Will Bernanke be Right Again?

Fed governor Ben Bernanke testified today on Capitol Hill as part of his confirmation process for a full 14 year term. He had some pretty bullish things to say, particularly about the prospect for an improvement in the US labor market. Here are some excerpts from his testimony:

After several false starts, the economy is showing signs of sustained recovery… Particularly encouraging are the signs of revival in capital expenditure by businesses… Although economic forecasting is far from an exact science, private-sector forecasters broadly agree that the economy should grow at nearly a 4 percent rate in 2004. I believe that forecast is plausible, assuming that the revival in business investment remains vigorous.

Until the job market improves, [however,] this recovery will not feel like a recovery to most Americans. A number of factors explain why we have not yet seen net new job creation.

First, we have seen truly remarkable increases in labor productivity, which have permitted firms to meet the increasing demands for their output without hiring additional workers. Second, possibly because of geopolitical and economic uncertainties, it appears that employers have been slower than usual to make commitments to expand their plants, add staff, or add to inventories.

However, in my view, the growth of productivity is likely to slow, at least somewhat, from its recent extraordinary pace, and so it seems very unlikely that firms can continue to meet rapidly rising demands without adding to their capital stocks (as they have already begun to do) and to their workforces.

Thus, given the rate of increase in spending and output that we are now witnessing, a reasonable expectation is that firms will need to add significant numbers of workers within the next several quarters.

I tend to think that Bernanke knows what he is talking about. As I mentioned in an earlier post, I think he’s been right on the mark about the trend of prices in the US. Plus, he’s just a really smart guy and a good economist. Interestingly, he’s also the only left-leaning economist that I can think of that Bush has nominated for anything. So it might be worth keeping his predictions in mind.

Hmm, that’s two non-bearish posts in a row. I’m going to have to do something about that…

Kash