Bush, Bernanke see economy weathering storm

By: JEANNINE AVERSA - Associated Press | Thursday, February 28, 2008 8:08 PM PST ∞

WASHINGTON ---- When it comes to the economy, President Bush and Fed Chairman Ben Bernanke see the glass half full, rather than half empty.

The economy is in turmoil, yet Bush and Bernanke say the country will weather the storm. Neither sees a recession on the horizon.

Both Bush and Bernanke are on the front lines of the government's efforts to right an economy that increasing numbers of economists fear is on the verge of its first recession since 2001, if it hasn't fallen into one already.

The housing market's collapse, a credit crisis and galloping energy prices are crimping spending and investing. Those are mighty punches to a teetering economy that nearly stalled at the end of last year.

Bush and the Federal Reserve chairman acknowledged the dangers Thursday. But Bush, at a White House news conference, and Bernanke, in congressional testimony, seemed to strike the same hopeful note that the economy should be able to survive its ills.

"I don't think we're headed to a recession, but no question we're in a slowdown," Bush said.

The Federal Reserve is not forecasting a recession. It does predict slow growth for this year as well as higher unemployment.

"I realize that my testimony wasn't the most cheerful thing you'll hear today ... but I do very much believe that the U.S. economy will return to a strong growth path with price stability," Bernanke told the Senate Banking, Housing and Urban Affairs Committee. It was his second day in a row on Capitol Hill discussing the economy.

Their comments didn't do much for the market, which followed four straight days of gains in the Dow -- its longest run of gains so far this year -- with a 112.10 drop, or 0.88 percent, to 12,582.18.

Broader stock indicators also lost ground. The Standard & Poor's 500 index declined 12.34, or 0.89 percent, to 1,367.68, and the Nasdaq composite index lost 22.21, or 0.94 percent, to 2,331.57.

Oil prices set a new record of $102.59 a barrel Thursday. Pump prices rose closer to record territory above $3 per gallon, with the prospect of $4 gasoline when the busy summer driving season arrives.

"That's interesting. I hadn't heard that. ... I know it's high now," Bush said during reporters' questioning about $4 a gallon gas.

Those high energy prices are a double-edged sword for the economy: They are spreading inflation and restraining economic growth because people clobbered by big bills to fill up their gas tanks and heat their homes are cutting back spending elsewhere.

Fears have grown that the country could come under the grip of stagflation, when stagnant growth is combined with rising inflation, for the first time in decades.

Bernanke rejected the notion

"I don't anticipate stagflation," he told lawmakers. "I don't think we're anywhere near the situation that prevailed in the 1970s." Bernanke said he expects inflation to calm down.

For now, he said, the biggest risk is the weakening economy.

To that end, Bernanke signaled that the Fed stands ready to lower a key interest rate again to bolster the economy.

The central bank started lowering that rate in September. Over just eight days in January, the Fed reduced it by 1.25 percentage points, the biggest one-month reduction in a quarter-century. Economists and Wall Street investors predict the Fed will cut rates again at its next meeting, March 18.

A government report Thursday showed the fragile state of the economy. The economy nearly stalled over the final three months of 2007. It grew at a pace of just 0.6 percent, a big loss of momentum compared with the brisk growth rate of 4.9 percent from July through September.

The National Association for Business Economics expects economic growth from January through March to slow to a meager 0.4 percent pace. Some analysts believe the performance could be even worse and actually shrink during this period. Under one rough rule, the economy would have to contract for six months in a row for the country to be viewed as in a recession.

It's possible that housing and mortgage troubles could force some banks out of business, Bernanke said. "I expect there will be some failures," he told lawmakers. The comment sent a shiver through Wall Street. The Dow Jones industrials sank 112.10 points.

Yet, Bernanke and the Bush administration are hopeful the economy will turn stronger in the second half of this year, helped by the Fed's rate reductions and the recently enacted rebates for people and tax breaks for businesses.

"We'll see the effects of this pro-growth package," Bush said, acknowledging that some lawmakers already are talking about a second aid plan. "Why don't we let stimulus package 1, which seemed like a good idea at the time, have a chance to kick in?"

As Bush urged patience, Treasury Secretary Henry Paulson expressed skepticism over proposals pushed by Democrats for more action to deal with the housing crisis, which has forced record numbers of people from their homes.

"So while some in Washington are proposing big interventions, most of the proposals I've seen would do more harm than good," the secretary said in remarks prepared for delivery Thursday night before the Economic Club of Chicago.

The administration has promoted ways to help struggling homeowners, including temporarily freezing rates on certain mortgages held by subprime borrowers -- people with tarnished credit who were hit the hardest by the mortgage meltdown.

All the economy's woes have rattled Wall Street, the public and businesses.

Bush suggested he understands the situation.

"There's a lot of uncertainty, " Bush said. "No question about it, it's a difficult period."

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