Federal Reserve Chairman Ben Bernanke said Tuesday that the U.S. economy should be on the upswing by the end of the year, but he warned that unemployment is likely to rise and that recovery would be slow.
Bernanke expressed cautious optimism in testimony before Congress' Joint Economic Committee, telling lawmakers that the housing market is beginning to stabilize and that inventories are expected to continue a slow decline in the coming months.
Forecasters are also expecting the government stimulus program to boost consumers' spending power over the next few months, nudging the economy upward as consumer sentiment improves. Still, Bernanke said the recovery will be gradual, in part, because businesses are likely to be cautious about hiring. That means the unemployment rate, which was 8.5 percent in March, could remain high even after economic growth resumes.
Bernanke warned lawmakers that the loss of 5 million jobs over the past 15 months continues to weigh on the economy and discourage consumer spending — and the economy is likely to continue to shed jobs.
"The most recent information on the labor market — the number of new and continuing claims for unemployment insurance through late April — suggests that we are likely to see further sizable job losses and increased unemployment in coming months," Bernanke said.
He also said that the somewhat rosier economic forecast could be undercut if the financial sector does not strengthen.
"A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall," Bernanke said.
He said financial markets and financial institutions remain under stress, and declines in asset prices, tight credit conditions and investors' hesitancy are weighing down the economy.
Investors are eagerly awaiting the results of "stress tests" that the government is conducting on the country's 19 largest financial institutions. Bernanke did not give lawmakers any details about the outcome of the tests, but published reports have said that about 10 of the banks will need additional capital.
Results of the tests, which are designed to show how well the banks are holding up under the strain of bad loans, are due Thursday.
Other key points in Bernanke's testimony included:
• Business investment remains weak. A recent survey of bank loan officers reported weak demand for commercial and industrial loans.
• Commercial real estate is suffering a downturn. Vacancy rates for office, industrial and retail properties are rising, while prices are falling.
• Inflation continues to be low, due in part to falling commodities prices, including energy.