Richmond Fed chief says recession could end this year

The U.S. recession may end this year as consumer spending and production rebound, Federal Reserve Bank of Richmond President Jeffrey M. Lacker said yesterday.

"It now appears as if the pace of contraction is diminishing," Lacker said in a speech to business leaders in Charlottesville. "At some point later this year, activity will bottom out and begin expanding again."

Earlier yesterday, hopes that the recession is easing were boosted by reports that construction spending and pending home sales fared better than expected in March. The news sent stock prices soaring, with the Dow Jones industrial average closing above 8,400 for the first time since January.

The Commerce Department said construction spending rose 0.3 percent in March, the best showing since a similar increase in September. Economists surveyed by Thomson Reuters had expected spending to drop 1.5 percent for a sixth straight monthly decline.

Meanwhile, the National Association of Realtors said its index of pending home sales rose 3.2 percent to 84.6 in March, the second monthly increase after it hit a record low in January. The pending sales index also is 1.1 percent above last year's levels. Typically, there is a oneto two-month lag between a contract and a done deal, so the index is a barometer for future home sales.

Housing activity also appears to be on the upswing in the Richmond area.

"For us and our area, it's April where we have seen an uptick," said Don Atkinson, president of the Richmond Association of Realtors and general manager of Hometown Realty. "It looks like April will be a very good month for us."

Christopher Corrada, president of the Home Building Association of Richmond and vice president of East West Partners, a development company in Midlothian, agreed that April seems to be the turning point for this area.

"Our sales were better than expected in April," Corrada said. "I am hearing from other members of the association that their traffic and sales are picking up."

He attributed the increased activity to low pricing on new homes; low interest rates; pent-up demand; and the spring home-buying season, the busiest time of the year for the housing market.

Economists called the new housing data faint glimmers of hope that construction activity may be stabilizing, although at very low levels. They cautioned that the construction rebound could be temporary, given the problems facing the industry because the financial crisis has made it hard for builders to obtain financing.

Spending on private residential projects fell 4.2 percent in March, the latest in a series of declines that began three years ago when the housing bubble burst with disastrous effects for the home industry and the overall economy.

Nonresidential construction rose 2.7 percent in March, the biggest advance in nine months. It marked the second straight increase and was led by gains in office construction, hotels and power plants.

Lacker said yesterday that the "boom-bust" cycle in housing has prompted concerns that the U.S. financial system is flawed.

"Before we jump to such conclusions, however, we need to evaluate the extent to which risk-taking incentives in financial markets have been distorted by actual and perceived government financial safety-net protection," he said.

Fuel for the U.S. recovery probably will include consumer spending, low interest rates, a more stable housing market, and increased production as companies rebuild inventories, Lacker said.

Many analysts are worried about the commercial real estate market. Delinquency rates on loans for hotels, offices, retail and industrial buildings have risen sharply in recent months and are likely to soar through the end of 2010 as companies lay off workers or close.

Economists are more hopeful that the three-year slide in housing could be nearing a bottom, although they don't see a significant rebound for some time.

The demand for new homes appears to be recovering faster than that for previously occupied homes. In March, sales of existing homes fell 3 percent to an annual rate of 4.57 million from a downwardly revised pace of 4.71 homes in February, the National Association of Realtors reported.

Staff writer Carol Hazard, Bloomberg News and The Associated Press contributed to this report.