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As he talks up economy, Bernanke will tread his usual cautious path

U.S. Federal Reserve chairman Ben. Bernanke will undoubtedly be talking up the somewhat brighter economic outlook, particularly on the labour front, during his regular semi-annual appearance before Washington lawmakers this week. .

Jason Reed/Reuters/Jason Reed/Reuters

After a relatively quiet week on the U.S. data watch, economists will have plenty to chew on as February draws to a close. The list of carefully parsed releases includes durable goods orders and the S&P/Case Shiller housing price index on Tuesday; the latest revised fourth-quarter GDP and consumer spending figures on Wednesday; and the ISM manufacturing index and initial jobless claims on Thursday.

Besides the deluge of end-of-month data, analysts will be paying close attention to the words coming from a handful of Federal Reserve officials, led by chairman Ben Bernanke, who makes his regular semi-annual appearance before Washington lawmakers on Wednesday. While the politicians look for ways to score points with a restive electorate at his expense, Mr. Bernanke will undoubtedly be talking up the somewhat brighter economic outlook, particularly on the labour front.

At the same time, the central banker will be treading his usual cautious path, warning that the economy is not yet out of the woods. Housing remains weak despite recent improvement, unemployment is still high, oil prices are rising and a struggling Europe is by no means over its debt woes. Hence, the Fed's commitment to keep interest rates at rock-bottom levels well into 2014.

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A hardy group of bearish analysts is shrugging off the recent surge in market optimism and suggests that Mr. Bernanke should be dusting off plans for another round of quantitative easing – creating new money to inject into the economy – sooner rather than later.

"Our view is that the momentum in the U.S. will not prove sustainable and that will be a QE trigger," said Michala Marcussen, the London-based head of global economics with Société Générale. The French bank's downbeat forecast for U.S. growth this year is only 1.5 per cent, well below the consensus view of 2.5 per cent.

Ms. Marcussen's assessment assumes that political gridlock will continue in Washington, recovery in housing and jobs remains elusive and austerity demands will trump further stimulus spending by governments.

Some "critical hurdles for the economy loom on the horizon and should not be dismissed out of hand," David Rosenberg, chief economist with Gluskin Sheff + Associates of Toronto, warned in a comment Friday. Better housing numbers have more to do with mild weather than a recovery in demand and improved labour market data reflect "deteriorating productivity growth" that will prompt companies to curb hiring plans, he said.

Indeed, the recent employment gains "aren't as good as people think they are," said Richard Cookson, global chief investment officer at Citi Private Bank in London. "It's not to say they're bad," but they are skewed by "some severe seasonal-adjustment problems." And the employment rate, which measures the proportion of working-age people who have jobs or are actively looking for work, remains "pathetic," Mr. Cookson said. In January, it measured 63.7 per cent. Before the financial crisis, it was about 66 per cent.

"If the participation rate were the same as it was at the start of this crisis, the unemployment rate wouldn't have fallen at all," he said.

Still, a growing number of economic soothsayers are convinced the U.S. has turned the corner and is heading for a relatively sturdy recovery.

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"The U.S. economy is transitioning quite quickly into a sustained period of growth led by the small business sector," Ian Shepherdson, chief U.S. economist with High Frequency Economics, said in a note last week.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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