IMF Says Rising Joblessness to Weigh on U.S. Growth Next Year

By Timothy R. Homan

Oct. 1 (Bloomberg) -- Rising unemployment and the waning effects of President Barack Obama’s $787 billion stimulus program will restrain a U.S. economic recovery next year, the International Monetary Fund predicted.

The world’s largest economy is forecast to expand 1.5 percent next year, after contracting 2.7 percent in 2009, the IMF said today in a semiannual report. In July, the Washington- based lender projected 0.8 percent expansion for 2010.

“The U.S. economy is showing increasing signs of stabilization,” the IMF said in its World Economic Outlook. At the same time, “combined with the impact of rising unemployment, the temporary nature of the fiscal stimulus, and subdued growth in trading partner economies, growth will remain sluggish,” the fund said.

Government stimulus plans such as an auto-rebate program and first-time homebuyer tax credits gave manufacturing and housing -- main contributors to a U.S. recession that started in December 2007 -- a boost from July through September. Federal Reserve policy makers are among those concerned that gains in consumer spending will not be sustained as unemployment climbs and incomes stagnate.

The U.S. economy contracted at a 0.7 percent pace from April through June, the Commerce Department said yesterday in Washington. The jobless rate in the U.S. is likely to peak above 10 percent in the second half of next year, helping to keep core inflation below 1 percent through most of 2010, according to today’s IMF report.

Markets ‘Stressed’

“Although financial conditions have improved significantly in recent months, markets remain stressed, and this will weigh on investment and consumption,” the fund said. It added that recapitalizing banks and repairing their balance sheets are an “indispensable condition for sustained growth.”

Bank losses on bad assets are projected to increase from July 2009 through next year by $420 billion in the U.S., the IMF said yesterday in a separate report. American banks have already written down $610 billion, and capital-raising efforts will not be enough to offset future losses, according to that report.

Today the IMF warned that the “massive increase in bank reserves” must not result in “excessive credit growth and lead to inflation.” The Fed will have difficulty reducing the quantity of longer-term assets on its balance sheet, exposing the central bank to “significant interest-rate risk,” according to the report.

Unemployment

Fed Chairman Ben S. Bernanke is trying to revive lending and cut the 9.7 percent unemployment rate while preventing a surge in inflation from the $1 trillion expansion of the Fed’s balance sheet.

The IMF added its views to debates in the U.S. Congress, saying the Obama administration’s plan for overhauling financial regulations is “sensible” and should be done in a “comprehensive fashion, rather than in piecemeal.” The IMF also said expanding health-care coverage should be budget neutral, and measures are needed to bring down costs in order to maintain debt sustainability.

The legacy of the crisis, the IMF said, is “a high and rising debt trajectory that could become unsustainable without significant medium-term measures.” Similarly, potential growth during that period is likely to register below 2 percent “for a considerable time.”

To contact the reporter on this story: Timothy R. Homan in Istanbul at thoman1@bloomberg.net