The U.S. housing bubble that exploded in 2008 "probably did some lasting damage to the economy," creating a situation where the potential growth rate of the U.S. is modest at best, said James Bullard, president and CEO of the Federal Reserve Bank of St. Louis.
Bullard warned in a speech at the OMFIF Golden Series Lecture in London that U.S. growth is sluggish even though unemployment managed to fall from 9.1% in June 2011 to 8.2% in June 2012.
Still, compromises on budget issues have been delayed until after the presidential election. Meanwhile, housing activity remains well below levels experienced during the housing bubble and is likely to experience slow growth in the coming years.
He added that the U.S. healthcare system is undergoing a transformation in which the effects are also "opaque," creating more uncertainty.
While Bullard sees a long-term sluggish cycle ahead and remains worried about the European sovereign debt crisis, he is more upbeat than most analysts when it comes to recent employment data.
"The most recent labor market data for the U.S. were somewhat weaker than expected, with the unemployment rate remaining at 8.2% and the total private sector payroll jobs added coming in at 84,000," he said. "However, the hours figures were somewhat more encouraging, and unemployment claims remain below the threshold value of 400,000. Accordingly, this report, by itself, is not sufficient to change my forecast of modestly improving economic growth during the second half of 2012 along with a slow and intermittent decline in unemployment."
Bullard blames uncertainty for restricting household spending and investor activity.
He already sees a recession in Europe today and believes it's now dragging on U.S. and Asian economic activity.