World Crisis Online

William Dudley, president of the Federal Reserve Bank of New York, said on Monday that the US economy was “brightening”, but that a weakened housing market and deleveraging consumers were still holding back economic growth.

Speaking at the New York Fed’s quarterly regional economic briefing, Mr Dudley defended the Federal Reserve’s plan to purchase $600bn in Treasury securities, arguing that the purchases “helped to ease financial conditions, thereby stimulating economic activity”. He said he expects growth to accelerate in 2011 and 2012.

In the New York region, Mr Dudley said that last year’s upturn in economic activity has “paused” and hiring has stalled, with weak job creation in the retail, financial and manufacturing sectors. Economic activity had increased at a rate of 2.5 per cent during the first nine months of last year, but was flat during the fourth quarter.

Mr Dudley said that the US was entering a period of gradual “convalescence”, as households that have been deleveraging their balance sheets slowly begin to borrow again. Nationally, household debt fell by 1.3 per cent from the third quarter of 2010 to the fourth.

The New York Fed chief said that before the recession US households were saving 2 per cent of their incomes and that the savings rate now stands at 6 per cent. He said that the deleveraging process can be a drag on the economy but that easing credit conditions would create a “virtuous circle” that would provide forward momentum.

“After declining during the crisis, credit applications have begun to increase, suggesting that the demand for credit is rising,” Mr Dudley said. “Although housing debt is still declining and delinquencies are still high, households in many parts of the region have sought and taken on some new debt in recent months.”

In spite of the slowdown in activity in New York, Mr Dudley noted that in New York City, where most people rent housing, debt-to-income levels are relatively low. This has made it easier for people in New York to weather the current credit cycle.

Renewed weakness in the housing market has also depressed the recovery, with home prices “softening” and construction activity stuck at a low level. Mr Dudley said that it could take another year before a meaningful pick-up in residential construction occurs.

One likely drag on the US economy going forward is the consolidation of municipal and state finances, which have been stressed as a result of growing shortfalls. However, Mr Dudley cautioned that these budget gaps represent only about 1 per cent of US gross domestic product.

“It’s bad, but pretty small in terms of the aggregate,” he said.