger also said the recent rise in mortgage interest rates could
encourage potential buyers to get off the sidelines and enter the
housing market “while affordability is still near record levels.”

“Even moderate growth in residential construction and home sales
will jobs and GDP compared to the job losses we’ve seen in the
construction in recent years,” he said.

Still, Krueger said, Europe’s sovereign debt and banking problems
have reduced risk appetite “and slowed our recovery.”

In addition, the sectors lagging behind the most are those related
to the 2008 financial crisis “and they are still impaired by its
lingering effects,” he said.

Focusing on the labor market, Krueger said although there is a long
way to go before it is operating normally — noting the problems faced
by the U.S. economy from the early 2000s “have given the job market a
much deeper hole to dig out of” — “the accumulating evidence should
lend confidence to the view that we are on a better path.”

Krueger argued that the recent job gains that have been more robust
have been more than just the result of “favorable” weather.

He noted that the drop in initial claims for jobless benefits have
been just as strong in regions with more temperate climates, adding, “I
am skeptical that seasonal factors are skewing our key statistics in a
major way.”

“Putting aside seasonal and weather factors, the evidence suggests
that the extension of the payroll tax cut and other steps that have been
taken to support the economy are helping the job market to gradually
heal,” Krueger said.

In a speech to the same NABE conference Monday, Federal Reserve
Chairman Ben Bernanke made clear he does not think recent “positive”
labor market signs, while “welcome,” justify a retreat from the Fed’s
easy money policies anytime soon.

Bernanke stressed the need to carefully watch incoming data,
especially on long-term unemployment, to assess whether the economy is
growing fast enough to bring down joblessness and whether lower
unemployment is in turn fueling the recovery in a virtuous circle.

Taking questions after his remarks, Krueger said he agrees with the
“broad outlines” of Bernanke’s speech.

“As a labor economist I certainly agree that the main problems we
face in the job market today are cyclical, although there have been
structural problems going on for a while,” he said.

On the U.S. fiscal situation, Krueger described it as “a large
challenge for the United States.”

He prescribed two remedies: strengthen and sustain the recovery and
address the long-term deficits.

In the near term, however, extending the payroll tax cuts as well
as unemployment insurance “should support demand in the current year and
provide a buffer against the rise in gasoline prices.”

** MNI Washington Bureau: 202-371-2121 **

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