When the Chairman of the Fed testifies before Congress, it is always a good idea to pay attention. Even if you do not agree with his assessment of the economy, it is an important insight into what the Fed is likely to be doing in the near future. Below are excerpts from his prepared testimony, with my interpretation and commentary interspersed.

"The U.S. economy has contracted sharply since last fall, with real gross domestic product (GDP) having dropped at an average annual rate of about 6 percent during the fourth quarter of 2008 and the first quarter of this year. Among the enormous costs of the downturn is the loss of nearly 6 million jobs since the beginning of 2008. The most recent information on the labor market -- the number of new and continuing claims for unemployment insurance through late May -- suggests that sizable job losses and further increases in unemployment are likely over the next few months."

Hard to disagree with mostly factual statements here, although I would say the next few quarters would be a more accurate statement than the next few months. In both of the last two recessions, unemployment continued to get worse long after the economy bottomed. The dynamics of this recession make it likely that it will be even more the case this time around.

"However, the recent data also suggest that the pace of economic contraction may be slowing. Notably, consumer spending, which dropped sharply in the second half of last year, has been roughly flat since the turn of the year, and consumer sentiment has improved. In coming months, households' spending power will be boosted by the fiscal stimulus program. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions."

Not going down is not the same thing as going up. He is correct that the stimulus program is helping out, and that if it were not put in place things would have been much worse. It was an attempt to prime the pump. The question is, are we just pumping back out the water we put in, or are we drawing out additional water? Have we ignited a self-sustaining basis for economic activity after the stimulus has worn off? Only time will tell.

"Activity in the housing market, after a long period of decline, has also shown some signs of bottoming. Sales of existing homes have been fairly stable since late last year, and sales of new homes seem to have flattened out in the past couple of monthly readings, though both remain at depressed levels.