Fed's No. 2: gradual recovery this year

LOS ANGELES — Federal Reserve Vice Chairman Donald L. Kohn said steadier consumer spending and home sales, together with favorable earnings results from some banks, may indicate that the U.S. economy is poised to stage a gradual recovery later this year.

The Fed's No. 2 official, delivering the annual Hutchinson lecture at the University of Delaware Monday evening, noted that consumer spending continues to suffer the effects of the poor job market and the sizable losses of equity and housing wealth over the past two years.

But he said consumption appears to have steadied in comparison to the sharp drops seen in the second half of 2008, and declines in sales and construction of single-family homes have abated — possibly because of low mortgage interest rates.

Kohn also noted that the plunge in energy prices has helped bolster real incomes and gives consumers much-needed cash to spend elsewhere.

"These developments may be an early indication that conditions are falling into place for real GDP to decline at a slower rate in the second quarter and to stabilize later this year," Kohn said.

Kohn noted that low confidence about future economic and job prospects is still crimping people's willingness to spend. Tight credit conditions — especially for commercial construction — also could hinder a recovery, as could weak exports in the face of global economic issues.

"My best guess is that we are in for a relatively gradual recovery," he added.

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