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Monday, 19 May 2008

U.S. Recession to End by September, Business Economists Say

By Steve Matthews

May 19 (Bloomberg) -- The U.S. economy will probably exit from a recession by the end of the next quarter as credit markets improve after a year of turmoil, according to a survey by the National Association for Business Economics.

The worst of the U.S. credit crunch and housing slump is about over, and growth will pick up to 2.1 percent in the second half, according to the poll of 52 professional forecasters taken April 17 to May 1. More than 60 percent of the economists surveyed predicted that businesses and consumers will find it easier to borrow in the final six months of the year.

The share of analysts who said the U.S. is in or will have a recession this year rose to 56 percent from 45 percent in February. They anticipate that the Federal Reserve's steepest interest-rate cuts in two decades, tax rebates, record exports and some stabilization in housing will lead to a recovery this quarter or next.

``We are most of the way through the downturn, or the worst of it,'' said Lynn Reaser, a Bank of America Corp. economist in Boston who chairs the economic survey committee. ``Recovery forces are in place and conditions should improve over the next year and a half.''

The worst housing recession in a quarter century, turmoil in financial markets and higher energy prices are taking a toll on current growth.

Second-Half Growth

The economists predicted the expansion will slow to an annual pace of 0.4 percent in the second quarter, following two straight periods of 0.6 percent gains. Second-half growth forecasts were cut to 2.1 percent from 2.8 percent in February. Still, about three-quarters of those predicting a recession said it will end in the second or third quarter.

The *censored* survey points to gradual improvement into 2009, when U.S. gross domestic product may increase 2.7 percent, a forecast trimmed from 2.9 percent in the February survey.

``Although housing and credit markets will gradually loosen their grip, U.S. economic growth is expected to only slowly return to health,'' Ellen Hughes-Cromwick, the group's president and chief economist at Ford Motor Co., said in a statement.

The growth projections were slightly higher than those in a Bloomberg News survey of economists taken May 2 to May 8. The Bloomberg survey predicted average GDP gains of 1.5 percent in the second half and a 2009 expansion rate of 2 percent.

Lower Rates

The Fed will keep its benchmark overnight lending rate between banks at 2 percent this year, and raise the rate to 3 percent by the end of 2009 as the central bank fights the threat of faster inflation, according to the *censored* survey median.

Futures markets show traders expect the rate to hold at 2 percent through October. The Fed's next policy meeting is June 24-25.

Policy makers indicated last month they may take a breather after lowering the benchmark rate by 2.25 percentage points this year, the most aggressive reductions in two decades.

Fed Chairman Ben S. Bernanke, speaking last week, said financial markets remain unsettled and the central bank will increase its auctions of cash to banks as needed. Markets remain ``far from normal,'' he told an Atlanta Fed conference in Sea Island, Georgia.

Stronger Dollar

The U.S. dollar is expected to gradually strengthen as the economy grows and the Fed raises rates. The survey predicted the dollar will advance to $1.50 per euro at the end of 2008 and $1.40 at the end of 2009. The U.S. currency reached a record low of $1.6019 on April 22.

Slowing growth didn't stop analysts from raising their inflation projections, the survey showed. The economists forecast the consumer price index will rise 3.1 percent in the final three months of 2008 from the same period a year before, compared with the 2.5 percent pace predicted in February.

Weakness in housing was cited as the greatest single cause for pushing the economy into a recession.

A recession hasn't been officially declared. The economy likely peaked in December or January and then started to decline, Martin Feldstein, a Harvard University professor and president of the National Bureau of Economic Research, said in an interview this month. The bureau's business cycle dating committee officially determines recessions.

The *censored* panel was divided on how effective the tax rebates will be in stimulating consumer spending. Thirty-five percent said households will spend between one quarter and one half of the money, while 31 percent expected a majority of the rebates to be spent.

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