Economy seems to be leveling off, but bumps not over

WASHINGTON -- After a six-month descent, the economy appears to be leveling off.

There were fresh signs Thursday that the full force of the recession may be petering out: a strong profit forecast from Wells Fargo, a drop in unemployment benefit filings and several retailers predicting solid April sales. On Wall Street, the Dow Jones industrials rose nearly 250 points.

Still, with unemployment rising, it will be at least several months before the country's economic engine pops into a growth gear. Job losses -- and the fear of them -- act as a headwind against consumer confidence and spending, which account for more than two-thirds of the U.S. economy.

"The sense of a ball falling off a table, which is what the economy has felt like since the middle of last fall, I think we can be reasonably confident that that is going to end within the next few months, and we will no longer have that sense of a free-fall," President Obama's top economic adviser, Lawrence Summers, said Thursday.

But Summers, who spoke at the Economic Club of Washington, said it was too soon to forecast how strong the rebound would be and when it would take hold.

The economy shrank at a 6.3 percent rate in the final three months of 2008, the worst showing in a quarter-century. Some economists say it fared about as poorly in the first three months of this year, while others expect a 4 to 5 percent rate of decline. The government releases its initial estimate at the end of April.

And the economy is still shrinking in the April-June quarter -- perhaps at a rate of 2 to 2.5 percent, some analysts say.

When will it grow again? Maybe the final quarter of the year.

For now, said Brian Bethune, economist at IHS Global Insight, "I think we can say we've gone through the most terrible part of the recession."

The scenarios charted by economists are consistent with Federal Reserve Chairman Ben Bernanke's hope that the recession, now in its second year, will end this year.

Bernanke, however, has been quick to caution that this will happen only if the government succeeds in stabilizing financial markets and getting banks to lend money more freely again to both consumers and businesses. To that end, the Fed recently plowed $1.2 trillion into the economy in an attempt to reduce interest rates for mortgages and other loans.

Even in the best-case scenario, the unemployment rate -- now at a quarter-century high of 8.5 percent -- is anticipated to climb to 10 percent by the end of this year.

History shows that the jobless rate moves higher well after a recession has ended. That's because companies won't want to ramp up hiring -- often their single-biggest expense -- until they feel confident any recovery will be lasting.

Consumers, whose sharp cutbacks in spending plunged the country into a steep economic tailspin at the end of last year, seem to be gradually spending more freely.

On Thursday, Wal-Mart Stores Inc., the world's largest retailer, said sales at stores open at least a year increased 1.4 percent in March. However, discount retailer Target Stores Inc.'s sales fell.

The government reported last month that consumer spending rose in February for the second month in a row -- after a half-year of declines.

Shoppers' appetites to spend should get a lift later this year from tax cuts contained in Obama's $787 billion economic stimulus package. Tax credits of $400 per worker and $800 per couple translate into about $13 a week less withheld from paychecks starting around June.

The hope is that the added consumer spending will prompt retailers to replenish inventories, which have been cut nearly to the bone during the recession. That would require factories to boost production, creating a ripple of positive economic activity.

Thursday's $3 billion first-quarter profit forecast from Wells Fargo was in part a reflection of the very low interest rates at which banks can borrow money from the government and then lend it out at higher rates to consumers and businesses.

Another positive flicker came Thursday from the Labor Department, which reported that the number of newly laid off Americans filing for unemployment benefits dropped by 20,000 last week to 654,000.

Although credit and financial conditions have shown some signs of improvement since the worst of the crisis last fall, they are operating far from normally, Fed officials say.

"In view of the state of the credit markets, it seems a fair bet that it will take time for momentum to build," Gary Stern, president of the Federal Reserve Bank of Minneapolis said in a speech Thursday. "But with the passage of time -- as we get into the middle of 2010 and beyond -- I would expect to see a resumption of healthy growth."

To be sure, the economy is not out of the woods yet. Another bailout of a troubled bank or other company could easily shatter already fragile confidence and send the economy reeling again. The collapse of General Motors would send many more to the unemployment lines and could jolt the economy into a major backslide. And, there's the risk that consumers will once again shut down as jobs continue to vanish.

And, even if the recession were to end later this year, most economists believe economic activity won't return to a more normal pace of around 3 percent to 3.25 percent until late next year.

"Yes we have probably seen the worst ... but the shape of the recovery will look more like the Nike swoosh," meaning a gradual -- not sharp -- rise back to normal, said John Silvia, chief economist at Wachovia Corp.