U.S. Economy May Be on Brink of Recovery, Tyson, Krugman Say

By Shamim Adam and Liza Lin

Aug. 10 (Bloomberg) -- The U.S. economy may be on the cusp of a recovery and the impact of the nation’s stimulus plan should increase this quarter, said Laura Tyson, an adviser to President Barack Obama.

“We may have hit stability, we may be in the beginning of an upturn” based on the latest economic data, Tyson, a member of the White House’s Economic Recovery Advisory Board, said yesterday during an interview in Kuala Lumpur. Nobel Prize- winning economist Paul Krugman said the deepest slump since the Great Depression may be ending.

“It’s quite possible, though not certain, that retrospectively, we’ll say that the recession ended in July or August, maybe September,” Krugman said in a separate interview in the Malaysian capital. “My guess is that we’ve bottomed out now, that August was probably the trough month.”

Krugman, 56, cited last week’s government report showing that the pace of U.S. job losses slowed more than forecast in July and the unemployment rate dropped for the first time in 15 months. He also pointed to reports by the Institute of Supply Management that manufacturing, while still contracting, is on the mend.

Tyson, 62, cautioned that declining housing values and an overhang of unsold homes pose threats to a recovery, and it’s too early to say the jobs report is the beginning of a trend.

“We’ve had one number that’s been slightly stronger than expected,” she said. “It’s pretty hard to read a single month as creating a trend. Most of the forecasts are still that the unemployment rate rises through till the end of the year.”

Unemployment Falls

U.S. payrolls fell by 247,000 in July, after a 443,000 loss in June. The jobless rate unexpectedly dropped to 9.4 percent from 9.5 percent. Obama said last week that the unemployment numbers indicate “the worst may be behind us.”

The report propelled the Standard & Poor’s 500 Index above 1,000 for the first time since November as U.S. stocks rose for a fourth week. The S&P 500 rose 2.3 percent to 1,010.48, the highest since Oct. 6. The Dow Jones Industrial Average climbed 198.46 points, or 2.2 percent, to 9,370.07.

The Aug. 7 Labor Department report came a week after the Commerce Department said U.S. gross domestic product shrank at a better-than-forecast 1 percent annual pace in the second quarter after a 6.4 percent drop in the prior three months.

There’s no reason for a second stimulus package now, Tyson said in the interview. She suggested on July 7 the U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was “a bit too small.” She told CNBC three days later that it’s premature to plan for a second stimulus package.

Stimulus Expectations

“We know that relative to plan, the stimulus package in place is performing along expectations,” Tyson said yesterday. “Right now, based on the evidence that the economy has put forward and the stimulus spend out relative to plan, there isn’t any reason to think about a next round.”

Policy makers may want to consider doing more for unemployed Americans, Tyson said. Employers have eliminated about 6.7 million jobs since the recession began in December 2007, the most since the Great Depression.

Congress will consider extending unemployment benefits next month when lawmakers return from their August recess, Majority Leader Harry Reid said Aug. 7. The Senate’s top Democrat said 1.5 million Americans may exhaust their benefits by the end of the year if Congress doesn’t act.

“That could be considered as a second stimulus or it could be considered as an extension of unemployment compensation,” said Tyson, a professor at the University of California’s Walter A. Haas School of Business, who was an adviser to Obama during last year’s presidential campaign.

1 Million Jobs

Krugman, a Princeton University economist, said the stimulus plan probably saved 1 million jobs. He said a second package is needed and should be directed at state and local governments as well as spending on construction projects.

The U.S. economy may be the first after Asia to “take off,” said Raghuram Rajan, the former chief economist of the International Monetary Fund who’s now a professor at the University of Chicago.

“Unemployment may continue rising and job losses may continue, but growth will start picking up in the U.S.,” Rajan, 46, said in an interview yesterday. “We will get a few quarters of rebound growth.”

Krugman, Tyson and Rajan were in Kuala Lumpur for the World Capital Markets Symposium, which starts today.

To contact the reporter on this story: Shamim Adam in Kuala Lumpur at sadam2@bloomberg.net; Liza Lin in Kuala Lumpur at llin15@bloomberg.net