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San Francisco Fed President Janet Yellen spoke in Phoenix yesterday, and she presented a relatively reserved view of the economy. it was her first speech since the economy entered its current recovery phase, and she defended and commended government action in fighting off economic meltdown. But she also warned that this recovery is going to be very slow. And she focused on two key factors--household spending and the woeful labor market: Consumers have surprised us in the past with their free-spending ways and it’s not out of the question that they will do so again. But I wouldn’t count on them leading a strong recovery. They face high and rising unemployment, stagnant wages, and heavy debt burdens. Their nest eggs have shrunk dramatically as house and stock prices have fallen, and their access to credit has been squeezed. It may be that we are witnessing the start of a new era for consumers following the harsh financial blows they have endured. 2 We often hear the word “deleveraging” used to describe the push by financial institutions to scale back debt and build equity. Households too have now begun to pay down debt and rebuild their savings. This phenomenon can be seen not only in the United States, but in most countries that experienced similar housing booms. The United States was hardly the only country where households borrowed heavily just before a severe housing bust set in. And those countries with greater increases in debt relative to income before the crisis experienced greater declines in consumption spending once the crisis began. In the United States, the personal saving rate, which had fallen to an incredibly low 1 percent in early 2008, has averaged 4 percent so far this year and may well rise higher. In the current environment, such belt-tightening makes great sense from the standpoint of individual households. In fact, some households may have no other option because their access to credit has been crimped. Over the long run, higher saving is surely a good thing for our economy because it provides capital that can be devoted to modern infrastructure, technology, and other productive investments that enhance our standard of living. All the same, the transition to a higher saving plane could be painful if it reduces the growth rate of consumer spending for an extended period. Weakness in the labor market is another factor that may keep the recovery sluggish for quite some time. Payroll employment has been plummeting for more than a year and a half, and, even though the pace of the decline has slowed, unemployment now stands at its highest level since 1983. In addition, many workers have seen their hours cut or are experiencing involuntary furloughs. To bolster earnings in the face of weak revenue growth, employers have been aggressive in cutting labor costs and jobs, and my business contacts say they will be reluctant to hire again until they see clear evidence of a sustained recovery. Weak demand for workers is also putting a lid on paychecks. Wages are barely rising. A well-known measure of overall employment costs rose by only 1¼ percent over the past year, the smallest increase in the history of the series. High unemployment, weak job growth, and paltry wage increases are a recipe for sluggish consumer spending growth and a tepid recovery. The U.S. experienced so-called jobless recoveries following the previous two recessions in 1991 and 2001, when job creation remained weak for several years following the business cycle trough. In both cases, output growth was less robust than in the typical recovery and, unfortunately, things seem to be shaping up similarly this time around. Since she gave the speech in Phoenix, Yellen's comments about the real estate market were both interesting and relevant to the local crowd. And she also addresses the Fed's monetary policy, past and present. Read the full speech here .

The Federal Open Market Committee (FOMC) is set to meet Tuesday and Wednesday of this week. Tim Duy points out that Ben Bernanke and friends will be meeting with a far more positive "economic backdrop" than they have had for a long time. But for all the relatively good economic news there is, uncertainty remains. Duy believes that the FOMC should continue to anticipate slow recovery, and he points to limited consumer credit as a primary reason: Given the steady anecdotal buzz surrounding the deterioration of the commercial real estate market, it is difficult to expect a rapid reversal of these trends. In short, if you think credit markets are still under stress, as the Fed certainly does, and are worried about the availability of credit to support future spending, also among Fed concerns, then shifting rhetorically to signal a tighter policy stance irrational. Moreover, it would seem inconsistent with plans to continue expanding the balance sheet via purchases of mortgage backed securities and TALF assets. So, it seems Duy is telling us not to expect a drastic change in Fed policy until we see a major shift in consumer credit and unemployment. Read Even With Growth, A Long, Hard Road here .

Add Fed Chair Ben Bernanke's voice to the growing chorus that the recession appears to be over and a long slow recovery is beginning. Bernanke spoke at the Brookings Insititution yesterday about the events of the last year, and during his speech he noted that he was well aware that forecasters were announcing the end of the recession. Here is a key excerpt from the speech. But the general view of most forecasters is that that pace of growth in 2010 will be moderate, less than you might expect given the depth of the recession, because of ongoing headwinds, including still ongoing financial and credit problems, you know, deleveraging by households, the needs for adjustments in the economy, sectoral adjustments in the economy, the need for a fiscal exit at some point, many, many factors that will likely, at least based on current information, make the 2010 recovery moderate, and in particular, not much faster than sort of the underlying potential growth rate of the economy. And the arithmetic is that unless the economy grows, you know, significantly faster than its longer term growth rate, it’ll be relatively slow in creating jobs over and above those needed to employ people coming into the labor force, and therefore, the unemployment rate would tend to come down quite slowly. So that’s a risk, that’s a possibility. Of course, there is on both sides of that forecast; we could have a stronger recovery, we could have a weaker recovery, but if we do, in fact, see moderate growth, but not growth much more than the underlying potential growth rate, then, unfortunately, unemployment will be slow to come down. It will come down, but it may take some time. Obviously, that’s a very serious concern, and that’s one reason why, even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time as many people will still find that their job security and their employment status is not what they wish it was, and so that’s a challenge for us and all policy-makers going forward. You can read a full transcript of the speech, and watch the full session by clicking here .

Nouriel Roubini is once again painting a darker view of the coming year than many of his contemporaries. While he is on board with the thinking that the recession is bottoming out this year, he sounds a warning over the possibility of a "double-dip recession." In a must-read piece in the Financial Times , he outlines reasons that recovery will be at best a U-shaped recovery--though he hints at a W-shape. Here are the first three of his seven reasons: Employment is still falling sharply in the US and elsewhere – in advanced economies, unemployment will be above 10 per cent by 2010. This is bad news for demand and bank losses, but also for workers’ skills, a key factor behind long-term labour productivity growth. Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest. Third, in countries running current account deficits, consumers need to cut spending and save much more, yet debt-burdened consumers face a wealth shock from falling home prices and stock markets and shrinking incomes and employment. Read The Risk of a Double Dip Recession is Rising here .

Warren Buffett writes in today's New York Times that we must not only be concerned with greenhouse emmissions, but with "greenback emmissions" as well. While Buffet applauds federal fiscal policymakers for pumping money into the economy last year--it played "an essential role in the rescue," he writes--now that recovery has begun, he warns that too much "monetary medicine," could pose a threat that "may be as ominous as that posed by the financial crisis itself": Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress. Read The Greenback Effect here .

Mark Thoma writes that he will know the economy has turned a corner when the private sector is "the primary driver of new economic activity." And he has certian things he's watching for, among them: First, though not necessarily foremost, that banks are being recapitalized with private sector funds, and that this is happening without the aid of government guarantees or other such programs that encourage capital infusions (which is hard to determine while the government programs are in place). Second, I will want to see private sector non-residential investment improving, another sign that private sector funds are moving back into circulation. Presently, this hasn't even started heading back upward, though there are signs the decline is slowing: Read How Will We Know when the Economy Turns the Corner ? here . And weigh in. What are you watching for?

Noted French intellectual and free marketeer Guy Sorman is confident that the economy is headed in the right direction. He feels this way in spite of his belief that the stimulus measures and government bailouts are “political statements, which are rather neutral vis-à-vis the economy.” He says measures like saving GM don’t make “a big difference,” and that governments should respond to crises by doing nothing. But he recognizes that politics doesn’t allow inaction, so he’s not as critical of recent government action as some of his peers on the Chicago school side of the fence. And in speaking at the Carnegie Council , Sorman explained that his optimism is based on his belief that innovation will lead to recovery: My major reason for optimism right now in the United States and also in Europe is by visiting emerging companies inventing new products. I'm quite sure that we will get out of the crisis not because of stimulus, not because of regulation, but because of new techniques in biotechnology, in nanotechnology, in communication technology. Like it in the past, it is innovation which will be the real engine of the economy and the real reason why we will get out of this crisis. Here is an excerpt of Sorman’s address: Sorman's latest latest book is Economics Does Not Lie: A Defense of the Free Market in a Time of Crisis . He spoke to more issues in the book in the speech , which you can watch by clicking here .