The national economy will continue a “reasonably strong” recovery for the near future, but only if unemployment falls and consumers retain confidence. That’s the somewhat mixed assessment of Robert T. Parry, the influential president and chief executive of the Federal Reserve Bank of San Francisco.

Parry, who spoke to Downtown Rotarians, says growth should pick up next year, but the economy will continue to be overshadowed by too much capacity. In short: don’t look for a return to the growth rates of the late ’90s anytime soon. The economy will continue to have “excess capacity throughout much, if not all, of 2004,” Parry said in an after-speech interview. That excess capacity will hold down inflation.

Of course, excess capacity also reduces the need for workers, as manufacturers struggle to find markets for their goods, hence stubbornly high unemployment numbers. The result: a recovery that looks strong by the numbers, unless one looks at the distinctly discouraging unemployment rate. The U.S. unemployment rate in July was 6.3 percent, that of California was 6.9 percent.

The economy should pick up soon, Parry said, because of factors such as a boost in defense spending for the Iraq war, economic stimulus packages passed by Congress, and tax reductions President Bush signed in May. “Looking ahead, the most likely outcome appears to be that the economy will show reasonably strong growth for the rest of the year, and then pick up some more steam in 2004,” Parry said.

Parry was more optimistic about San Diego’s economy, which he described as stronger than that of Northern California. (For July, San Diego County’s unemployment rate was just 4.5 percent.)

“I find it very difficult to characterize the California economy, because there are two economies. There is the North, which has really experienced tremendous challenges in the last three years. A very large share of the loss in employment in this country occurred in the Bay Area. “But if you come to the South, like Los Angeles and even more so San Diego, I think you see a different situation. In San Diego, employment when the nation was losing over 3 million jobs actually recorded an increase in jobs. I frankly think the economic situation here and L.A. has been reasonably good. The economy hasn’t taken off, but the recession has been barely visible.”

Rising mortgage rates could slow down the rapid rise in home prices, but Parry sees little chance of a housing price “bubble” in California because demand far exceeds supply.

“If supply is constrained, then why would there be a tendency for prices to fall? I don’t see that. In general, I think you can look to the future pretty optimistically in regard to housing prices in this state.”

— Bradley J. Fikes