Recovery may speed up as Fed moves build confidence

By Bob Willis and Alex Tanzi
(c) 2010 Bloomberg News
Wednesday, November 10, 2010; 9:34 AM

Nov. 10 (Bloomberg) -- The world's largest economy will strengthen through next year as the Federal Reserve's unprecedented actions help underpin consumer and business confidence, according to economists surveyed by Bloomberg News.

After growing at a 2.2 percent annual rate this quarter and next, gross domestic product will accelerate each successive period, reaching a 3.2 percent pace by the last three months of 2011, according to the median forecast of economists polled from Nov. 3 to Nov. 9.

The $2.3 trillion that the central bank said it will have pumped into financial markets by June will probably keep interest rates low and sustain the rebound in stocks, shoring up corporate and household finances. An improving job market and election results that raised the odds Bush-era tax cuts will be extended may help the economy gain speed.

"There will be a very slowly evolving acceleration of economic activity," David Resler, chief U.S. economist at Nomura International Securities Inc. in New York. "The benefits of QE2 have already been felt and reflected in the financial markets," he said, referring to the second round of the Fed's program of asset purchases, or quantitative easing.

The Standard & Poor's 500 Index has climbed 14 percent since Aug. 27, when Fed Chairman Ben S. Bernanke said the central bank was prepared to take additional action to spur growth. The yield on the 10-year note rose to 2.66 percent at 5 p.m. New York time yesterday, the highest level in eight days. The yield reached a 2010 low of 2.39 percent on Oct. 7.

Economists raised their GDP forecasts from the October survey, starting with the second quarter of 2011, according to this month's median estimate. They cut the projection for the first three months of next year.

"We are losing two drivers of growth" in coming months, said Diane Swonk, chief economist at Mesirow Financial Inc., in Chicago. Inventory restocking, which propelled the economy since the recovery began in June 2009, is likely to cool, and government stimulus will diminish, she said.

Consumer spending will grow at a 2.4 percent pace in the fourth quarter, and average 2.3 percent for 2011, up from 1.7 percent this year, the economists estimated.

Employers added 151,000 workers to payrolls in October, the first gain in five months, according to a report last week from the Labor Department. The increase exceeded even the most optimistic forecast of economists surveyed. A Labor Department report today showed that the number of initial claims for unemployment benefits fell last week to the lowest level in fourth months.

"The labor market is what really turns it," said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania. "We will see a slow and steady improvement in job growth. In the next six to nine months, we won't be talking about a jobless recovery anymore."

The economists surveyed this month forecast the average jobless rate will fall to 9.3 percent in 2011 from 9.6 percent this year.

Fed Bank of St. Louis President James Bullard on Nov. 8 said the impact from the central bank's second round of asset purchases, worth up to $600 billion, will have the biggest effect on the economy starting in six months.

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