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U.S. Enters Recovery as Stimulus Refutes Skeptics (Update2)
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By Shobhana Chandra and Kristy Scheuble

Aug. 12 (Bloomberg) -- Recovery from the worst recession since the 1930s has begun as President Barack Obama’s fiscal stimulus -- derided as insufficient and budget-busting months ago -- takes effect, a survey of economists indicated.

The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years, according to the median of 53 forecasts in the monthly Bloomberg News survey. Analysts lifted their estimate for the third quarter by 1.2 percentage points compared with July, the biggest such boost in surveys dating from May 2003.

“We’ve averted the worst, and there are clear signs the stimulus is working,” said Kenneth Goldstein, an economist at the Conference Board in New York.

The new projections, following better-than-anticipated reports on manufacturing, employment and home construction, echo gains in investor confidence that have propelled the Standard & Poor’s 500 Stock Index to its high for the year. A rebound may help cushion declines in Obama’s approval ratings, political analysts said.

“The fact that people for the first time in over a year are starting to look at some glimmers of hope plays to the prospect of some strength in the stimulus,” said Susan Molinari, a Republican strategist in Washington who advised Rudy Giuliani during his presidential nomination campaign in 2008.

Global Confidence Surges

Confidence in the world economy surged to a 22-month high in August on signs the worst global recession since World War II is coming to an end, a Bloomberg survey of users on six continents showed. The Bloomberg Professional Global Confidence Index jumped to 58.12 this month from 39.13 in July. A measure of U.S. participants’ confidence in the world’s largest economy rose to 47.3 from 29.5, the survey showed.

There was just a one-in-five chance of a “double-dip” recession at some point in the next 12 months, where the economy shrinks again after starting to grow, according to the median of 33 economists answering a special survey question.

The anticipated expansion in the coming year won’t be enough to prevent the unemployment rate from reaching 10 percent for the first time since 1983, the survey also showed. That will force the Federal Reserve to forego raising its benchmark interest rate until the third quarter of 2010, according to the median projection.

Fed Action

The Fed’s policy-setting Open Market Committee today kept the target rate near zero and retained plans to buy as much as $1.45 trillion of housing debt by year-end to help secure a recovery. Central bankers said they will slow the pace of the program to buy Treasury securities and anticipated the full $300 billion commitment will be purchased by the end of October.

Obama’s $787 billion economic recovery effort, spanning tax cuts, infrastructure spending and a goal to create or save 3.5 million jobs, was enacted about six months ago. Republican lawmakers, nearly all of whom voted against the package, have pilloried the plan as a waste of money.

“Trillions more in Washington spending will not end a recession, it only puts future generations under a mountain of unsustainable debt,” House Minority Leader John Boehner, an Ohio Republican, said last week. The nonpartisan Congressional Budget Office estimated last week that the stimulus has pumped $125 billion into the economy so far.

A federal program to replace older vehicles with more fuel- efficient ones helped boost sales of cars and light trucks last month to the highest level since September, according to industry figures. Automakers, operating with lean inventories, will resume output to meet the jump in demand.

‘Clunkers’ Impact

“Cash-for-clunkers was the icing on the cake,” said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. “It’s well-timed stimulus syncing with cyclical forces leading to a ramping up of production.”

Company heads seeing an improvement include David Weidman, chief executive officer of Dallas-based chemical maker Celanese Corp. “We exited the quarter with increasing optimism,” and there are “clear signs of economic recovery,” Weidman said in an interview in July.

“The stimulus was really a long-term political and economic play by the administration, and now they’re starting to see the results they wanted,” said Bill Buck, a Democratic strategist who worked on the presidential campaigns of former Vice President Al Gore and retired General Wesley Clark. “The administration would be wise to use this to build their credibility with the public” on other issues like health care, he said.

Approval Rating Declines

The president’s approval rating is falling on concern over rising joblessness and the growing budget deficit, a Quinnipiac University poll showed last week.

Half of the registered voters surveyed from July 27 to Aug. 3 by Quinnipiac said they approve of the job Obama is doing, compared with 42 percent who disapprove. That’s down from 57 percent approval and 33 percent disapproval in a late June poll.

Americans are hurting as employers continue to cut jobs, albeit at a slower pace. The unemployment rate will average 9.8 percent in 2010, according to the Bloomberg survey taken from Aug. 5 to Aug. 11.

“The labor market is going to be the key,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. “The risk isn’t that it gets much worse, but that it doesn’t improve quickly enough. It’d be nice if the consumer found his legs.”

Consumer spending, which accounts for about 70 percent of the economy, will rise an average 1.5 percent from July to December, up from prior estimates, the survey showed.

“What’s happening now is a leveling off, not a strong increase in growth, and that owes a little to the stimulus package,” said Robert Solow, a Nobel laureate and professor emeritus at the Massachusetts Institute of Technology in Cambridge, Massachusetts. “Seeing the rest of it filter through to the economy in the second half of the year will be extremely helpful.”

To contact the reporter on this story: Shobhana Chandra in Washington [e-mail] Scheuble in Washington at [e-mail]
Last Updated: August 12, 2009 14:42 EDT