The steep decline in the U.S. economy has started to moderate, but a pending recovery is likely to be slow and marked by continued high unemployment, Cleveland Federal Reserve Bank President Sandra Pianalto said on Thursday.

I expect sales and production to begin to recover, although gradually, during the second half of the year, Pianalto said at the INVESTKentucky Conference.

Speaking at Churchill Downs racetrack, home of the Kentucky Derby, Pianalto was not betting on a quick return to strong economic growth and aggressive hiring.

Once the recession ends, we may be tempted to hope that the economy will take off at a full gallop, but that is not likely to happen because of some long-standing imbalances within our economy, she said.

It could take a long time before the unemployment rate returns to levels we think of as normal, and we might even need to revisit our definition of normal.

Many Americans now have no choice but to save as they attempt to rebuild personal wealth gutted by staggering home and stock price declines, she said.

As people come to grips with the fact that their finances are more uncertain than they had ever thought they would be, they are not likely to resume spending at the pace they once did, she said.

Pianalto said consumer spending will not return to the 70 percent share of gross domestic product that it reached just before the recession started in December 2007.

At the same time, international markets cannot be relied upon to pick up the slack at a time the global economy is forecast to contract for the first time since World War Two, she added.

Pianalto is not a voting member of the Federal Open Market Committee in 2009.

She said that expansionary monetary and fiscal policies are the centerpiece of the powerful forces putting the economy back on track for recovery.

But amid the attention now being paid to exactly when the U.S. recession might end, Pianalto said not enough thought is being paid to the huge gap between current output and pre-recession levels of activity.

Addressing these imbalances may result in a slower, lengthier recovery period, but doing so will increase our ability to achieve sustainable economic growth over the longer term, she said.

(Writing by Ros Krasny in Chicago; Editing by Kenneth Barry)

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