Fed’s Dudley displayed a particularly cautious stance on the state of the U.S. economy

William Dudley, President of the Federal Reserve Bank of New York, displayed a particularly cautious stance on the state of the U.S. economy in a speech this morning.

In prepared remarks at the Long Island Association in Melville, New York, Dudley stated that while recent U.S. economic data has shown considerable improvement, “it is far too soon to conclude that we are out of the woods.”

“Real economic activity has yet to be strong enough on a sustained basis to make a big dent in the overall amount of slack in the U.S. economy,” the New York Fed President added. “While it is true that growth was stronger in the fourth quarter, most of that growth was due to inventory accumulation. Growth of final sales was actually quite weak. Historically, a quarter in which inventory investment makes a significant growth contribution is typically followed by a quarter in which that growth contribution is modest or even negative. That appears to be what is shaping up for the first quarter of this year.”

Dudley – known as one of the most dovish members of the Federal Open Market Committee (FOMC), along with Chairman Ben Bernanke – went on to pour some cold water on the better than expected employment data of late.

“Although the sharp decline in the unemployment from 9 percent last September to 8.3 percent in February suggests we are doing better than that, it is important to recognize that about half of that decline was due to a declining labor force participation rate.  In fact, had the labor force participation rate not declined from around 66 percent in mid-2008 to under 64 percent in February, the unemployment rate would still be over 10 percent. Also, it appears that productivity growth has slumped recently. Although that means that a given amount of growth translates into bigger employment gains, it certainly is not an unmitigated good development.”