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The U.S. economic recovery will probably be “lackluster,” hobbled by strains in financial markets and weak consumer spending, Federal Reserve Bank of Atlanta President Dennis Lockhart said.

“Over the medium term, I see a slow recovery with ongoing repair of the financial sector,” Lockhart said today in remarks prepared for a speech in Jacksonville, Florida. “There are risks to even this lackluster outlook.”

The Fed said yesterday that 11 of its 12 regional banks, including Atlanta’s, reported signs of a stable or improving economy in July and August, adding anecdotal evidence that the worst U.S. recession in seven decades is over. The number of Americans filing first-time claims for jobless benefits dropped last week to the lowest level since July, the Labor Department reported today.

Policy makers said last month the economy appeared to be “leveling out,” with a “gradual” resumption in growth likely. Still, consumer spending was expected to be constrained by “job losses, sluggish income growth, lower housing wealth and tight credit.”

“Although consumer confidence is rising, actual consumption has remained muted overall,” Lockhart said. “Consumers remain cautious because of employment concerns and wealth loss. Households continue to deleverage, that is, pay down debt.”

Household Wealth

Unemployment that’s projected to reach 10 percent by early next year and a decline in household wealth are casting doubt on the strength of a recovery. Consumer credit fell by 10 percent at an annual rate in July to $2.5 trillion, according to a Fed report released this week.

The central bank lowered its main interest rate almost to zero in December and committed to purchasing as much as $1.75 trillion of Treasuries and housing debt to reduce borrowing costs.

Lockhart told reporters after the speech that the Fed may not purchase $1.25 trillion of mortgage securities that have been authorized.

The central bank has “flexibility to do what was needed but not necessarily go to the absolute top number that the program had been publicized as its ultimate target,” he said. “It is not inconceivable we will decide to do less.”

“My grasp of the issue is how to phase out the program in a way that doesn’t unnecessarily distort the markets,” he said. Policy makers “have studied the tapering off of that program as one option” and will probably discuss the purchases at their next meeting on Sept. 22-23.

Complete Purchases

Fed district bank presidents Jeffrey Lacker of Richmond and James Bullard of St. Louis said last month the central bank may not need to complete its purchases of mortgage securities. New York Fed President William Dudley by contrast stressed an exit would be “premature,” citing “high unemployment” and weak growth.

Dallas Fed President Richard Fisher said Sept. 3 that he’s “not against completing that process” of purchasing the securities, while Chicago Fed President Charles Evans said yesterday he supports following through with the purchases.

Policy makers “are confident we have the tools” for withdrawing stimulus from the economy, Lockhart said. “It is simply the question of having the will to apply them when the time comes.”

Potential Shock

Lockhart said falling commercial real estate prices pose another potential shock to the U.S. banking system. Banks and financial institutions have reported more than $1.6 trillion in credit losses and writedowns worldwide since the global credit crisis began.

The Atlanta Fed chief also warned that growing federal budget deficits threaten the economy.

“Despite the recent growth in U.S. public indebtedness, the level of debt is still manageable,” Lockhart said to the World Affairs Council of Jacksonville. “But the trend is unsustainable and in a less stable country would spell trouble.”

The budget deficit is projected to reach $1.6 trillion this year and $1.4 trillion next year, according to the nonpartisan Congressional Budget Office.

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