Fed's Dudley Says U.S. Recovery Slowing Down

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Federal Reserve Bank of New York President William Dudley said the U.S. recovery is likely to slow down this quarter, although a double-dip recession is unlikely. He also said the New York area's recovery is likely to continue at a moderate pace, driven by the manufacturing sector.

In a press briefing on developments in the regional economy on Thursday, Dudley said the U.S. recovery is turning out to be "bumpy" and "far less robust" than the Fed would like. "U.S. economic activity has expanded for four consecutive quarters, but at rates that can only be described as modest when compared with early stages of past recoveries," he said.

"Growth in the third quarter may turn out to be a bit less than we saw in the first half of the year, though we think there is only a slight risk of a double-dip," said Dudley. "The road to recovery is turning out to be a bit bumpy as relatively weak consumer spending and the ongoing problems in financial markets are keeping growth far less robust than we would like."

Dudley's comments follow Federal Reserve Chairman Ben Bernanke's testimony to lawmakers on Wednesday, in which he said the U.S. recovery is likely to proceed at a slower pace than projected earlier. "Most participants [on the Federal Open Market Committee] viewed uncertainty about the outlook for growth and unemployment as greater than normal, and the majority saw risks to growth as weighed to the downside," Bernanke told the Senate Banking Committee.

A string of weak economic data from the U.S. has fueled concerns that the recovery in the world's largest economy may be petering out. Data released last week showed that retail sales slipped more than forecast in June while producer prices fell at a sharp pace.

The Fed last week lowered its expectations for GDP growth this year to 3.0-3.5% from 3.2-3.7%. The members of the Federal Open Market Committee said in the minutes of the latest policy meeting that the downward revision reflected "intensifying concerns among investors about the implications of the fiscal difficulties faced by some European countries."

Dudley said the manufacturing sector had been one of the key drivers of the recovery, helped by an "unusually pronounced" inventory cycle. "Another driver of manufacturing output over the past several quarters has been a pronounced rebound of our exports of manufactured goods," he said. "Economic activity abroad has been recovering from its weak levels in 2009, and that global recovery has helped fuel demand for our products, particularly capital goods."

Turning to the regional economy, Dudley said the New York / New Jersey area is in the midst of a "moderate" recovery, driven by the manufacturing sector. He forecast the manufacturing-led recovery to continue, despite signs that the inventory cycle is winding to completion, fueled by improving demand both at home and overseas.

"Yet, if this recovery follows the typical pattern for past recoveries, the prospect for growth in factory jobs will likely be weaker here than the rest of the nation," he said. Dudley said the region's unemployment levels are still "painfully high." New York state registered an unemployment rate of 8.2% in June, less than the national average of 9.5%.

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