Dallas Federal Reserve Bank President Richard Fisher on Thursday gave a muted outlook for the U.S. economy, saying a long period of slow growth lies ahead even when the recession ends.

We are likely to see a prolonged period of sluggish economic performance and uncomfortably high unemployment as businesses reallocate capital and labor to fit the new economic landscape, Fisher said in remarks prepared for delivery at the University of California in Santa Barbara.

Deflation, not inflation, is the bigger risk to the United States for the immediate future, said Fisher, who is not a voting member of the policy-setting Federal Open Market Committee (FOMC) in 2009.

Businesses are sorely lacking in pricing power, a condition that caused prices for almost half the items in a commonly used U.S. inflation basket to fall in July, Fisher noted, adding that revenue growth at companies has evaporated.

To preserve profits firms will continue to focus on cost control, most painfully by shedding workers and driving those who remain on the payroll to higher levels of productivity.

Fisher largely echoed the tone of minutes from the August FOMC meeting released on Wednesday, which stressed that a gradual recovery was likely at hand.

A combination of factors is beginning to propel the economy upward from the longest and deepest U.S. recession since the Great Depression of the 1930s, he said.

Among the elements that will pull the economy out of recession will be the current modest upturn in the housing market, Fisher said, on the heels of a dramatic, years-long decline.

Our latest estimate is that residential investment will add roughly half of 1 percentage point to GDP growth in the current quarter, he said.

Similarly, Fisher said the worst may well be over for household consumption now that many Americans have adjusted to the reality of a deteriorating labor market.

Still, consumers will not fuel a global economic boom any time soon.

Households and businesses will focus on shoring up their savings and balance sheets rather than spending money. For consumption, that translates into a slow crawl out of purgatory, he said.

Fisher said huge government spending was helping to propel the economy upward, but carries a long-term price tag including the prospect of higher interest rates as investors respond to the massive issuance of debt.

The major challenge facing U.S. fiscal authorities is meeting the need for near-term economic stimulus while pursuing a practicable plan to stabilize the government's debt-finance obligations, he said.

California Inflation