Finance Blog number 1

European consumer prices dropped less than economists forecast in August as the economy recovered from the deepest slump in six decades.

Prices in the 16-member euro region fell 0.2 percent from the year-earlier month after declining a record 0.7 percent in July, the European Union statistics office in Luxembourg said today. Economists predicted a 0.3 percent decrease, according to the median of 36 estimates in a Bloomberg News survey.

Inflation may accelerate as the global economy emerges from the worst recession since World War II, stoking demand and driving up the cost of crude oil and other commodities. The European Central Bank has warned that the recovery may face obstacles as rising unemployment curbs consumer spending and helps keep a lid on prices.

“It’s certainly a shorter period of negative inflation rates than most people thought and could be over next month,” said Nick Kounis, chief European economist at Fortis Bank NV in Amsterdam. “This latest piece of data puts the final nail in the coffin of the idea that the ECB will do more. At the same time, they don’t really have to worry about inflation pressures until 2011 or 2012.”

Consumer prices in Italy, the euro region’s third-largest economy, unexpectedly increased 0.2 percent in August from a year earlier, the Italian Statistics Institute in Rome said today. Economists forecast a 0.1 percent drop, according to the median forecast of 15 projections in a Bloomberg survey. Italian retail sales unexpectedly fell 0.4 percent in June from May, according to a separate report.

Increased Discounting

Germany’s Puma AG, the second-largest sporting-goods maker in Europe, on Aug. 7 reported a 16 percent drop in quarterly profit because of increased discounting. Unilever, the world’s second-biggest consumer-goods company, will distribute 50 million discount coupons in Germany to lure shoppers, following the example of Nivea skin-cream maker Beiersdorf AG, which offered consumers a three-euro ($4.28) rebate last month.

Consumers in Europe anticipate prices will decline more steeply in the next year than they did in July, while companies’ projections are less negative than a month ago, a European Commission report showed on Aug. 28. A gauge of consumers’ price expectations over the next 12 months fell to minus 16, the lowest since the data were first compiled in 1990.

While oil prices are down about 40 percent from this time last year, they have more than doubled from a February low of $34 a barrel. In Germany, Europe’s largest economy, energy prices increased in August from July and helped to boost the annual inflation rate, which unexpectedly rose to zero.

Stimulus Spending

Evidence is increasing that the worst of the global recession is passed. In India, Asia’s third-largest economy, economic growth accelerated in the second quarter for the first time since 2007, data showed today. India joins China, Japan and Indonesia in rebounding as Asian economies benefit from $950 billion of stimulus spending and lower borrowing costs.

The euro-area economy contracted 0.1 percent in the second quarter after shrinking 2.5 percent in the previous three months, while Germany and France returned to growth. European economic confidence jumped twice as much as economists forecast this month, with the European Commission’s index of executive and consumer sentiment rising to the highest since October.

Even as the economy recovers, rising unemployment may restrain consumer spending. The euro-area jobless rate increased to 9.4 percent in June, the highest in a decade, and may reach 11.5 percent next year, according to EU forecasts. Retail sales fell for a 15th month in August, the Bloomberg purchasing managers’ index showed.

Steady Course

“A weak labor market will prevent companies from raising prices too much, so subdued inflation will prompt the ECB to hold a steady course for now,” said Nick Matthews, an economist at Royal Bank of Scotland Group Plc in London.

The ECB, which aims to keep inflation just under 2 percent, has cut its benchmark rate to a record low of 1 percent and started buying covered bonds to stimulate lending. The bank will publish a new set of quarterly growth and inflation forecasts at its next rate meeting on Sept. 3 in Frankfurt.

“It looks ever more likely that the ECB’s key interest rate has bottomed out at 1%; however, any tightening of monetary policy by the ECB still looks highly improbable until well into 2010,” said Howard Archer, an economist at IHS Global Insight in London, “Underlying inflationary pressures are still very weak and there remains a very serious risk that euro-zone economic recovery could falter.”

European stocks were on speculation the market’s six-month rally has outpaced prospects for earnings growth. The Dow Jones Stoxx 600 Index down 0.5 percent at 236.24 at 2:46 p.m. in London. The euro traded at $1.4289, down 0.1 percent on the day.

The inflation report released today is an estimate. The statistics office will publish a detailed breakdown of the consumer-price data, including energy-price inflation as well as the core rate, on Sept. 16.

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The billionaire co-founder of top data storage equipment firm EMC Corp, Richard Egan, died on Friday, a spokesman for the company said in an emailed statement.

Egan, the “E,” behind the EMC name, co-founded the Hopkinton, Massachusetts-based company 30 years ago with Roger Marino, according to the company’s web site.

Listed in Forbes’ 2009 list of the world’s billionaires with net worth of $1 billion, Egan led the management team that took EMC company public in 1986 and was elected chairman of the board in 1998. He also held the position of president and CEO until 1992, EMC’s web site said.

Egan stepped down from the role of chairman in 2001 and retired from the board that year, when he took on the role of U.S. Ambassador to Ireland, a position he held until 2003 according to details published on the American Ambassadors web site.

“Dick’s vision became one of the world’s top technology companies, and his legacy will live on through the tens of thousands of lives he affected in so many positive ways,” Joe Tucci, EMC Chairman, President and CEO, said in a statement car loans. “We have all lost a great mentor and friend.”

The Boston Herald reported on its web site that Egan was battling terminal cancer and died of a self-inflicted shotgun wound to the head, citing police and other sources. A spokesman for EMC declined comment beyond the statement.

Egan grew up in Boston, Massachusetts, earned a degree in Electrical Engineering from Northeastern University and then studied at the Massachusetts Institute of Technology, according to the American Ambassadors web site. Prior to forming EMC he worked at technology companies including Intel Corp, the website said.

(Editing by Nick Macfie)

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Airline shares have rallied ahead of Labor Day, an anticipated turning point for the troubled industry when many carriers will begin slashing seat capacity to match the drop in demand.

Investors are hoping capacity cuts will allow airlines to jack up ticket prices and reverse declining revenue. But the plan could falter because business travelers, the industry’s bread and butter, have yet to return.

"We’ve seen some improvement, but I think the bulk of that is being driven by the leisure traveler," said analyst Matt Jacob. "But the business traveler, those who buy close to booking and pay a premium price, that section of the business has continued to be weak.

"So the concern is, once we reach Labor Day and the end of the leisure travel period, how will that impact the improvement we’ve seen?"

Airline stocks have been volatile as investors try to figure out that answer.

After hitting its lowest point on record in March, the NYSE Arca Airline Index has bumped along this summer as airlines readjusted outlooks because of depressed demand and declining revenue. But since late June, the industry benchmark has managed to climb more than 44 percent.

That enthusiasm is tempered among many airline analysts.

"Our short-term revenue data suggest a little strength in late summer," said UBS analyst Kevin Crissey in a recent note.

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European retail sales fell for a 15th month in August as rising unemployment damped consumer spending, the Bloomberg purchasing managers index showed.

The measure of euro-area sales declined to 47.1 from 47.3 in July when adjusted for seasonal swings. It has remained below the 50 mark, indicating contraction, since June of last year. The index is based on a survey of more than 1,000 executives compiled for Bloomberg LP by Markit Economics.

Households across the region are holding back on spending after the jobless rate increased to a 10-year high of 9.4 percent as companies fired workers and cut costs to survive the worst recession in six decades. While the European Commission projects unemployment will reach 11.5 percent in 2010, consumer confidence gained more than economists forecast in July on signs the economic slump is easing.

“Euro-area unemployment has further to rise and that should weigh on household spending while improving confidence is still fragile as well,” said Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd. “The question remains what will act as a spur to growth once the fiscal stimulus measures abate.”

Germany and France, the euro region’s largest economies, unexpectedly returned to growth in the second quarter after their governments pledged billions of euros to fight the recession, including subsidies for consumers who scrap an old car and buy a new one. The incentives are to expire at year end.

Steepest Decline

The retail-sales gauge for France showed a slower revenue drop in August, while in Germany, Europe’s biggest economy, the pace of decline was little changed, according to today’s report. Italy, the euro area’s third-largest economy, recorded the steepest decline of the three surveyed countries.

Retailers eliminated more jobs this month to cope with falling revenue and narrowing profit margins, which “remained under severe downward pressure in August,” Markit said in the report. A gauge of gross margins fell to 41.2 from 41.6 in July, the survey showed.

Bulgari SpA, the world’s third-largest jeweler, last month reported a second straight quarterly loss as the Rome-based company struggled to sell its Assioma watches around the world. Puma AG, Europe’s second-largest sporting-goods maker, on Aug. 7 said profit fell 16 percent because of increased discounting.

The global recession has eroded household and company demand for credit in Europe and made banks more reluctant to lend. Loans to the private sector increased 0.6 percent from a year earlier in July, the slowest annual growth since records began in 1991, the European Central Bank said today. On the month, loans fell 0.4 percent, the biggest drop ever recorded.

‘Cautiously Optimistic’

While retail companies continued to miss their sales targets this month, led by clothing and shoe stores, they were “cautiously optimistic” about the one-month sales outlook for the first time since May, Markit said.

European stocks were higher as better-than-projected earnings at France’s Credit Agricole SA overshadowed concern that the U.S. economy shrank at a faster pace than previously estimated. The Dow Jones Stoxx 600 Index was up 0.2 percent at 9:26 a.m. in London. The measure has gained 50 percent since March 9 on signs the worst of the global slump is over.

The European economy barely contracted in the second quarter as Germany and France showed expansion for the first time in five quarters. Euro-area gross domestic product fell 0.1 percent from the first quarter, when it plunged 2.5 percent, the biggest drop since at least 1995.

Record Low

The economy will return to growth in mid-2010 after contracting about 4.6 percent this year, according to ECB forecasts. The central bank has cut its benchmark interest rate to a record low of 1 percent and started buying covered bonds to stimulate bank lending.

“We see some signs confirming that the real economy is starting to get out of the period of freefall,” ECB President Jean-Claude Trichet said last week. This “does not mean at all that we do not have a very bumpy road ahead of us.”

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Japan’s exports fell for a tenth straight month in July as demand from all of the nation’s major markets deteriorated.

Shipments abroad tumbled 36.5 percent from a year earlier, steeper than June’s 35.7 percent drop, the Finance Ministry said today in Tokyo. The median estimate of 23 economists surveyed by Bloomberg News was for a 38.4 percent decrease.

Manufacturers are still reeling from plunging sales of cars and electronics even as the economy emerges from its worst postwar recession. Toyota Motor Corp., Japan’s largest carmaker, said today it will cut domestic production by 220,000 vehicles.

“The U.S. hasn’t quite recovered, and China’s economy looks somewhat shaky too,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “We’re unlikely to see a recovery in exports in the short term.”

The yen traded at 94.17 per dollar at 4:55 p.m. in Tokyo from 94.04 before the report. The Nikkei 225 Stock Average rose 1.4 percent after U.S. consumer confidence gained.

Exports may also have been eroded by the yen’s 1.7 percent advance against the dollar in July from June. A stronger yen cuts into exporters’ profits when they are repatriated back into local currency.

Declines in shipments accelerated in all major regions: Exports to China fell 26.5 percent, shipments to the U.S. slid 39.5 percent and those to Europe slumped 45.8 percent, according to today’s report.

Return to Growth

Japan’s gross domestic product grew an annualized 3.7 percent last quarter, the first expansion in more than a year, as governments worldwide poured more than $2 trillion into their economies to spur demand.

Prime Minister Taro Aso is struggling to cement an economic recovery as his ruling Liberal Democratic Party trails the opposition Democratic Party of Japan in polls ahead of an Aug. 30 election.

Toyota, which is shutting down an assembly line at its Takaoka plant in central Japan, and Nissan Motor Co. led a ninth straight drop in domestic auto production in June as exports to the U.S. plummeted, according to the Japan Automobile Manufacturers Association.

Nippon Steel Corp., the world’s second-largest steelmaker, last month widened its first-half loss forecast by 33 percent.

Not all economists forecast exports will continue to worsen. Robust growth in China, which overtook the U.S. as Japan’s largest overseas customer this year, will support demand, according to Kyohei Morita.

Continue Rising

“We do not believe a drop in exports would mark the start of a downward trend,” said Morita, chief economist at Barclays Capital in Tokyo. “Exports, especially to Asia and the U.S., are likely to continue rising.”

China’s economy expanded 7.9 percent last quarter, rebounding from the weakest growth in almost a decade. The nation’s 4 trillion yuan ($585 billion) stimulus to encourage consumer spending and investment in building projects has benefited Japanese manufacturers.

By volume, exports rose 2.4 percent in July from June, a fifth monthly increase, the Bank of Japan said today. The data correlate closely with the export component of GDP, according to London-based Capital Economics Ltd.

Export volumes “are set to drive strong growth in both industrial production and GDP” in the current quarter, said Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo. “The recovery from the trough is rapid, but the level is still badly depressed.”

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NEW YORK (CNNMoney.com) — The $3 billion Cash for Clunkers program will shut down on Monday, the government said Thursday.

Dealers must submit any pending Clunker deals, including any necessary paperwork, by 8 p.m. ET Monday.

"It’s been a thrill to be part of the best economic news story in America," said Transportation Secretary Ray LaHood. "Now we are working toward an orderly wind down of this very popular program."

Officials decided to wind down the program, which Congress passed to spur flagging auto sales, after determining that it would soon run out of money.

As of Thursday, the program has recorded more than 457,000 dealer transactions worth $1.9 billion in rebates.

The Department of Transportation is confident, based on its own analysis of Clunker deals that have been submitted and those that are still pending, that the program has enough money left to continue through Monday night, a senior White House official said.

"We are providing several days for consumers and dealers to finalize deals," the official said.

Under the Clunkers program, which launched July 27, vehicles purchased after July 1 are eligible for refund vouchers worth $3,500 to $4,500 on traded-in cars with a fuel economy rating of 18 miles per gallon or less.

"We expect there will be a flurry of activity over the weekend as the program comes to a close," Jeremy Anwyl, chief executive of the automotive Web site Edmunds.com, said in a statement.

"With a date certain, NADA is strongly recommending that all dealers now focus their attention and efforts on submitting reimbursement claims prior to the looming deadline," said John McEleney, chairman of the National Automobile Dealers Association in a statement on Thursday.

Car dealer Brian Benstock, president of Paragon Honda in Woodside, N.Y., said he’s already written 200 Clunker deals and will have a big advertising push this weekend to get a few more.

"We’re leaving nothing behind," Benstock said. "When it’s over its over and we’re leaving no dollars on the sidelines."

Car buyers trading in a vehicle must prove that the vehicle has been titled to them for at least a year and, in most states, that the car has been insured for a year.

Dealers are required to disable and destroy any clunked vehicle so that it cannot be resold.

Dealers have complained that the Transportation Department has been slow to process rebates — slowing their rebate checks and putting them in a financial squeeze. In response, the department recently hired additional personnel.

The program proved wildly popular, running through its initial $1 billion in its first week and leading lawmakers to approve an additional $2 billion in funding on Aug. 7.

Cash for Clunkers has been credited with boosting auto sales, sparking several automakers to re-open closed plants in an effort to refill ravaged inventories. Industry analysts at J.D. Power and Associates forecast that August retail auto sales, a figure that excludes fleet sales to businesses, will pass the 1 million unit mark, thanks largely to the program. That would make it the first million-plus retail sales month in a year.

"Improved consumer confidence and credit availability during the past six months have combined with the CARS program to lift industry sales out of their slumping year-to-date levels, which have been down approximately 35% year-over-year," said Gary Dilts, senior vice president of global automotive operations at J.D. Power and Associates, in a statement.

Overall auto sales are still expected to be down slightly, mostly due to low inventories hampering fleet sales, J.D. Power said. The company has boosted its overall projected sales for the year due to the success of the program.

What remains to be seen now is where things go from here.

"The effectiveness of the ‘cash-for-clunkers’ program will be judged in a number of ways, but a key measure will be how does the automotive market respond to the absence of the ‘clunkers’ incentive to buy now?" said Jack Nerad, editorial director at auto pricing trackers Kelley Blue Book, in a statement. 

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Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet said the world economy is pulling out of its deepest recession since the 1930s.

“Prospects for a return to growth in the near term appear good,” while “critical challenges remain,” including possible further losses for financial firms, Bernanke said yesterday. Trichet said “green shoots” aren’t enough for him to declare the recovery sustainable and that officials “have an enormous amount of work to do.”

The mixed outlook was one of the main themes struck on the first day of the annual central bankers’ symposium in Jackson Hole, Wyoming, hosted by the Kansas City Fed bank. Policy makers from South Africa to Mexico and economists dissected the causes of the financial crisis and debated how to prevent or mitigate the next one.

Economic reports this week showed unexpectedly strong signals of a rebound in the U.S., Germany and France. U.S. purchases of previously owned homes climbed 7.2 percent in July to the highest level in almost two years, indicating the housing crisis that crippled the world’s largest economy is easing.

U.S. stocks gained for a fourth day, with the Standard and Poor’s 500 Index rising 1.9 percent in New York to the highest level since October. Benchmark 10-year notes yielded 3.57 percent, up 13 basis points from Aug. 20.

Services Expanded

Following last week’s data showing the euro-area’s two largest economies pulled out of a recession in the second quarter, Markit Economics reported yesterday that German services expanded this month for the first time since September. Its gauge for French manufacturing rose to its highest in 15 months.

“There is a sense here that things have stabilized since the panic,” said John Taylor, a former U.S. Treasury official and now a professor at Stanford University in California, who attended the symposium. “But things still look pretty flat and nobody is saying there is going to be a sharp rebound.”

After giving welcoming remarks at a dinner the previous evening, Bernanke, 55, opened the formal part of the conference yesterday with a speech defending the Fed’s responses to the crisis over the past year and those of counterparts around the world. A “strong and unprecedented international policy response” averted “the imminent collapse of the global financial system,” Bernanke said.

On the Mend

Even with the economy on the mend, Bernanke said “strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit.” Recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

Bernanke’s note of caution underscored the Fed’s decision last week to leave interest rates near zero for an “extended period” and to delay by a month the scheduled end to its $300 billion program to buy U.S. Treasuries free credit report instantly.

At lunch, Bank of Israel Governor Stanley Fischer told attendees that “despite the encouraging signs of recovery, it is too early to declare the economic crisis over.” The former first deputy managing director of the International Monetary Fund also said the global banking system may require “radical restructuring” to avoid future crises.

While economists predict the U.S. will return to growth this year, they say the jobless rate is likely to rise beyond 10 percent, restraining consumer spending and casting a cloud over the strength of the recovery.

‘A Bit Uneasy’

Later in the day, Trichet, 66, spoke from the audience during a debate period, saying, “I am a little bit uneasy when I see that because we have some green shoots here and there, we are already saying, ‘Well, after all, we are close to back to normal.’”

“We know that we have an enormous amount of work to do and we should be as active as possible,” Trichet said without elaborating on a forecast.

Bundesbank President Axel Weber, speaking on CNBC, said at the gathering that it’s “too early to say it won’t be a bumpy road ahead.”

Separately, the Organization for Economic Cooperation and Development will next month upgrade its outlook for the economy of its 30 nations, which include the U.S. and Japan, Secretary General Angel Gurria said. The Paris-based group said in June that the combined economy of the world’s most-industrialized countries will shrink 4.1 percent this year and grow 0.7 percent in 2010.

‘Positive Trend’

“We’re confirming a positive trend but are still cautious,” Gurria said in an interview in Jackson Hole. “There are risks that are important.”

Economists forecast the U.S. economy will expand at a 2.2 percent annual rate in the third quarter, according to the median estimate in an August survey by Bloomberg News. The IMF last month predicted the world economy will grow 2.5 percent in 2010 after contracting 1.4 percent this year.

One academic paper presented at the symposium said large financial crises can impair long-term economic growth by increasing government debt and reducing tolerance for risk.

“Many systemic banking crises have had lasting negative effects on the level of gross domestic product,” Bank for International Settlements economist Stephen Cecchetti said in the paper, written with BIS economists Marion Kohler and Christian Upper.

Meredith Whitney, the analyst who predicted that Citigroup Inc. would cut its dividend last year, outlined one key risk to the recovery by predicting the number of U.S. bank failures will quadruple as lenders struggle with bad loans.

“There will be over 300 bank closures,” Whitney said in an interview with Bloomberg Television in Jackson Hole. “The small-business owner on Main Street continues to see liquidity come away.”

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For the first time in his career, Bank of England Governor Mervyn King wants a more expansive monetary policy than his colleagues.

King’s push to expand the central bank’s bond-purchase program to 200 billion pounds ($329 billion) was overruled by the Monetary Policy Committee, minutes of their Aug. 6 meeting published yesterday showed. On the 14 other occasions that King has lost a vote since the central bank was given rate-setting independence in 1997, he opted for tighter policy every time.

King, who led a global push by central banks to start buying bonds in March, argues that too timid an approach may undermine optimism that Britain is recovering from its worst recession in a generation. The vote for an even looser approach than his colleagues prefer defies King’s image as an advocate of tight monetary policy with a track record of backing interest- rate increases. The pound dropped after yesterday’s report.

“It proves he’s not just a hawk, he’s more of an activist,” said George Buckley, an economist at Deutsche Bank AG in London. “He’s not afraid to vote against the rest of the committee if he thinks it’s the right thing to do.”

The MPC voted 6-3 to increase bond purchases by 50 billion pounds to 175 billion pounds, the minutes showed. King was joined by Timothy Besley and David Miles in voting for an increase of 75 billion pounds. All nine opted to keep the benchmark interest rate at a record low of 0.5 percent.

‘Less Severe’

The pound weakened against all of the 16 most-traded currencies tracked by Bloomberg after the report. The danger from doing too much stimulus is “less severe” than the cost of being too cautious, the minutes said.

The pound fell as much as 0.8 percent against the dollar before rebounding later in the day.

“The bank is clearly taking the view that the recovery isn’t very sustainable,” said Jamie Dannhauser, an economist at Lombard Street Research Ltd. in London. “There’s very little damage that can come from doing too much stimulus.”

King’s vote suggests he may try to steer the central bank towards a further expansion of the purchase program at future decisions, economists say. The last time the governor was outvoted, in June 2007, he pushed through the quarter-point rate increase he wanted at the next month’s meeting.

Clear Signal

King typically casts the final vote at policy meetings, a practice which suggests he would have known he was on the losing side when he made the call.

“He made the choice to vote for more quantitative easing even though he knew it would make no difference to the decision,” said David Tinsley, an economist at National Australia Bank in London and a former central bank official cheap car insurance. “It’s a clear attempt to signal the direction of his policy. He’s persuaded by the argument that doing more now is much less risky than doing less.”

King, who has now been outvoted three times since becoming governor in 2003, has rejected labels on his voting tendencies in the past and emphasized the importance of the 2 percent inflation target in the bank’s policy. He reiterated that mantra last week, saying the decision to increase bond purchases was justified by the fact that inflation may slow too much.

King says inflation, which stayed at 1.8 percent in July, could slow below 1 percent in coming months.

King’s caution on the strength of the economy echoes Prime Minister Gordon Brown, who said last month that government officials are “determined to keep our focus” on the recovery. Brown must call an election by June 2010, and his ruling Labour Party trailed the opposition Conservatives by 14 percentage points in a YouGov Plc opinion poll ended on Aug. 14.

ECB Concerns

While surveys this month showed U.K. services expanded the most in 1 1/2 years and manufacturing grew for the first time in more than a year in July, unemployment has risen to a 14-year high. The economy contracted 0.8 percent in the second quarter, even as France and Germany returned to growth.

European Central Bank officials are also showing concern on whether the euro region’s economy can gain traction. Bundesbank President Axel Weber said in comments published yesterday he’s not yet convinced Germany’s recovery is sustainable after government stimulus measures helped the economy unexpectedly return to growth in the second quarter.

In the U.K., economists say King’s stance shows his determination to keep printing money and avoid the fate of Japan in the 1990s, where a delayed reaction to a banking crisis contributed to the country’s so-called lost decade.

“There’s a clear consensus that the situation is serious and it isn’t going to improve dramatically in the near term,” said Danny Gabay, director of Fathom Consulting in London and a former central bank official. “The message is that the MPC as a whole fears Japan more than Zimbabwe,” where inflation reached nearly 500 billion percent last September.

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Manufacturing in the New York region grew in August for the first time in more than a year, reinforcing signs the worst recession since the 1930s is nearing an end.

The Federal Reserve Bank of New York’s general economic index climbed to 12.1, higher than forecast and the first expansion since April 2008, the bank said today. Readings above zero for the Empire State index signal manufacturing is growing.

Today’s report, the first regional factory measure for the month, indicates the government’s stimulus plan and record inventory cutbacks are starting to help companies such as ITT Corp. rebound. Economists project growth will resume this quarter, helped by stabilization in manufacturing and housing.

“Inventories were drawn down to such amazingly low levels that companies need to start bringing them back,” said Tom Porcelli, a senior economist at RBC Capital Markets in New York. “We are coming out of the recession. It’s probably over at this point.”

Stocks fell around the world as investors speculated the recent rally in riskier assets had outpaced prospects for economic growth. The Standard & Poor’s 500 index was down 2.2 percent at 1:10 p.m. in New York to 981.82. The yield on the benchmark 10-year note was 3.49 percent, down from 3.57 percent at the end of last week.

Exceeds Forecast

Other reports today showed foreign investors renewed purchases of U.S. financial assets in June and builder sentiment climbed this month to the highest level in more than a year.

Investors from Japan and the U.K. increased demand for Treasuries while China pared its holdings, a report from the Treasury Department showed. Total net purchases of long-term equities, notes and bonds were $90.7 billion in June, compared with net sales of $19.4 billion a month earlier.

The National Association of Home Builders/Wells Fargo confidence index climbed to 18, matching the median forecast by economists and reaching the highest level since June 2008, the Washington-based group said. A reading below 50 means most respondents view conditions as poor.

Economists projected the Empire State index would rise to 3, according to the median of 41 estimates in a Bloomberg News survey. Forecasts ranged from 8 to minus 5.

Cohen, Recession

“We think the recession is ending right now,” Abby Joseph Cohen, senior investment strategist at Goldman Sachs Group Inc., said in an interview today on Bloomberg Radio. The economy may grow by 3 percent in the next couple quarters and by 1.5 percent to 2 percent next year, Cohen said.

The August reading on the New York Fed index was the highest since November 2007, the month before the recession began. The index was at minus 0.6 in July.

Manufacturers account for 6 percent of New York’s $1.1 trillion economy paydayloan.

The New York Fed’s report showed orders and shipments increased, while inventories and employment contracted at a slower pace.

The index of prices paid climbed to 13.8, while the gauge of prices received dropped to minus 12.8, signaling that factories are not able to pass along increasing raw-material costs to their customers.

Factory executives in the New York Fed’s district, which encompasses New York state, northern New Jersey and one county in Connecticut, turned more optimistic about the future. The gauge measuring the manufacturing outlook rose to 48.2, the highest level since July 2007, from 34.

Production Rebounds

Chrysler Group LLC, the U.S. automaker run by Fiat SpA, will make more light trucks than it had planned in the second half to meet growing demand, a person with knowledge of the situation said last week. Chrysler plans to run two plants on overtime and is operating a third shift at another factory to restock dwindled inventory on dealer lots, said the person.

Businesses in the region that are raising forecasts include White Plains, New York-based ITT. The company said on July 31 that 2009 profit will be higher than its prior forecast after second-quarter expenses fell.

“There’s signs of life” in some markets, Chief Executive Officer Steve Loranger said on a conference call on July 31.

Loranger said ITT’s municipal water business has begun to stabilize as federal economic-stimulus money starts trickling in. Benefits from the stimulus plan aren’t likely to aid the company’s results until next year, he said.

Stimulus Impact

“We’re still not forecasting any significant stimulus benefit this year because the actual distribution of those funds has been very slow,” Loranger said. “We certainly will get our fair share.”

Industrial production rose for the first time in nine months in July as the federal “cash-for-clunkers” program spurred demand for cars and automakers completed mid-year overhauls of their factories, a Fed report showed last week.

The auto plan, which provides cash incentives for fuel- efficient cars, already is boosting vehicle sales and is likely to help lift production this quarter.

A report from the Philadelphia Fed, due on Aug. 20, may show manufacturing in that region shrank this month at the slowest pace in almost a year, according to a Bloomberg survey.

A Bloomberg monthly survey of economists showed the economy will expand 2 percent or more in four straight quarters through June 2010, the first such streak in more than four years, as the effects of the government’s fiscal stimulus broaden.

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Instead of a so-called New Normal of subdued growth, the U.S. may be heading for a robust recovery.

The worst recession since the 1930s has created a reservoir of demand that will buoy the economy, say a growing number of economists led by James Glassman at JPMorgan Chase & Co., former Federal Reserve Governor Laurence Meyer and Stephen Stanley at RBS Securities Inc.

“Whenever we have plunged off a cliff and fallen into a deep hole in the past, for a while the economy has a tendency to bounce back very quickly,” said Glassman, a senior economist at JPMorgan in New York. Glassman and his colleagues this month said forecasts of 3 percent to 4 percent growth in coming quarters may be too low given “pent-up” consumer demand.

JPMorgan’s outlook contradicts the view popularized by Mohamed El-Erian at Pacific Investment Management Co. that elevated unemployment and record wealth destruction will keep growth at 2 percent or less for years. The divergence highlights the dilemma for policy makers, who must decide whether to maintain record fiscal and monetary stimulus or begin to pull back and prevent a surge in inflation should growth accelerate.

El-Erian, chief executive officer of Newport Beach, California-based Pimco, said “the indicators we follow continue to point to sluggish medium-term growth in the U.S.,” when asked to respond to arguments for a so-called v-shaped recovery.

Retail Sales

A report from the Federal Reserve today added to signs of recovery as industrial production rose 0.5 percent in July, the first increase in nine months. A separate government report showed consumer prices were unchanged, emphasizing companies lack pricing power after the biggest drop in U.S. gross domestic product in any recession since the 1930s.

Confidence among U.S. consumers unexpectedly fell in August for a second consecutive month as concern over jobs and wages grew, according to the Reuters/University of Michigan preliminary index of consumer sentiment today. The U.S. has lost 6.7 million jobs in the recession that began in December 2007.

The New Normal theory predicts that the recession will leave unemployment, forecast to reach 10 percent for the first time since 1983 early next year, higher for years. Glassman and Meyer dispute that.

“The thing I object to most about the New Normal idea is that we are stuck and have to accept higher unemployment — if you look at the Fed, they are doing everything they can to fight it,” said Glassman, who formerly worked as a Fed economist in Washington.

Meyer’s Projections

Meyer, who served as a central bank governor from 1996 until 2002, said he and his colleagues “don’t find any evidence” that the unemployment rate consistent with stable inflation is now higher. Meyer is now vice chairman of St. Louis-based Macroeconomic Advisers LLC, whose economic estimates are monitored by the National Bureau of Economic Research panel charged with dating U.S. recessions.

Meyer expects GDP to jump by 3.6 percent in 2010 and 3.9 percent in 2011. Annual growth surpassed 3 percent only once so far this decade, in 2004, and has averaged just 2.2 percent.

“The big driver of that is home prices,” said Meyer, referring to his recovery forecast. “If home prices stabilize, that is a tremendous boost to housing that dominates every other variable in our equation. There is a lot of pent-up demand in that particular area.”

Home construction has subtracted from GDP growth for a record 14 straight quarters through June 2009. Consumer spending has also dropped in four of the past six quarters, and is down 2 percent from its peak in July-to-September 2007, the biggest retrenchment since 1980.

‘Very Depressed’

Housing and automobile sales are at “very depressed levels” and are likely to contribute to growth even if they don’t reach prior peaks, said Stanley, chief economist at RBS Securities in Greenwich, Connecticut, who used to work at the Richmond Fed paydayloan.

“Consumers are holding off on practically all of their discretionary purchases,” said Stanley, who sees the expansion picking up from 2.9 percent next year to 4.4 percent in 2011 and “about” 3.5 percent in 2012. “There is a lot of pent-up demand.”

Recoveries from the past two recessions were weaker than in previous decades. After the 2001 recession, the economy expanded just 1.6 percent in 2002, picking up to 2.5 percent the next year. The 1990-91 recession was followed by 3.3 percent growth in 1992 and a 2.7 percent gain in 1993.

U.S. Roared

By contrast, the U.S. roared out of the 1981-82 recession. In 1983, GDP rose 4.5 percent, accelerating to a 7.2 percent pace in 1984, when Ronald Reagan won re-election with victories in 49 of 50 states.

Alan Blinder, the former Fed vice chairman who is now an economics professor at Princeton University in New Jersey, has described himself as “skeptical” of the New Normal scenario.

“To accept a 2 percent trend, you have to believe in about a 1.2 or 1.3 percent productivity trend — I don’t,” Blinder said in an e-mailed response to questions. He added that he sees growth sustained at “closer, but not quite, to 3 percent” in coming years.

Fed policy makers in their latest projections submitted in June anticipated an expansion of 2.1 percent to 3.3 percent from this year’s fourth quarter to the same period next year and 3.8 percent to 4.6 percent in 2011.

‘Leveling Out’

Chairman Ben S. Bernanke and his Federal Open Market Committee colleagues two days ago said the economy is “leveling out.” The central bank has pumped about $1 trillion into the banking system in a campaign to end the crisis, triggered by mortgage defaults, that has caused more than $1.6 trillion in losses and writedowns among financial firms worldwide.

President Barack Obama last week said: “We are pointed in the right direction,” in remarks at the White House. “We’ve rescued our economy from catastrophe.” The administration anticipates a gathering impact from its $787 billion fiscal stimulus into next year.

Some companies are also seeing signs of a turn in the economy.

Karen Hoguet, chief financial officer at Macy’s Inc., the second-biggest U.S. department store chain, said on a conference call Aug. 12 that the Cincinnati-based company is “cautiously optimistic” its sales trends will improve.

A rebound in equities in recent months will help repair households’ balance sheets and buttresses the outlook for spending, said Glassman at JPMorgan.

The Standard & Poor’s 500 Stock Index has climbed about 50 percent from its low in March. U.S. stock-market capitalization has increased by almost $4 trillion in that time.

Economists’ Forecasts

Economists this month lifted their projection for third- quarter growth by 1.2 percentage points to 2.2 percent compared with July, according to the median of 55 forecasts in a Bloomberg News survey. That is the biggest such boost in surveys dating from May 2003. Forecasts for 2010 were raised to 2.3 percent from 2.1 percent.

Neal Soss, chief economist at Credit Suisse Group AG in New York, played down concern that the economy may suffer a “double dip” recession.

“Historically these double dips are routinely forecast and actually very rarely come to pass,” Soss said in a Bloomberg TV interview this week. “Once the economy tends to get some upward momentum, it tends to keep going that way.”

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