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News : US Economy Last Updated: Jun 9, 2011 - 7:04 AM

US Economy: Bernanke sees improvement later this year; Paper says high level of financial illiteracy among most Americans
By Michael Hennigan, Founder and Editor of Finfacts
Jun 8, 2011 - 6:10 AM

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US Federal Reserve chairman Ben Bernanke on Tuesday gave a downbeat assessment of the economy, saying in an acknowledgement of the current rough patch in the recovery that the economy is growing more slowly than the Fed had expected. However, he predicted an improvement later this year. Meanwhile, an economics paper suggests that there is a high level of financial illiteracy among most Americans.

"US economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8% at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments," Bernanke said at a conference in Atlanta, Georgia. "That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year. Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective ofms of unemployed and underemployed workers."

Bernanke's speech reversed a positive movement in stocks on Wall Street, which closed the day with the Dow off 19 points or 0.2% to 12,071.

Also Tuesday, the Bureau of Labor Statistics reported that the number of job openings in April was 3.0m, little changed from 3.1m in March. After increasing in February, job openings have been flat. Job openings have been around 3.0m for three consecutive months; the last three-month period with levels this high was September-November 2008. The number of job openings was 549,000 higher than at the end of the recession in June 2009 but remains well below the 4.4m openings when the recession began in December 2007.

With 13.7m officially unemployed in April, there were roughly 4.6 jobless workers for every opening.

In April, the hires rate was essentially unchanged at 3.0% for total employment. The hires rate also was essentially unchanged for all industries and regions. At 4.0m in April, the number of hires has increased from 3.6m in October 2009 (the series trough) but remains below the 5.0m hires in December 2007 when the recession began.

In an interview with The Wall Street Journal, Charles Evans, president of the Federal Reserve Bank of Chicago, said he expects the economy to grow by 3% to 3.25% in 2011 and 3.5% to 3.75% in 2012, compared with the 4% growth he expected before a recent series of disappointing economic data.

To achieve these projections, economic growth will need to accelerate from the first quarter's annualised 1.8% pace.

Bernanke Glum on Growth:


Financial Illiteracy

A new working paper, 'Americans’ Financial Capability,' published by the National Bureau of Economic Research and authored by Professor Annamaria Lusardi of the George Washington School of Business, presents the results of  a survey of nearly 1,500 Americans in the summer 2009 and found when given a basic list of questions on economics and finance in everyday life, less than 10% of respondents were able to answer all questions correctly.

The paper quotes from a report, US President’s Advisory Council on Financial Literacy (2008): “While the crisis has many causes, it is undeniable that financial illiteracy is one of the root causes... Sadly, far too many Americans do not have the basic financial skills necessary to develop and maintain a budget, to understand credit, to understand investment vehicles, or to take advantage of our banking system.”

Prof. Lusardi says the majority of Americans do not plan for predictable events such as retirement or children’s college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks. "To understand financial capability, we need to look not only at assets but also at debt and debt management, as an increasingly large portion of the population carries debt.

In managing debt, Americans engage in behaviours that can generate large expenses, such as sizable interest payments and fees. Moreover, more than one in five Americans has used alternative (and often costly) borrowing methods (payday loans, advances on tax refunds, pawn shops, etc.) in the past five years. The most worrisome finding is that many people do not seem well informed and knowledgeable about their terms of borrowing; a sizeable group does not know the terms of their mortgages or the interest rates they pay on their loans."

Finally, she says the majority of Americans lack basic numeracy and knowledge of fundamental economic principles such as the workings of inflation, risk diversification, and the relationship between asset prices and interest rates. There is also a sharp disconnect between self-reported financial knowledge and financial knowledge as measured by financial literacy quizzes. Even those who give themselves high knowledge ratings score poorly on the quizzes. Moreover, while many believe they are pretty good at dealing with day-to-day financial matters, in actuality they engage in financial behaviours that generate expenses and fees: overdrawing checking accounts, making late credit card payments, or exceeding limits on credit card charges. Comparing terms of financial contracts and shopping around before making financial decisions are not at all common among the population.

In an analysis of the survey results, Prof. Lusardi says in addition to not preparing for unforeseen emergencies, people do not prepare for predictable events. Despite the changes in the pension landscape in the past twenty years and the increased individual responsibility for financial security after retirement, the majority of Americans have not done any retirement planning.

Prof. Lusardi concludes: "Lack of financial capability matters not only for the individual but for society as well. As Chairman Bernanke stated in a recent hearing on April 12, 2011: 'The recent crisis demonstrated the critical importance of financial literacy and good financial decision making, both for the economic welfare of households and for the soundness and stability of the system as a whole.'"

Dimon Presses Bernanke on Impact of New Bank Rules: Jamie Dimon, JP Morgan CEO, questions Fed Chief Ben Bernanke on the likely impact new rules will have on the banking industry:

Dallas Fed Pres. on Jobs & Economic Growth: Since the recovery began, 38% of jobs created in America have been created in Texas, says Richard Fisher, Federal Reserve Bank of Dallas:

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