Bernanke sees evidence of a self-sustaining recovery

But expect slow progress on the job front

Fed Chairman Ben Bernanke, in his written testimony before the Senate Budget Committe, said he sees "increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold."

Bernanke pointed to a 2-1/2 percent rise in real consumer spending in Q3 and evidence that Q4 expanded at a faster pace.  He also said business investment in new equipment and software has grown robustly in recent quarters, as firms have started to replace aging equipment and make investments that had been delayed during the downturn.

However, he noted that housing remains depressed amid the "overhang of vacant houses."

Stubbornly high unemployment
Despite his belief that growth will likely be "moderately stronger in 2011 than it was in 2010," an improvement in the labor market could lag.

"After the loss of nearly 8-1/2 million jobs in 2008 and 2009, private payrolls expanded at an average of only about 100,000 per month in 2010 - a pace barely enough to accommodate the normal increase in the labor force and, therefore, insufficient to materially reduce the unemployment rate."

Furthermore, Bernanke forecasts that the unemployment rate may only dip to about "8% two years from now...and it could take four to five more years for the job market to fully normalize."

And the shortfall in job creation has to be the number one problem facing the economy today.  After a sluggish start to the recovery in the second half of 2009, the economy hit a soft patch last summer that was tied to the financial instability caused by the debt crisis in Europe.

We've managed to avoid a double-dip recession in the U.S., while spending is picking up, we're seeing a broadening of the recovery, the Leading Index is pointing to further gains, and jobless claims are in a downward trend.

Still, housing is hugging the bottom and the lack of a more robust recovery has yet to force the hand of hiring managers across the country.  Until GDP begins to consistently grow at a faster pace - somewhere between 4-5%, we're not going to see much progress on the labor front.

Fiscal insanity
In the meantime, Bernanke did not shy away from the need to talk about the nation's fiscal imbalances.

He said the current path is "unsustainable," and if government deficits grow as projected by the Congressional Budget Office, "the economic and financial effects would be severe."

So far, few in Congress have seriously talked about the president's panel that has provided a blueprint for credible deficit reduction. Waiting for a crisis to sneak up and create havoc cannot be the only option.