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US starts long, fragile recovery

Published on Sunday, August 23, 2009 Email To Friend    Print Version

Customers buy fruits and vegetables on August 1, 2009 at Eastern Market in Washington. (AFP PHOTO)

NEW YORK (Reuters) - The U.S. economy is recovering more strongly than expected from its worst recession in decades, but next year will be lackluster and risks of a double-dip downturn remain, economists said in a Reuters poll.

After shrinking by 1.0 percent in the second quarter on an annualized basis, U.S. gross domestic product will grow 2.4 percent in the current quarter and 2.2 percent in the final three months of the year, according to a sample of around 70 economists.

This would make the recession that many say ended in the second quarter the longest since World War Two.

The recovery is now expected to be more robust than economists predicted last month, when they saw growth of 0.8 and 1.8 percent in the third and fourth quarters, respectively. The broad U.S. stock market is up 50 percent from March lows.

High unemployment, which the poll showed topping out at 10 percent, and a massive debt load on the shoulders of consumers will hamstring the economy after the initial rebound.

This will keep inflation largely in check and official interest rates low, while economists still see a 25 percent chance of a double-dip recession.

“Recent data suggest that the economy is near a bottom, but the recovery is likely to prove to be lengthy, gradual, and fragile,” said Scott Brown, chief economist with Raymond James & Associates in St Petersburg, Florida.

“Fiscal stimulus should provide support through the end of the year and in 2010. Fed policy will remain supportive.”

The government and Fed have pumped trillions of dollars into the economy in economic stimulus spending and intensive care measures meant to revive the moribund financial system, which appeared on the verge of collapse late last year.

The consensus prediction of a peak unemployment rate of 10 percent compares with 10.2 percent in the July poll.

A government report earlier this month showed the U.S. unemployment rate fell in July for the first time in 15 months as employers cut far fewer jobs than expected.

The poll predicted the economy will shrink 0.8 percent this year and grow 2.5 percent next year on a fourth quarter over fourth quarter basis.

That is a narrower contraction than the 1.4 percent shrinkage predicted for 2009 in last month’s poll, but the 2010 growth forecast was downgraded slightly from 2.6 percent.

But there is a clear pickup in growth on the quarterly profile. Economists see a 2.3 percent rise in the first quarter next year, 2.4 percent in the second, 2.5 percent in the third and 2.8 percent in the fourth quarter.

Last month, they predicted growth of 2.0 percent in the first quarter of 2010, 2.4 percent in the second, a third quarter rise of 2.6 percent and 2.8 percent in the fourth.

Higher initial growth in the second half of this year means a slight uptick in inflation from previous forecasts, but nothing strong enough to worry the Federal Reserve.

Economists said the U.S. central bank will keep interest rates in the current zero-to-0.25 percent range until raising them to 0.5 percent in third quarter 2010.

Though many in the financial markets have worried that the cheap money, economic stimulus and Fed liquidity measures will fuel inflation, analysts see price growth remaining within the U.S. central bank’s 1-2 percent comfort zone.

Overall consumer prices will drop 0.5 percent this year and rise 1.8 percent next year, versus last month’s predictions of a 0.6 percent drop for 2009 and a 1.6 percent rise next year.

Core consumer prices, which exclude volatile food and energy prices, will rise 1.6 percent on average this year and 1.4 percent in 2010, the poll showed.

The subdued inflation outlook is not surprising given the difficulties facing the economy.

After the initial rebound, growth will remain sluggish as consumers attempt to pay down the debts they racked up during the boom-and-bust expansion of credit during the last decade.

Data which showed a surprising fall in July retail sales only adds credence to this view.

“I expect a couple of quarters of decent growth and then a long period of mediocre growth as consumers and businesses don’t have the bubble income that they had in the past two decades,” said Joel Naroff, head of Naroff Economic Advisors in Holland, Pennsylvania.

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