Bernanke: Before the rebound, an overhang

M. Spencer Green/AP
A man wearing a sandwich board advertised suits for sale on Chicago's Michigan Ave. last April. Retailers have been selling their large inventory rather than ordering new products, which has made the economy look weaker, Fed Chairman Ben Bernanke said Tuesday.

If there are so many green shoots sprouting, why hasn't spring come to the economy?

A slew of data over the past month has pointed to higher consumer confidence and a slowing contraction. Even Fed Chairman Ben Bernanke sounded upbeat in congressional testimony Tuesday. He said he's looking for an "exit strategy" once the economy stabilizes (click here for that story). He pointed to "some tentative signs that final demand, especially demand by households, may be stabilizing. "

For a central banker, that borders on downright enthusiasm. But here's the challenge. Before selling new stuff, businesses have to get rid of what they already have on hand.

Inventory challenge

It's called excess inventory – and it takes a long time for the economy to work through excess supply when few people are buying.

Here's how a central banker would sum things up: "Some progress has been made; the Bureau of Economic Analysis estimates that an acceleration in inventory liquidation accounted for almost one-half of the reported decline in real GDP in the first quarter," Bernanke told the Joint Economic Committee Tuesday. (His full testimony is here)."

Translation: The recession would only look half as bad if businesses were ordering stuff from factories but they're selling their excess stuff instead.

Housing glut to ease

Ditto for housing. Bernankespeak: "With sales of new homes up a bit and starts of single-family homes little changed from January through March, builders are seeing the backlog of unsold new homes decline – a precondition for any recovery in homebuilding."

Translation: Builders are constructing so few new homes that supply is coming back into balance with demand.

The blog CalculatedRisk takes issue with some of that reasoning in a recent post.

For an even quicker way to reduce housing inventory, check out this video of what a Texas bank decided to do with newly built homes it acquired through foreclosure in Victorville, Calif.

Inventories are slowing down the economy's recovery, but there MUST be a better solution than destruction.


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