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Hope for a strong economic rebound is fading

Growth last quarter was less than initially estimated. The Federal Reserve doesn't expect the economy to pick up steam until 2011, despite huge stimulus spending and low interest rates.

November 25, 2009|By Jim Puzzanghera and Don Lee
  • "There are no quick fixes here," warns Sheila Bair, chief of the Federal Deposit Insurance Corp.
"There are no quick fixes here," warns Sheila Bair, chief of… (Jay Mallin / Bloomberg )

Reporting from Washington — The economy is improving according to most yardsticks, but fresh evidence emerged Tuesday that the path to revival could resemble a Thanksgiving holiday road trip -- long, slow and stressful.

Hopes for a strong rebound from the recession are fading as the government Tuesday downsized its estimate of economic growth in the third quarter to 2.8% from its earlier calculation of 3.5%.

And despite huge stimulus spending from Washington and historically low interest rates, the Federal Reserve expects the economic recovery to remain weak into next year, with the economy unable to gather steam until 2011, according to minutes released Tuesday of its latest meeting.

"The recession is over largely due to" the government's efforts to stimulate the economy, said Mark Zandi, chief economist at Moody's Economy.com, "but the recovery remains very fragile."

Troubles persist in the real estate market, where a budding recovery in home prices shows signs of stalling and a surge in foreclosures of commercial properties looms. Consumers remain unusually downbeat, holding back their spending. And the unemployment rate, which hit 10.2% last month, is such a concern that President Obama will convene a White House summit next week to find new ways to create jobs.

Nowhere is the sluggish recovery more evident than in the woes of the nation's banks.

Although the industry's bottom line improved slightly in the third quarter, the sector's condition remains delicate. The Federal Deposit Insurance Corp. said Tuesday that the number of banks in danger of failing jumped to 552 at the end of September, the highest level in 16 years. And the federal fund that makes good on deposits at banks that go under is officially in the red for the first time since 1992.

Banks continued to set aside more money to cover potential loan losses, limiting the amount they can lend. As a result, the dollar amount of loans on the books of U.S. banks fell in the latest quarter by the largest percentage since at least 1984, making a strong economic recovery more difficult.

"There are no quick fixes here," warned FDIC chief Sheila Bair.

Federal Reserve policymakers don't expect rapid improvement either.

Although slightly raising its projections of economic growth for the rest of this year, the Fed's interest-rate committee remains highly cautious about the pace of the recovery, in large part because of the labor market's persistent weakness.

In their latest forecasts, most Fed officials predicted that the unemployment rate would stay well above 9% next year and that it would be five or six years before the jobless rate got close to 5%. Even those projections may be a bit optimistic, given that they were made during the Fed's monetary-policy meeting in early November.

Fed Chairman Ben S. Bernanke and others at the central bank worry that prolonged high unemployment will weigh further on consumer spending, which accounts for about 70% of the American economy. Although job losses are easing, the Fed report cited the large number of people working part-time involuntarily.

In that environment, the Fed report says, "businesses would be able to meet any increases in demand in the near term" by giving their current employees more hours -- without bringing on new workers.

In a separate report Tuesday, the Commerce Department lowered its estimate of the gross domestic product -- the total value of goods and services produced in the country -- in the third quarter. The revised numbers still indicate that the economy grew for the first time after a year of contraction. But the new annualized growth rate of 2.8%, reduced from 3.5%, reinforced fears that the recovery will be slower than what has followed past recessions.

The adjustment, however, didn't affect Zandi's prediction that the economy will grow at an annual rate near 3% in the last three months of 2009.

"The best news in the report was a sturdy increase in corporate profits, as businesses have succeeded in getting their costs down," Zandi said. "Historically, profit gains lead a better job market."

As for the nation's banks, Bair of the FDIC said she didn't expect to see significant improvement until sometime next year.

In the third quarter, the country's commercial banks and savings and loans posted net income of $2.8 billion. The performance reversed a $4.3-billion collective loss in the second quarter and more than tripled the industry's $879 million in profits recorded in last year's third quarter.

But earnings at banks could drop in the current quarter as they undergo their traditional end-of-the-year write-down of bad assets, the FDIC said.

"The recession ended midyear . . . but it's still going to take a period of time until banks can put all these losses behind them and move on to make better, more secure loans," said James Chessen, chief economist for the American Bankers Assn. "We're in the middle, and it's a tough place to be."

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