Finance Blog number 1

Industrial production in the U.S. rose more than anticipated in September, putting manufacturing at the forefront of the emerging economic recovery.

The 0.7 percent increase in production at factories, mines and utilities exceeded every forecast of economists surveyed by Bloomberg News and followed gains of 1.2 percent in August and 0.9 percent in July, Federal Reserve figures showed today. Another report showed consumer sentiment dropped more than projected this month.

The recent burst of activity on factory floors, spurred in part by a rebound at automakers, will likely give way to more moderate and sustainable gains in coming months as companies rebuild inventories and exports grow. The improvement has yet to generate jobs, one reason consumers remain anxious and underscoring why Fed policy makers say they will keep interest rates low for a long time.

“Manufacturing is turning around from deep recession to strong growth in a very short time,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “It’s going to be one of the important supports to growth.”

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 69.4 from 73.5 in September, which was the highest in more than a year, the group reported today. Measures of expectations for six months ahead and current conditions both fell.

Stocks Fall

Stocks dropped, depressed by disappointing results at General Electric Co. and Bank of America Corp. The Standard & Poor’s 500 Index fell 0.8 percent to close at 1,087.68. Treasury securities rose.

Industrial production was forecast to increase 0.2 percent after a previously reported 0.8 percent gain in August, according to the median estimate of 77 economists surveyed by Bloomberg News. Projections ranged from a gain of 0.5 percent to a drop of 0.5 percent.

Manufacturing accounts for about 12 percent of the U.S. economy. The jump in production over the past three months was the biggest since late 2005.

Capacity use climbed to 70.5 percent last month from 69.9 in August, the report showed. It was estimated to rise to 69.8 percent, according to the Bloomberg survey median.

Economists track plant operating rates to gauge factories’ ability to produce goods with existing resources. Lower rates reduce the risk of bottlenecks that can force prices higher.

Factory Production

Factory output, which accounts for about four-fifths of industrial production, increased 0.9 percent after a 1.2 percent gain the prior month.

Motor vehicle and parts production climbed 8.1 percent following a 6.1 percent increase the prior month.

“Cash for clunkers,” which offered incentives of as much as $4,500 for consumers to trade in old cars for more fuel- efficient ones, helped automakers trim stockpiles as sales climbed in July and August. Industry data showed sales plunged in September after the plan expired on Aug. 24.

General Motors Co. and Toyota Motor Corp. have predicted sales gains for the fourth quarter. GM on Oct. 7 said it plans to boost output to 655,000 vehicles in North America during this quarter to match increasing demand.

The increases in output last month were widespread. Factory production excluding motor vehicles increased 0.5 percent, and the diffusion index gauging the number of categories advancing was 56.9 in September, exceeding the 50 breakeven level for a second month.

October Gains

Regional reports yesterday showed gains in manufacturing extending into October. The New York Fed’s Empire State index soared to the highest level since mid-2004, while the Philadelphia Fed’s gauge eased off September’s two-year high.

Winnebago Industries Inc., the motor-home maker, yesterday reported a fiscal fourth-quarter loss that was smaller than analysts had estimated. The Forest City, Iowa-based company said it’s seeing a pickup in demand.

“Dealer inventory is very close to reaching the bottom, and our dealer partners will need to start to replenish soon to satisfy retail demand going forward,” Chief Executive Officer Bob Olson said in a statement.

Inventories at businesses fell 1.5 percent in August, the biggest drop this year, bringing the value of goods on hand down to $1.31 trillion, the least since December 2005, according to Commerce Department data this week.

American factories may also get a boost as more than $2 trillion in government stimulus programs worldwide are reviving demand from Asia to Europe. Exports climbed in August for a fourth consecutive month to reach the highest level of the year, according to Commerce Department figures.

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President Barack Obama said recent data suggest the U.S. economy is returning to growth and the administration must avoid removing stimulus programs prematurely.

“All the indicators would tend to suggest that we’re starting to see growth,” Obama said today in a Bloomberg Television interview. “What we have to be careful of is taking the crutches away from the patient too early.”

The White House last week said it expects the $787 billion stimulus to add as many as 3 percentage points to growth in July through September, and it credited the initiative with creating or saving as many as 1.1 million jobs. Obama signed the fiscal spending package into law in February.

“We want to get out of some of these extraordinary interventions as quickly as possible but not so soon that the recovery doesn’t take place,” Obama said. “We have to make sure that we avoid” a second recession, he said.

Economists put the odds of a double-dip recession in the next 12 months at 25 percent, according to the median estimate in a monthly Bloomberg News survey taken from Sept. 3 to Sept. 10. The previous forecast called for a 20 percent chance of the economy backsliding after it expands.

The U.S. economy will grow at a 2.9 percent annual rate in July through September, the Bloomberg survey showed. Growth is projected to slow to a 2.2 percent pace during the last three months of the year as consumer spending weakens during the holiday shopping season, when many stores expect to reap half of their annual revenue.

Economic Contraction

The world’s largest economy contracted 1 percent from April through June, according to the Commerce Department. The drop was the fourth in a row, making it the longest contraction since quarterly records began in 1947.

The unemployment rate last month jumped to 9.7 percent, a 26-year high, from 9.4 percent in July, the Labor Department said. Economists surveyed by Bloomberg this month forecast the jobless rate will reach 10 percent by the end of the year.

“We’ve seen steady declines in the number of people who are losing their jobs each month,” Obama said. “We’re seeing a bottoming out and potentially we could start seeing some positive job growth.”

Since the recession began in December 2007, the U.S. has lost 6.9 million jobs. Payroll cuts peaked at 741,000 in January and have since subsided, with 216,000 job losses in August, according to the Labor Department.

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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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The U.K.’s house-price slump will persist until 2012 and hurt consumer spending, the National Institute of Economic and Social Research said.

Home values will resume their decline because recent gains were driven by a lack of available homes and the number of mortgages remains 65 percent lower than before the financial crisis, the London-based institute said today. It also predicts gross domestic product will keep falling until the final quarter of this year.

“There has been talk of stabilization and some recovery in the housing market, but we don’t think this is the case,” Simon Kirby, an economist at Niesr, told reporters yesterday. “We only see growth in the housing market returning in 2012.”

The Bank of England said this week that mortgage lending may strengthen in coming months, while Nationwide Building Society says that house prices increased in June. The economy has yet to emerge from recession after contracting the most since 1958 in the first quarter.

“The temporary rise in prices is probably the result of limited supply,” the report said. The institute’s clients include the Treasury and the Bank of England.

Falling house prices will hurt consumer spending growth in the next two years, Niesr said. Together with rising unemployment, this will encourage an increase in the household savings ratio to the highest level since 1997 next year, the institute predicted fast cash loans.

Budget Deficit

Government borrowing will peak at 12 percent of GDP in the fiscal year ending March 2010, or 165.7 billion pounds ($273 billion), before shrinking to 7.5 percent of GDP in 2013-14, Niesr said.

GDP slumped 2.4 percent in the first quarter. Niesr estimates that it fell 0.4 percent in the second quarter. The median forecast of 32 economists in a Bloomberg News survey is for a 0.3 percent drop. The Office for National Statistics will release the data on July 24.

The economy will grow again in the fourth quarter, by 0.5 percent, the institute said.

“The recovery will be weak,” Kirby said. “We see continued contraction in consumer spending and business investment.”

Bank of England policy makers are spending 125 billion pounds of newly printed money on assets to help bolster the economy. Minutes showing how they voted at the July 9 meeting, when they decided to maintain the size of the current buying program, will be released today at 9:30 a.m. in London.

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Norman Chan, named today as the new head of the Hong Kong Monetary Authority, vowed to maintain the local currency’s peg to the U.S. dollar, while expanding business in Chinese yuan in the city.

Chan, who will replace Joseph Yam on Oct. 1, will be paid 32 percent less than his predecessor, taking home HK$6 million ($774,179) a year. That’s more than three times the salary of U.S. Federal Reserve Chairman Ben S. Bernanke last year.

The 54-year-old Chan takes over the city’s de-facto central bank at a time when the yuan’s 21 percent appreciation over the past four years against the greenback is testing the Hong Kong dollar’s 26-year-old fixed exchange rate. The authority is also considering tougher regulation of financial products after a scandal over the sale of securities linked to the failed Lehman Brothers Holdings Inc.

“There’ll be no change near-term to the peg,” said Callum Henderson, Singapore-based head of currency strategy at Standard Chartered Plc. “It’s served Hong Kong very well and will continue to do so for the foreseeable future. Once the yuan is fully convertible Hong Kong can think about an adjustment to the policy but that’s still many years away.”

Chan, a former deputy at the central bank who oversaw reserves management and international affairs, will return after four years at the office of Hong Kong’s leader, Donald Tsang. Yam, who will step down on Oct. 1, will hand over management of a $207 billion currency reserve pool, the world’s eighth largest.

“It’s crucial that the HKMA strikes to enhance the competitiveness of Hong Kong’s financial services sector,” Chan told a press briefing. “In this regard the development and deepening of yuan business in Hong Kong is an important aspect. I shall use my best endeavors to maintain Hong Kong’s position as a premier financial center in Asia.”

The Peg

Chan joined the civil service in 1976 after graduating from the Chinese University of Hong Kong with a bachelor’s degree in sociology. He was an executive director of the HKMA when it was established with Yam at the helm in 1993 and became deputy chief executive in 1996.

Yam, 60, is Asia’s longest-serving central bank chief, guiding the HKMA through Hong Kong’s final years as a British colony into its first 12 years of Chinese sovereignty. He started his career as a government statistician in 1971.

As head of the HKMA, Yam consistently backed the Hong Kong dollar’s peg to the U.S. dollar. The city’s currency was kept at HK$7.8 versus the greenback since 1983 and from 2005 was allowed to trade in a range of HK$7.75 to HK$7.85. It traded at HK$7.7501 today. Chan told a press briefing he had no plan to change the peg.

Financial Crisis

Yam steered Hong Kong through the late 1990s Asian financial crisis, responding to a speculative attack on the Hong Kong dollar with $15 billion in stock purchases, and other troubles including the outbreak of SARS in 2003.

The HKMA has injected more than HK$195 billion this year to maintain the currency peg as funds pour into the city. The aggregate balance, a measure of liquidity in the banking system, climbed to a record HK$257 billion on May 19 faxless payday loan.

Hong Kong may widen the local currency’s trading band versus the U.S. dollar in the next one to two years, enabling it to appreciate as China’s economic growth lures investment to the city, according to ING Groep NV.

“They’ll realize they’re fighting a battle that’s really leaning against a structural wind, not just a cyclical wind,” said Tim Condon, chief Asia economist at ING in Singapore. “They’ll determine that that’s not a fruitful activity and respond like in May 2005, when they first widened the band.”

Hang Seng

Hong Kong has a “distinct advantage” in helping China become more important in the global financial system, Yam said June 18. The People’s Bank of China approved on July 2 a trial for five Chinese cities to use yuan for settling cross-border trade with Hong Kong, encouraging companies to replace the U.S. dollar in their transactions.

HSBC Holdings Plc and Bank of East Asia Ltd. won approval in May to be the first foreign banks to sell yuan bonds in Hong Kong from Chinese regulators. Yam said July 9 he hopes to have some of the city’s stocks denominated in China’s currency, according to The Wall Street Journal.

Hong Kong’s Hang Seng Index of shares has underperformed this year, rising 31 percent, compared with a 75 percent jump in the Shanghai composite index. The city’s gross domestic product fell 4.3 percent in the first quarter from the fourth, the most since at least 1990, official figures show.

Lehman Collapse

A blot on Yam’s legacy was a scandal involving so-called mini-bonds backed by Lehman. Investors, many of them elderly, say the bonds were marketed by banks as safe investments when in fact they were structured products that plunged in value after Lehman declared bankruptcy late in 2008. Critics pointed the blame largely at what they called lax regulation.

Regulators should “strike a delicate balance” between protecting investor interests and developing different kinds of financial products, Chan told the press briefing.

Yam’s compensation attracted criticism. In 2008, he received HK$11.9 million, compared with Fed Chairman Bernanke’s $191,300 and Bank of England Governor Mervyn King’s 283,564 pounds ($462,000) in 2007. Central Banking Publications described Yam last year as the highest-paid central banker in the world.

Albert Ho, a lawmaker and Chairman of the Democratic Party, said Chan’s appointment lacks “credibility,” Radio Television Hong Kong reported on its Web site. Chan was picked by a three- man committee consisted of former HSBC Holdings Plc chairman John Bond and Li & Fung Ltd.’s founder Victor Fung, Hong Kong’s Financial Secretary John Tsang told reporters.

“Chan’s strong connections on the mainland will enable the HKMA to further enhance its close relationship with the regulatory authorities there,” Margaret Leung, Chief Executive of Hang Seng Bank Ltd., the biggest Hong Kong-based lender by market value, said in an e-mailed statement.

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Japan’s government and central bank agree that the worst of the deepest postwar recession is over.

Demand is picking up even though “the economy is in a difficult situation,” the Cabinet Office said in Tokyo yesterday. The Bank of Japan said the world’s second-largest economy has “begun to stop worsening.”

Evidence the economy has turned a corner has mounted as companies bolstered industrial output at the fastest pace in 56 years in April and exports recovered from unprecedented declines. Central bank Governor Masaaki Shirakawa said this week he is “cautious” about the rebound because renewed demand may only be temporary.

“Policy makers are raising their economic assessments to reflect recent improvements, but they remain pretty cautious about the outlook,” said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. “Exports are starting to turn around, but that doesn’t guarantee production will keep rebounding and support employment.”

The Nikkei 225 Stock Average rose above 10,000 for the first time in eight months last week and consumer sentiment climbed to a 14-month high in May. Stocks have retreated 2.9 percent this week and the yen has strengthened against the dollar on concern a recovery in the U.S., Japan’s largest export market, isn’t a sure thing.

“It seems clear the economy bottomed out between January and March,” Japan’s Finance Minister Kaoru Yosano told reporters at a press briefing yesterday. “There are signs the decline in personal spending on some items is ending.”

‘Engines Turn’

It may take some time before Americans start spending again. President Barack Obama said in an interview that unemployment may climb to 10 percent from the current 25-year high of 9.4 percent.

“You’re starting to see the engines of the economy turn,” Obama said. Still, he added that “it’s going to take a long time” for a full-fledged recovery as households work off the debt accumulated during the real-estate boom.

Japan’s export dependence has caused it to suffer the most from the global recession. Gross domestic product fell at an annual 14.2 percent pace in the three months ended March 31, the steepest contraction since records began half a century ago guaranteed payday loans. Analysts surveyed by Bloomberg expect the economy to grow this quarter, which would be the first expansion in a year.

“The upgrades by the BOJ and the government just mean the worst is over,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “The U.S. recovery will be postponed until the middle of next year so it’ll be impossible for Japan to have a solid recovery.”

‘Delicate Stage’

Economists say the economy may stutter after recovering from its worst contraction on record as Prime Minister Taro Aso’s 25 trillion-yen ($260 billion) stimulus plans wear off. The government said in yesterday’s report that rising unemployment may also discourage consumer spending and damp growth in the coming months.

“The Japanese economy is still at a delicate stage,” said David Cohen, head of Asian forecasting at Action Economics in Singapore. “At the end of the day, much will remain dependent upon the outlook for global export demand.”

Optimism that the worst is over doesn’t mean the Bank of Japan is preparing to raise the key overnight lending rate, which has stayed at 0.1 percent since being cut in December.

“Given that employment and wages are deteriorating and deflation risk is rising, it’s difficult to expect a rate hike anytime soon,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The central bank won’t likely raise rates until fiscal 2011 at the earliest,” he said, referring to the year ending March 2012.

Job Shortage

Deteriorating prospects for consumers are also a risk, the Cabinet Office said in yesterday’s report. The unemployment rate rose to a five-year high of 5 percent in April and economists surveyed by Bloomberg expect it to climb to a record 5.8 percent next year. About two work seekers are competing for a single spot, the most severe job shortage on record.

“We aren’t in a recovery phase,” said Fumihira Nishizaki, director of macroeconomic analysis at the Cabinet Office. “There is a risk that Japan’s economy will deteriorate again.”

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Japan’s government and central bank agree that the worst of the deepest postwar recession is over.

Demand is picking up even though “the economy is in a difficult situation,” the Cabinet Office said in Tokyo yesterday. The Bank of Japan said the world’s second-largest economy has “begun to stop worsening.”

Evidence the economy has turned a corner has mounted as companies bolstered industrial output at the fastest pace in 56 years in April and exports recovered from unprecedented declines. Central bank Governor Masaaki Shirakawa said this week he is “cautious” about the rebound because renewed demand may only be temporary.

“Policy makers are raising their economic assessments to reflect recent improvements, but they remain pretty cautious about the outlook,” said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. “Exports are starting to turn around, but that doesn’t guarantee production will keep rebounding and support employment.”

The Nikkei 225 Stock Average rose above 10,000 for the first time in eight months last week and consumer sentiment climbed to a 14-month high in May. Stocks have retreated 2.9 percent this week and the yen has strengthened against the dollar on concern a recovery in the U.S., Japan’s largest export market, isn’t a sure thing.

“It seems clear the economy bottomed out between January and March,” Japan’s Finance Minister Kaoru Yosano told reporters at a press briefing yesterday. “There are signs the decline in personal spending on some items is ending.”

‘Engines Turn’

It may take some time before Americans start spending again. President Barack Obama said in an interview that unemployment may climb to 10 percent from the current 25-year high of 9.4 percent.

“You’re starting to see the engines of the economy turn,” Obama said. Still, he added that “it’s going to take a long time” for a full-fledged recovery as households work off the debt accumulated during the real-estate boom.

Japan’s export dependence has caused it to suffer the most from the global recession. Gross domestic product fell at an annual 14.2 percent pace in the three months ended March 31, the steepest contraction since records began half a century ago cash advance no fax. Analysts surveyed by Bloomberg expect the economy to grow this quarter, which would be the first expansion in a year.

“The upgrades by the BOJ and the government just mean the worst is over,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “The U.S. recovery will be postponed until the middle of next year so it’ll be impossible for Japan to have a solid recovery.”

‘Delicate Stage’

Economists say the economy may stutter after recovering from its worst contraction on record as Prime Minister Taro Aso’s 25 trillion-yen ($260 billion) stimulus plans wear off. The government said in yesterday’s report that rising unemployment may also discourage consumer spending and damp growth in the coming months.

“The Japanese economy is still at a delicate stage,” said David Cohen, head of Asian forecasting at Action Economics in Singapore. “At the end of the day, much will remain dependent upon the outlook for global export demand.”

Optimism that the worst is over doesn’t mean the Bank of Japan is preparing to raise the key overnight lending rate, which has stayed at 0.1 percent since being cut in December.

“Given that employment and wages are deteriorating and deflation risk is rising, it’s difficult to expect a rate hike anytime soon,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The central bank won’t likely raise rates until fiscal 2011 at the earliest,” he said, referring to the year ending March 2012.

Job Shortage

Deteriorating prospects for consumers are also a risk, the Cabinet Office said in yesterday’s report. The unemployment rate rose to a five-year high of 5 percent in April and economists surveyed by Bloomberg expect it to climb to a record 5.8 percent next year. About two work seekers are competing for a single spot, the most severe job shortage on record.

“We aren’t in a recovery phase,” said Fumihira Nishizaki, director of macroeconomic analysis at the Cabinet Office. “There is a risk that Japan’s economy will deteriorate again.”

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The U.S. recession will probably end in the third quarter, a survey of business economists showed, even as rising joblessness indicates the recovery will be weaker than previously estimated.

The world’s largest economy will begin to expand next quarter, according to 74 percent of economists in a National Association for Business Economics survey. Compared with NABE’s February poll, growth will be slower and unemployment will be higher in the second half of this year and through 2010.

Government stimulus spending and Federal Reserve efforts to thaw credit markets are helping pull the economy out of the worst slump in half a century, the survey said. While housing is stabilizing, the economists predicted consumer spending will be restrained by a deteriorating labor market as job losses continue for the rest of the year.

“There are emerging signs that the economy is stabilizing,” Chris Varvares, president of the group and of Macroeconomic Advisers LLC in St. Louis, said in a statement. Still, the recovery may be “considerably more moderate than those typically experienced following steep declines,” he said.

The economy will shrink at a 1.8 percent annual rate from April to June, and then grow at a 0.7 percent pace in the next three months, the survey showed. Growth will accelerate to a 1.8 percent rate by the final quarter.

Spending to Fall

Consumer spending, which accounts for about 70 percent of the economy, may fall 0.4 percent this year, compared with a 1.3 percent drop forecast in the prior poll. Purchases will increase 2.1 percent next year, less than estimated in February.

The NABE survey, based on the median forecast of a panel of 45 economists, was conducted from April 27 to May 11.

Signs of a U.S. recovery coincide with evidence that the first global recession since World War II is easing. German investor confidence rose to the highest since 2006 in May and the Bank of Japan last week raised its view of the economy for the first time in almost three years fastcash.

Policy measures by central banks and governments “have assisted in reviving trust in the financial markets and the real economy,” Deutsche Bank AG Chief Executive Josef Ackermann said yesterday. “We can already see first positive signs.”

In the U.S., nine of every 10 survey participants said the Fed’s new credit facilities improved borrowing conditions, and 55 percent said the programs also benefited markets that were not directly targeted. At the same time, nearly half the economists said credit was still hard to get.

Home Sales

Home sales may reach a bottom by mid-year, according to 72 percent of the panelists, and more than six in 10 predicted housing starts will hit a trough by that time. The survey showed home prices have further to fall, with 40 percent of the respondents forecasting the declines will continue into 2010 or later.

Payrolls will decrease by an estimated 4.5 million in 2009, pushing the unemployment rate to 9.8 percent by year-end, almost a percentage point higher than the previous estimate of 9 percent, the survey showed. Job gains next year will help reduce the jobless rate to 9.3 percent by the end of 2010.

The outlook for business investment this year also soured compared with the February survey, reflecting sharper pullbacks in spending on equipment, software and facilities, and a bigger reduction in inventories. Economists in the survey also predicted corporate profits will decline 16 percent this year.

The cost of living will fall and worker productivity will improve this year, the NABE report showed. With inflation in check and unemployment rising, Fed policy makers will keep the benchmark interest rate close to zero until the second quarter of next year, at which time a series of increases may push the rate to 1.25 percent by year-end.

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The European Central Bank cut its key interest rate to a new record low of 1 percent today, and may offer banks longer-term loans to stem the region’s worst recession since World War II.

ECB officials meeting in Frankfurt lowered the benchmark rate by a quarter point, as predicted by all 53 economists in a Bloomberg News survey. Separately, the Bank of England left its key rate at 0.5 percent and increased its asset-purchase program. ECB President Jean-Claude Trichet, who has promised to unveil new policy measures to tackle the crisis, holds a press conference at 2:30 p.m.

“That’s it with rates,” said Stephane Deo, chief European economist at UBS AG in London. “They are now moving into unconventional territory. Trichet will announce an extension of the bank loan maturities and will have to flag that the ECB will keep all other options open.”

The difficulty for Trichet is that his 22-member Governing Council is split over how best to proceed. Germany’s Axel Weber wants the ECB to signal that 1 percent is the floor for the key rate and has argued against buying government or corporate debt to boost the economy. Others such as Athanasios Orphanides of Cyprus say asset purchases and deeper rate cuts may be needed.

‘Woefully Inadequate’

“The continuing divisions and bickering risk delaying the appropriate policy response,” said James Nixon, an economist at Societe Generale SA in London. “What they announce today will be woefully inadequate given the challenges facing the economy.”

The ECB narrowed the corridor around its benchmark rate. It lowered the marginal rate, at which banks can borrow overnight funds, by half a point to 1.75 percent, and left the deposit rate, at which banks can park funds overnight, at 0.25 percent.

The euro rose more than half a cent to $1.3377 after the rate decision.

Having cut their key rates to close to zero, the Bank of England, U.S. Federal Reserve and Bank of Japan are now buying bonds, effectively printing money to reflate their economies in a policy known as quantitative easing.

With recent economic reports in Europe suggesting the worst of the recession is over, Trichet may find common ground around the less aggressive approach put forward by Weber. The pace of decline in Europe’s service and manufacturing industries is easing and factory orders in Germany, the region’s largest economy, unexpectedly rose in March.

War ‘Not Won Yet’

“The recent stronger data have increased the risk that the bank will settle for a more prudent approach,” said Marco Annunziata, chief economist at UniCredit Group in London free credit score online. “This would be a mistake. The war against the financial and economic crisis is not won yet.”

Arguing that asset purchases are not required, Weber is pushing for the ECB to extend the maturities on its loans to banks to ease tensions in money markets.

The measure may force colleagues to sign up to his second request — a signal from the ECB that interest rates won’t drop any further. That’s because banks would be reluctant to take up long-term loans if they thought credit could get cheaper.

Council member Yves Mersch and Executive Board members Juergen Stark and Lorenzo Bini Smaghi have signaled support for Weber’s view. They’re squaring off against Orphanides, Nout Wellink and George Provopoulos, who want to preserve the option of further action. That has opened perhaps the biggest split among ECB policy makers in the bank’s 10-year history.

Deflation Threat

The 16-nation economy will shrink 4.2 percent this year, according to the International Monetary Fund, more than the projected 2.8 percent contraction in the U.S. and 4.1 percent slump in the U.K.

While some economic reports are pointing to stabilization, lending to companies and consumers dropped for a second straight month in March and a European Commission survey shows households expect prices to fall over the next 12 months.

Inflation was 0.6 percent in April. The ECB, which aims to keep the rate just below 2 percent, says it may dip below zero this summer.

“If inflation threatens to remain significantly below 2 percent for a considerable period of time, then additional policy easing could be warranted” after May, Orphanides, a former Fed adviser, said in an April 14 interview.

Even though almost three quarters of company financing in the euro area comes from banks, buying corporate debt may be helpful because “all asset markets are interconnected,” Orphanides said.

“The euro area is clearly experiencing a deep recession,” said David Mackie, an economist at JPMorgan in London. “It is hard to see how the region can avoid something that looks a lot like deflation. The ECB should be putting in place the most accommodative policy stance possible, and leaving it in place for an extended period of time.”

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India’s central bank reduced interest rates for the sixth time in as many months to a record low after forecasting the economy will expand at the slowest pace since 2003.

The Reserve Bank of India cut the reverse repurchase rate to 3.25 percent from 3.5 percent, according to a statement in Mumbai today. Economic growth may ease to 6 percent in the year that started April 1 from 7.1 percent in the previous 12 months, the central bank said.

Governor Duvvuri Subbarao’s efforts to stimulate growth in Asia’s third-largest economy are being hampered by the reluctance of commercial lenders to pass on rate cuts and the government’s inability to increase spending during an election. Bond yields fell to the lowest in six weeks.

“The worst is yet to come for India as signs of weakness are still growing,” said Sherman Chan, a Sydney-based economist at Moody’s Economy.com. “The RBI needs to facilitate credit growth to support the economy.”

Bonds extended gains after the central bank decision, with the yield on benchmark 10-year government bonds declining to 6.21 percent from 6.34 percent before the announcement. The rupee traded little changed at 50.44 a dollar. Only six of 15 analysts in a Bloomberg News survey expected the rate to be cut.

India’s industrial production dropped 1.2 percent in February from a year earlier, the most in more than 14 years. Exports plunged by a record in March, extending the longest declining streak in a decade.

‘Further Action’

The Reserve Bank also cut the repurchase rate by a quarter- point to 4.75 percent and kept the cash reserve ratio unchanged at 5 percent, today’s statement said.

“Banks have been slow in reducing their lending rates,” Subbarao said in the statement. “Further action on policy rates is now being taken to reinforce this process.”

The central bank had lowered the reverse repurchase rate by 275 basis points and its repurchase rate by 425 basis points since October. In response, non-state-owned ICICI Bank Ltd., India’s second-biggest, has reduced its lending rates by only 50 basis points. State-run banks cut their borrowing costs by about 200 basis points after government prodding.

“There is typically a six-month time lag for the central bank’s rate cut to filter through the economy,” said Arun Kaul, New Delhi-based treasurer at state-owned Punjab National Bank. “Commercial rates will come down, but not substantially because government savings instruments are offering higher rates.”

Deposit Rates

Government-run savings plans such as postal deposits, which compete with banks’ deposits, offer interest rates at upwards of 8 percent faxless payday loans. The rates on these plans are set by the government and haven’t been changed since the central bank started cutting borrowing costs to counter the global downturn.

Kaul said banks are also holding high-cost term deposits because the central bank’s key rates were double current levels until October 2008 after inflation touched a 16-year high of 12.91 percent in August.

Inflation has subsequently slowed to 0.18 percent in the week ended April 4. The central bank expects inflation to accelerate to about 4 percent by the end of March.

“Inflation risks have clearly abated,” Subbarao said. “Banks should not be overly apprehensive about reducing deposit rates for fear of competition from small savings, especially as the overall systemic liquidity remains highly comfortable. There is scope for the overall interest rate structure to move down.”

Cash Injection

Between April and September, the central bank will inject 1.2 trillion rupees ($23.8 billion) of cash into the banking system by purchasing government bonds via auctions and buying back market stabilization bonds, which were sold in the past four years to drain money from the economy. The cash injected will be equivalent to a 3 percentage point reduction in the cash reserve ratio, the central bank said.

Subbarao said the central bank’s efforts are aimed at creating consumer demand and spurring growth, which he expects will remain favorable compared with most countries as normal rains boost farm production.

“However, any upturn in the growth momentum is unlikely in view of the projected contraction in global demand during 2009, particularly in trade,” Subbarao said.

The rate cut came in the middle of elections in India, which started on April 16 and will continue until May 13, with counting of ballots due to be held on May 16. Most opinion polls say Prime Minister Manmohan Singh’s Congress party may emerge with most seats, though it may have to rope in new allies to secure a majority in the legislature.

The central bank said it will use “a combination of monetary and debt-management tools” to ensure there is enough money in the economy and prevent the government’s record 4.35 trillion rupees of borrowings this year from disrupting growth.

“With no further fiscal stimulus likely until after the election, the onus is on the monetary policy to boost growth,” said Sonal Varma, an economist at Nomura Securities Ltd. in Mumbai.

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