Romer upbeat on US economy

Romer upbeat on US economy
By Krishna Guha in Washington
Copyright The Financial Times Limited 2009
Published: June 28 2009 20:57 | Last updated: June 28 2009 20:57
http://www.ft.com/cms/s/0/2cb7a6a8-641a-11de-a818-00144feabdc0.html


The US economy will feel a substantial boost from the Obama administration’s emergency spending package over the next few months, says Christina Romer, a senior White House official, who has warned against tightening monetary and fiscal policy before recovery is well established.

Ms Romer, chairman of the US president’s council of econ omic advisers, told the Financial Times in an interview she was “more optimistic” that the economy was close to stabilisation.

But while hopeful that America could yet experience a V-shaped recovery, she said it was much too soon to begin tightening policy: “We do not want to repeat the mistake Japan made in the 1990s, when the moment things started to improve they tightened policy.”

Meanwhile, David Axelrod, a senior White House adviser, told NBC Television on Sunday the administration would be open to further stimulus if needed. “Let’s see in the fall where we are, but right now we believe what we have done is adequate to the task. If more is needed, we’ll have that discussion.”

Ms Romer’s comments come as opposition Republicans step up their attacks on the $787bn fiscal stimulus, pointing out that it has not prevented unemployment from hitting a quarter-century high of 9.4 per cent.

Ms Romer said stimulus spending was “going to ramp up strongly through the summer and the fall”.

“We always knew we were not going to get all that much fiscal impact during the first five to six months. The big impact starts to hit from about now onwards,” she said.

Ms Romer said that stimulus money was being disbursed at almost exactly the rate forecast by the Office of Management and Budget. “It should make a material contribution to growth in the third quarter.”

But she acknowledged that cutbacks by states facing budget crises would push in the opposite direction.

Ms Romer said the latest economic data were encouraging, following a weaker patch a month ago. “I am more optimistic that we are getting close to the bottom,” she said.

The CEA chairman, who has forecast a sharper rebound in 2010 than most economists, said she had lowered her estimates for growth this year “and also for next year, a bit” since the start of the year. She said the consensus forecast that unemployment would continue to rise for the rest of this year and peak early next year was probably accurate.

But she added: “I still hold out hope it will be a V-shaped recovery. It might not be the most likely scenario but it is not as unlikely as many people think.

“We are going to get some serious oomph from the stimulus, there is the inventory cycle and I believe there is some pent-up demand by consumers.”

Even so, Ms Romer warned against tightening monetary and fiscal stimulus prematurely. She said the authorities should continue to work on their exit plans but not implement them until the economy came back strongly.

“It is important to think about it now but policymakers should not start acting until we are really recovering well and are approaching full employment.”

Ms Romer, an expert on monetary policy, said she thought the risk of inflation was “very low”.

“With unemployment and unused capacity high, it is not as if inflation is going to creep up on us. We will have a long period of time to figure out what to do.”