US economy dip ‘less than feared’

The US economy will sink at a slower pace than previously thought in 2009, thanks to a rebound in the second half of the year, the Federal Reserve says.

The Fed also upped its growth forecast for 2010 and 2011.

But it warned that US unemployment would rise above 10%, which is higher than its earlier forecasts.

The Fed predicts the jobless rate could get as high as 10.1%, from its old estimate of 9.6%. In June, unemployment climbed to 9.5%, a 26-year high.

The new projections were released along with minutes from its rate-setting committee.

“Consumer spending appeared to have stabilized since the start of the year, sales and starts of new homes were flattening out, and the recent declines in capital spending did not look as severe as those that had occurred around the turn of the year,” it said.

“Moreover, it seemed likely that economic activity was in the process of levelling out, and the considerable improvements in financial markets over recent months were likely to lend further support to aggregate demand.”

Stimulus measures

The Fed now predicts that the US economy will shrink by between 1% and 1.5% this year. The forecast issued in May projected it would contract by between 1.3% and 2%.

And for 2010, it forecast that the economy would grow by between 2.1% and 3.3% – a slight upgrade from its earlier prediction of forecast of growth between 2% and 3%.

However this would represent a slow recovery, the Fed added, meaning that unemployment would remain high until well into 2011, as firms waited to be convinced a corner had been turned before hiring staff.

US interest rates have been cut to almost zero in a bid to stimulate recovery.

And President Barack Obama has unveiled a $787bn stimulus package of tax cuts and increased government spending to try and get the US economy back to growth. –BBC News