washingtonpost.com
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.

"Easing of monetary policy produces its maximum impact on real variables in the economy, including output, consumption, and investment, with a lag of six to 12 months and can be difficult to disentangle," Bullard said in a speech in New York.

Fed policy has also contributed to weakening the dollar, helping make U.S. exports more competitive. The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners, fell 14 percent from its year-high on June 7 through Nov. 4. It has since risen about 2 percent.

The dollar's decline helped narrow the trade deficit more than forecast in September as exports climbed to the highest level in two years, Commerce Department figures showed today. The gap shrank 5.3 percent to $44 billion.

Rising exports will continue to boost profits of U.S. manufacturers such as Caterpillar Inc., the world's largest maker of construction and mining equipment. The Peoria, Illinois-based company is benefitting from growth in China, Brazil and other emerging economies. On Oct. 21 it raised its full-year earnings forecast and posted third-quarter profit that topped analysts' estimates.

"Good economic growth in the developing world has been positive for sales," said Mike DeWalt, director of investor relations during a teleconference.

Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York, is among those seeing a more immediate turnaround in U.S. growth following the Nov. 2 elections that gave the Republicans a majority in the House of Representatives, the pickup in hiring and Fed actions.

"The air has been cleared," said Rupkey. "The impediments to growth, uncertainty about change in Washington and will the Fed go or not, those have gone to the wayside and people's animal spirits can start to revive." He projected growth will exceed 3 percent this quarter and in three of the next four.

Economists still forecast the Fed won't begin raising its benchmark fed funds rate until the first quarter of 2012. The rate, which has been in a range of zero to 0.25 percent since December 2008, will increase by a quarter point, less than the prior survey's forecast of a half point.

© 2010 bloomberg.com