White House's Bernstein upbeat on economy despite Mideast war, shutdown threat

Senate Banking Committee holds nominations hearing on Capitol Hill in Washington

By Jeff Mason

NEW YORK (Reuters) -U.S. Council of Economic Advisers Chair Jared Bernstein said on Wednesday he did not "thus far" see the Israel-Gaza war as an exogenous shock that could derail U.S. economic growth, but noted that Washington was watching its impact on oil prices.

Bernstein said he remained generally upbeat about the U.S. economy, and did not expect a possible government shutdown to result in a recession, although it was hard to be sure without knowing the length of any potential disruption.

"I'd say from the tailwind perspective, we're looking at a pretty clear transition to steady and stable growth," he told the Reuters NEXT conference in New York, citing a "gangbuster" of GDP growth, low unemployment rates and real wage gains.

"On the headwind side, certainly being in a higher rate environment is something we have to be mindful of. There is obviously a terrible new conflict in a part of the world that is sensitive for energy production, so we have to watch the price of oil, which has actually come down recently."

The price of U.S. crude initially jumped after the militant Hamas group's Oct. 7 attack on Israel, but it has since fallen to about $75 per barrel, the lowest since July.

The U.S. economy has defied nearly universal expectations that the Federal Reserve's aggressive rate hikes - beginning in March 2022 - would bring activity to a halt and trigger a recession and a rise in joblessness.

Instead, the economy in the most recent quarter grew at a 4.9% annualized rate, more than double the pace that Fed policymakers see as its long-term trend potential of 1.8%.

However, there are signs emerging that the 5.25 percentage points of rate hikes the Fed has imposed is beginning to weigh on parts of the economy and could finally slow consumer spending, which has continued to rise at a rate above its pre-pandemic trend.

Job growth recently has slowed as well and the unemployment rate in October rose to 3.9%, the highest in nearly two years, but it remains near historic lows.

Fed officials in their most recent projections in September estimated on balance that the jobless rate would edge up a bit further next year - to 4.1% - before leveling off around 4%.

Bernstein said the U.S. economy was outperforming virtually all its competitors and urged Congress to pass the necessary appropriations bills to keep the government running.

"Congress has a responsibility to keep the lights on ... at a time when we really don't need any own-goal kicks. There's a lot of stuff going on in the world. We've got a very strong backdrop to a U.S. economy that's outperforming virtually all our competitors," he said. "We'd like to keep it that way."

Asked about recent negative polls reflecting concern about President Joe Biden's handling of the economy, Bernstein said Americans had to reset their price expectations given an increase in their buying power.

Bernstein said the Biden administration had taken a series of steps to ease prices while maintaining a strong labor market.

(Reporting by Jeff Mason; additional reporting by Eric Beech; Writing by Andrea Shalal and Dan Burns; Editing by Richard Chang)