Service industries in the U.S. barely expanded in December, underscoring Federal Reserve forecasts that the economic recovery will be slow to develop. The Institute for Supply Management’s index of non- manufacturing businesses that make up almost 90 percent of the economy rose to 50.1 from 48.7 in November, according to the Tempe, Arizona-based group.

Fifty is the dividing line between expansion and contraction. Other reports today showed job cuts are diminishing. Services from retailing to transportation are lagging behind the rebound in manufacturing as consumer demand is restrained by tight credit and 23 months of job losses.

Economists surveyed last month projected the pace of growth will keep unemployment above 10 percent through the first half of this year, making it more likely central bankers will keep interest rates low for an “extended period.” “We’re on a slow recovery path,” said Michael Englund , chief economist at Action Economics LLC in Boulder, Colorado, who forecast a reading of 50. “The economy will grow enough to slowly reduce unemployment, but not nearly enough to get the public to perceive it as low.”

The December figure compared with economists median forecast for an increase to 50.5, according to 67 projections in a Bloomberg News survey. Forecasts ranged from 48 to 52.1. The Standard & Poor’s 500 Index added 0.1 percent to a 15- month high of 1,137.14 at 4:05 p.m. in New York. The Dow Jones Industrial Average increased 1.66 points, or less than 0.1 percent, to 10,573.68.

Manufacturing Stronger The services index is up almost 13 points from a record low of 37.4 reached in November 2008, a period of mounting job losses, falling home and stock prices, and a lack of credit for businesses. The ISM began keeping records in 1997. By comparison, the group’s manufacturing index has increased 23 points since reaching a 28-year low in December 2008. The manufacturing gauge rose in December to the highest level since April 2006 as factories ramped up production to rebuild inventories and meet increasing global demand.

The ISM’s employment index for services rose to 44 last month from 41.6 in November. Separate reports showed that while the labor market is improving, companies are still trimming their workforces. Figures from ADP Employer Services showed companies cut an estimated 84,000 jobs in December, the fewest since March 2008. The decline last month was larger than the 75,000 decrease forecast by economists in a Bloomberg survey. Planned payroll reductions dropped 73 percent in December from a year earlier, according to another report from the job placement firm Challenger, Gray & Christmas Inc. Payrolls Forecast The Labor Department may report on Jan. 8 that employment was unchanged in December after almost two years of job cuts, according to a Bloomberg survey.

The jobless rate probably stayed at 10 percent. The non-manufacturing gauge of business activity, a measure of sentiment, rose to 53.7 in December from 49.6 a month earlier. The ISM’s index of new orders dropped to 52.1 last month from 55.1 and a gauge of backlogs eased. Categories in the ISM services survey include utilities and resources, health care, housing, and finance and insurance.

Retailers are offering discounts on merchandise such as Nike Inc. footwear to encourage sales. Nike, the world’s largest athletic-shoe maker, said Dec. 17 that it’s “cautious” about its outlook. “While we’re seeing hopeful signs of recovery in consumer sentiment around the world, macroeconomic indicators remain mixed,” Chief Financial Officer Donald Blair said on a conference call. Same-Store Sales Retailers may report same-store sales rose 1.8 percent in December, after 2008 marked the worst decline in more than 40 years, according to analysts estimates compiled by Retail Metrics Inc. Retailers report monthly sales tomorrow.

The economy grew at a 2.2 percent annual pace in the third quarter following four quarters of contraction that marked the deepest recession since the 1930s. Economists at JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley in New York are among those projecting the economy expanded by at least a 4 percent annual rate in the final three months of 2009. The pace will probably cool early this year. “Lingering credit constraints are a key reason why I expect the strengthening in economic activity to be gradual and the drop in the unemployment rate to be slow,” Fed Vice Chairman Donald Kohn said Jan. 3 in a speech to the American Economic Association in Atlanta. Fed Chairman Ben S. Bernanke and his fellow policy makers have left the benchmark lending rate in a range of zero to 0.25 percent to support an economy that is recovering from the worst recession since the Great Depression. Central bankers said Dec. 16 that high unemployment and “subdued” inflation warrant low interest rates “for an extended period.”

Federal Reserve Chairman Ben S. Bernanke said removing the central bank from bank supervision and tampering with its political independence would “seriously impair” economic stability in the U.S.

“A number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions,” the Fed Chairman said in a commentary released yesterday on the Web site of the Washington Post. The measures “would seriously impair the prospects for economic and financial stability in the U.S..”

Bernanke has presided over the most expansive use of Fed powers since the Great Depression. While the 55-year-old Fed chairman has said he averted a financial meltdown, lawmakers have voiced concern about taxpayer-sponsored bailouts and proposed the most sweeping dismantlement of Fed authority since the creation of the institution in 1913.

Bernankes commentary is his first comprehensive answer to proposals in the House and Senate that would limit the Fed’s supervisory powers and exert more political oversight in the setting of interest rates. The issues are likely to be discussed when he faces the Senate Banking Committee on Dec. 3 for a hearing on his nomination to a second term as chairman.

“Congress has a lot of public support for an attack on the Fed,” Allan Meltzer, a Fed historian and professor at Carnegie Mellon University in Pittsburgh, said in an interview Nov. 23. “They bailed out everybody in sight.”

Lax Supervision
Senate Banking Committee Christopher Dodd, a Democrat from Connecticut, has criticized the central bank for lax supervision and introduced legislation this month that would strip bank oversight from the Fed and create a single bank regulator. Dodd would also limit the central bank’s ability to loan to individual companies.

“There is a strong case for a continued role for the Federal Reserve in bank supervision,” Bernanke said. “Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks.”

The Fed chairman pointed to capital adequacy tests the Fed performed in May which helped restore confidence in the banking system. The Standard and Poor’s 500 Financials Index has increased 34 percent since May 1, outperforming the S&P 500 by about 10 percentage points.

Dodd and Representative Barney Frank, chairman of the House Financial Services Committee, want to take away the Fed’s rule- writing power on consumer financial products and give it to a new Consumer Financial Protection Agency.

Excessive Risk-taking
“The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis,” Bernanke said. The Fed has reviewed its performance and “moved aggressively to fix the problems,” he added.

As the subprime mortgage crisis began to trigger losses in bank portfolios, Bernanke used emergency authority last year to purchase securities from Bear Stearns Cos. and facilitate its merger with JPMorgan Chase & Co.

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Federal Reserve Chairman Ben S. Bernanke said economic “headwinds” of reduced bank lending and a weak labor market will probably restrain the pace of the U.S. economic recovery, warranting continued low borrowing costs.

“Significant economic challenges remain,” Bernanke said in a speech today to the Economic Club of New York. “The flow of credit remains constrained, economic activity weak and unemployment much too high. Future setbacks are possible.” He added that the Fed is “attentive” to changes in the dollar’s value and “will help ensure that the dollar is strong.”

The central bank chief gave no indication he favors raising interest rates anytime soon. Bernanke repeated the key sentence from the Nov. 4 statement of Fed policy makers, who reiterated that interest rates will stay very low for an “extended period” as the central bank seeks to maintain a recovery from the deepest recession since the 1930s.

“Of course, significant changes in economic conditions or the economic outlook would change the outlook for policy as well,” Bernanke said in Manhattan in his first talk since the Fed’s Open Market Committee met this month. The Fed has a “wide range of tools” for tightening credit “when the economic outlook requires us to do so,” he said.

Retail Sales Rise
A government report today showed October retail sales in the U.S. rose 1.4 percent, more than anticipated, as demand for autos climbed, easing concern households will curtail spending after government incentives ended. A report from the Federal Reserve Bank of New York today showed manufacturing in the region expanded in November for a fourth straight month.

“The increases in productivity we have seen so far are so large, so strong, that I am a bit skeptical they can be maintained going forward,” Bernanke said in response to a question after the speech. Firms will find that “as demand begins to strengthen they will need to bring more workers back on.”

U.S. stocks rose, with the Standard & Poor’s 500 Index increasing 1.8 percent to 1,113.27 at 2:21 p.m. in New York. Treasuries extended gains, pushing the yield on the 10-year note down eight basis points, or 0.08 percentage point, to 3.34 percent.

The dollar, which traded at $1.4969 against the euro before the speech, declined to $1.5002.

The U.S. currency saw a “marked increase” because investors flocked to stronger markets during the financial crisis, Bernanke said. Now that markets have improved and the global economy has stabilized, ” these safe haven flows have abated, and the dollar has accordingly retraced its gains. The Federal Reserve will continue to monitor these developments closely,” he said.

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The Federal Reserve said U.S. banks kept tightening lending standards for companies and consumers last quarter, reinforcing the central bank’s decision to leave its benchmark interest rates at record lows for a long time.

At the same time, the number of banks making it tougher to borrow diminished, the Fed said yesterday in its quarterly Senior Loan Officer survey. Demand for most types of loans weakened at a smaller number of banks than in the second quarter, the survey showed.

The report helps explain why Fed policy makers last week said tight credit remains a drag on the economy and pledged to keep their benchmark interest rate near zero for an extended period. JPMorgan Chase & Co. is among the banks that have reduced lending in response to stricter underwriting standards for consumer loans and lower demand among companies.

The fact that banks are still tightening standards is just another reason why the Fed is not going to be raising rates anytime soon, said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, who predicts the Fed won’t tighten until September.

While the Fed isn’t about to raise rates, with fewer banks making it tougher to borrow, credit may be less of a headwind to growth in coming quarters than is commonly believed, said Maki, a former Fed economist. The percentage of banks tightening standards was quite similar to the end of the last recession, in 2001, he said.

Separately, the Fed said yesterday that nine of 10 bank holding companies deemed short of capital in May have raised their reserves enough to withstand the risk of higher unemployment and slower economic growth.

Talks With Treasury
The one exception, GMAC Inc., is expected to meet its remaining buffer need by accessing one of several government programs to help the auto industry, the Fed said. GMAC is in discussions with the U.S. Treasury on the structure of its investment, it said.

The survey of loan officers at 57 U.S. banks and 23 U.S. branches of foreign banks was conducted from about Oct. 6 to Oct. 20, the central bank said. The report doesn’t identify respondents.

Loans and leases held by U.S. commercial banks have declined for 10 straight months, falling to $6.7 trillion as of Oct. 28 from $7.2 trillion at the end of 2008, according to a separate statistical release from the Fed.

Commercial and industrial loans have dropped to $1.37 trillion from $1.6 trillion, commercial real-estate loans have declined to $1.66 trillion from $1.72 trillion, and consumer loans have fallen to $847 billion from $857 billion at the end of last year.

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The Federal Reserve Open Market Committee (FOMC) Wednesday said that the economy has improved, but kept the benchmark interest rate target at all-time lows, indicating that it is determined to nurture a budding economic recovery by providing liquidity to the financial sector.

Economic activity is “picking up,” the Fed statement said. The statement was a more upbeat assessment of the economy than comments from Federal Reserve Chairman Ben Bernanke last week, warning that the recovery is likely to be anemic.

The central bank also said it intends to extend purchases of $1.45 trillion in long-term government bonds into the first quarter of 2010.?? It originally had scheduled those purchases to be completed by the end of the year.

By lengthening the deadline, the Fed is signaling that Bernanke and other members of the committee believe the economic recovery is on firm footing.

Signs of a fledgling recovery have shown up recently in government reports that show the housing industry is stabilizing, retail sales are slowly on the mend and utilization of industrial capacity is increasing.

Consensus projections by economists have forecast U.S. gross domestic product (GDP) growth will hit 2.9% in the third quarter, up from a 1% estimate in July, according to Bloomberg News.

“The bottom is no longer falling out, but the recovery is still at a very early stage,” Mark Gertler, a professor of economics at New York University told Bloomberg, who studied the Great Depression with Bernanke before he became Fed chairman. “There is no need to expand the balance sheet now, but it is a bit too early to begin shrinking it.”

By keeping interest rates steady, the central bank signaled that inflation is not a current threat to the economy, and that the recovery still needs fiscal stimulus.

The Fed lowered the benchmark lending rate to a range of zero to 0.25% at the Dec. 16th, 2008 meeting and has left it unchanged since.?? It later adopted a policy of “quantitative easing” authorizing the purchases of the long-term government bonds.

The announcement to stretch the purchase of long-term government bonds was expected by analysts and means the Fed is unlikely to withdraw government funds from the system until at least the second quarter in 2010.

Draining funds from the system now could drive up interest rates on 10-year Treasury notes.?? That would likely increase the odds of higher mortgage rates which could crush the housing recovery.

“Probably two-thirds of the committee is concerned that being too quick to embrace the stronger growth story could lead the market to price in sooner rate hikes and tighter financial conditions than they would like,” Michael Feroli, an economist at JPMorgan Chase & Co. (JPM: 41.86 +0.54 +1.31%) in New York and a former member of the Fed’s research staff told Bloomberg.

And with unemployment at a 26-year high of 9.7% and forecast to reach 10.1% in the fourth quarter, the central bank has made it clear it’s too early to celebrate, because? “businesses are still cutting back on fixed investment and staffing.”

Some on the committee believe that with millions out of work and ample capacity to increase factory production, the economy has plenty of room to run before inflation becomes a threat.

“The Fed will move gradually and cautiously in reducing its balance sheet next year even as there are further signs of a sustained economic recovery,” UBS AG Securities (UBS: 17.32 -0.13 -0.74%) economist Maury Harris wrote in a research note obtained by Reuters.

The steady-as-she-goes approach has been a relief to investors.?? Stock markets have surged since bottoming out in March, and the blue chip Dow Jones Industrial Average has gained around 3300 points, or about 51%, as the Fed held interest rates at all time lows.

And it’s unlikely the Fed is going to shock investors by springing a surprise policy change on them anytime soon.

“The Fed has been pretty good about telegraphing what they’re going to do via speeches by the governors at conferences and things like that,” Marc Pado, of Cantor Fitzgerald LP, told The Wall Street Journal. “There’s just been no hint of a policy change lately.”

Home values in 20 U.S. cities climbed in July by the most in almost four years, helping stem the record plunge in household wealth that’s depressed spending.

The S&P/Case-Shiller home-price index rose 1.2 percent in July from the prior month, the biggest gain since October 2005, the group said today in New York. Another report showed consumer confidence unexpectedly fell in September, while holding above the record low reached earlier this year.

Home values are rebounding as low borrowing costs and government tax credits lift home sales. Combined with rising stock prices, the gains will begin to restore the $13 trillion plunge in net worth caused by the worst financial crisis since the Great Depression, a process that economists such as Brian Bethune say will take years to complete.

Home prices are a major, major turning point for the economy, said Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts. We are eating away at the problem of household balance sheets.

The New York-based Conference Board’s consumer confidence index fell to 53.1 in September from 54.5 the prior month, the private research group said today, amid growing concern over the lack of jobs. The gauge sank to 25.3 in February, the lowest level in data going back to 1967.

The Standard & Poor’s 500 Index dropped after the confidence report, erasing earlier gains, and closed down 0.2 percent at 1,060.61 in New York. The yield on the benchmark 10- year Treasury note was little changed at 5:15 p.m. in New York from 3.28 percent late yesterday.

Decline Slows

From a year earlier, the S&P/Case Shiller index was down 13.3 percent, less than economists anticipated and the smallest decrease in 17 months.

The measure was forecast to fall 14.2 percent, according to the median projection of 36 economists surveyed by Bloomberg News. Estimates ranged from declines of 12.5 percent to 15 percent. It was down 15.4 percent in the 12 months ended in June.

Compared with the prior month, 17 of the 20 cities covered showed an increase, led by a 3.1 percent jump in Minneapolis and a 2.9 percent increase in San Francisco. Las Vegas suffered the biggest one-month decrease at 1.9 percent.

Sales Rising

Combined sales of new and existing homes have risen for four out of the last five months, signaling the worst of the housing crisis is over.

The Obama administration’s $8,000 tax credit for first- time buyers, which is due to expire at the end of November, combined with lower prices as foreclosures soared, have helped lift sales this year. The National Association of Realtors and the National Association of Home Builders have lobbied to extend the credit on concern demand will wane after it lapses.

Karl Case, co-creator of the S&P/Case-Shiller index, said the U.S. residential property market is improving enough to end the tax credit for first-time buyers.

We’ve got to phase back incentives and this may be a good time to do that, Case said in an interview on Bloomberg Radio. I believe in some cities you’ll see the beginning of recovery.

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One of the current reason many people are lockng into five year fixed term mortgages is the concern that interest rates will rise sharpely due to hyper inflation taking hold in the US. Here is an article that covers some information that has come out from the head of the US Federal Reserve. In t Ben Bernanke is very clear that there is a plan in place that will allow them to emove the stimulus from the economy and keep inflation in check.

Of course there are no guarantees but I feel that the governments in both the US and Canada are aware that it is important to keep inflation as low as possible and they will do everything possible to keep inflation in check.

Having said this I don’t think we can possible escape the current situation without some inflation but I also feel it will not be areturn to the 80’s where we have 12% plus inflation.

I am staring to lean back towards the variable rate mortgages as an option for those who could withstand an increase of interest rates of 3%. I’m not saying we will hit the 3% but it is best to estimate on the high side.

July 21 (Bloomberg) – Federal Reserve Chairman Ben S. Bernanke said while the economy is showing tentative signs of stabilization the central bank intends to maintain a “highly accommodative” monetary policy for “an extended period.”

“The pace of decline appears to have slowed significantly” Bernanke said today in semi-annual testimony before the House Financial Services Committee. At the same time, in light of the substantial economic slack and limited inflation pressures, monetary policy remains focused on fostering economic recovery he said.

Fed officials said in a report submitted as part of Bernanke’s testimony that policy will be tightened when the labor market improves, an economic recovery takes hold and pressures holding down inflation diminish. The comments follow a rally in stocks and a rebound in corporate earnings that have stoked speculation the worst recession in half a century is ending.

Bernanke, 55, defended the central bank’s actions to restore financial stability, urged lawmakers to lay plans for reining in the deficit, and warned Congress against impinging on the Fed’s independence in his testimony. Bernanke, responding to a question, said the Obama administration’s plan to make the Fed a systemic-risk regulator would be a modest reorientation of its authority, and he argued against the plan’s proposal to strip the Fed of consumer-protection role.

Unprecedented Actions
The Fed chief has countered the credit crisis with actions unprecedented in the central bank’s 95-year history, cutting the benchmark lending rate to as low as zero and flooding the banking system with cash. He today detailed how the Fed can reverse the stimulus when appropriate and expressed confidence it has tools to prevent any inflation surge.

Bonds rose and stocks reversed gains after Bernanke’s statement was released. The yield on the benchmark 10-year Treasury note fell to 3.46 percent at 11:56 a.m. in New York, from 3.61 percent late yesterday. The Standard & Poor’s 500 Index was down 0.4 percent at 946.94.

Some companies are beating analysts earnings estimates. Coca-Cola Co. reported adjusted second-quarter profit of 92 cents a share. Analysts surveyed by Bloomberg estimated 89 cents. Caterpillar Inc., the biggest maker of earth-moving equipment, said 2009 earnings before some items will be $1.15 to $2.25 a share. Analysts surveyed by Bloomberg had expected $1.12 on average.

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