Bernanke sees 'moderate growth;' long road to recovery

NEW YORK (CNNMoney.com) -- Federal Reserve chairman Ben Bernanke said Monday that the U.S. economy faces a long and bumpy ride ahead to overcome the deepest recession since the Great Depression, though the worst is over.

Speaking to politicians attending the annual meeting of the Southern Legislative Conference in Charleston, S.C., Bernanke said the nation's economy is growing at a "moderate" pace, but has a "considerable way to go to achieve a full recovery."

Persistent weakness in the housing and labor markets continue to weigh on the economy, he said. The improvement in private payrolls is still not robust enough to reduce the unemployment rate and restore the nearly 8.5 million jobs lost over 2009 and 2009, he added.

But on the bright side, an increase in spending by households and business should help sustain growth, in upcoming quarters.

The Fed chief also focused on the fact that the downturn has taken a severe toll on state and local budgets, forcing them to make significant cuts that are in part to blame for the sluggishness of the national recovery.

With steep drops in tax revenue and ballooning Medicaid costs, states have had to lay off and furlough employees, trim capital spending, reduce aid to local governments and raise taxes to balance budgets.

While the Recovery Act's stimulus funds have helped states meet some fiscal pressures, Bernanke said that source of funding will wind down next year, leaving states to cope alone.

"With economic conditions far from normal, state budgets will probably remain under substantial pressure for a while, leaving governors and legislatures a difficult juggling act as they try to maintain essential services while meeting their budgetary obligations," Bernanke said.

Since 49 out of 50 state constitutions prohibit long-term borrowing to cover budget shortfalls, Bernanke called on states to boost their reserve funds to ease their financial woes.

While these balances stood at a record of about 12% of expenditures at the end of 2006, they were still insufficient buffers given the depth of the recession.

"State governments may wish to revisit their criteria for accumulating reserve funds," he said. "Building a rainy-day fund during good times may not be politically popular, but it can pay off during the bad times."

Bernanke also urged states to invest in education to spur future growth.

"No economy can succeed without a high-quality workforce, particularly in an age of globalization and technical change," he said. "Doubtless, investment in education and training has been a key source of the remarkable economic gains that the South has achieved over the past 50 years or so."

In addition to secondary and post-secondary education, Bernanke encouraged state investment in early childhood education, which increases high school graduation rates, as well as community colleges and vocation schools that play a key role in job training for adults.

Later Monday, the Senate is schedule to vote on a bill that includes $10 billion to limit layoffs in education and $16.1 billion in Medicaid assistance to states.