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The Bank of Japan raised its assessment of the economy and held the benchmark interest rate close to zero percent as it seeks to strengthen the recovery.

“Japan’s economic conditions are showing signs of recovery,” the central bank said in a statement in Tokyo today, after last month saying they had “stopped worsening.” Governor Masaaki Shirakawa and his colleagues kept the overnight lending rate at 0.1 percent at the policy board meeting.

Reports today showed the economy is rebounding from its worst postwar recession: manufacturers turned optimistic for the first time in almost two years and demand for services rose for a second month in July. The revival has been driven by global stimulus spending and Shirakawa said on Aug. 31 that he’s not yet confident it will continue to improve.

“Even though Japan’s economy is on a recovery path, demand is still weak and the bank seems to think it’s too early to normalize policy measures,” said Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo, who used to work at the central bank. He said the policy board will keep the key rate unchanged at least until March 2011.

The yen was little changed, trading at 91.05 per dollar at 12:47 p.m. in Tokyo from 91.01 before the report was published.

The Bank of Japan said consumer spending remains weak and companies are still reducing investment because of falling profits. Financial conditions are showing signs of improvement “with some severity lingering,” the central bank said.

Downside Risk

“While there are signs of a better-than-projected recovery in emerging economies, risks to the economy are still on the downside,” the bank said, adding it will pay “attention for the time being to the downside risks to economic activity and prices.”

Since its most recent rate cut in December, the central bank started buying corporate debt from lenders and offering them unlimited loans backed by collateral to channel funds to companies. The policy board extended the programs until Dec. 31 in July, saying funding conditions remain “tight.”

Japan’s economy grew in the second quarter for the first time in more than a year, helped by some $2 trillion in global stimulus that bolstered exports and household spending. Factories increased output for a fifth month in July as companies rebuilt inventories, and shipments abroad are showing signs of improving as the global recession eases.

Sentiment among large manufacturers rose to 15.5 points this quarter, the highest reading since the survey began in 2004, today’s joint survey by the Cabinet Office and Finance Ministry showed. The tertiary index, a measure of service demand, advanced 0 absolutely free credit report.6 percent from June, the Trade Ministry said.

Tankan Survey

The business confidence report offers a hint of the results likely in the Bank of Japan’s quarterly Tankan survey due Oct. 1. The Tankan will provide policy makers with information on companies’ hiring plans and ability to raise funds a year after the collapse of Lehman Brothers Holdings Inc. caused credit to dry up worldwide.

While some companies are optimistic, the rebound in global demand hasn’t spurred capital investment, and consumer spending may weaken amid record unemployment and falling incomes. The value of households’ financial assets slid 3 percent from a year earlier to 1,441 trillion yen ($15.8 trillion) last quarter, the Bank of Japan said today.

“Consumer spending will remain sluggish and deflationary pressure will be mount,” said Akio Makabe, a professor of economics at Shinshu University in Matsumoto, central Japan. “Companies will continue to carry idle capacity and face pressure to streamline operations.”

Hatoyama Government

Yukio Hatoyama became prime minister yesterday after his Democratic Party of Japan won an election on a pledge to support households. While the DPJ has said it supports the Bank of Japan’s independence, economists say the policy board may face pressure from the new administration to increase its monthly purchases of government bonds to fund its spending.

“The issue of an increase in the bank’s bond purchases may gain momentum if the government finds it has to sell more debt to make up for a shortage of revenue,” said Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs Group Inc.

The central bank currently buys 1.8 trillion yen ($20 billion) of the securities each month.

Deflation may provide an obstacle to raising interest rates even if the economy keeps growing. Japanese authorities will hold the key rate at 0.1 percent at least through the end of 2010, according to 14 of 16 economists surveyed this month.

Consumer prices excluding fresh food fell a record 2.2 percent in July, and policy makers are likely to forecast the slide will extend into 2011 in their twice-annual outlook next month. They consider prices to be stable within a range of zero to 2 percent.

“Japan’s consumer prices have been on a downward trend for a decade,” said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Chase & Co. in Tokyo. “Even if the economy achieves a moderate recovery, it’s difficult to expect expectations for deflation will wane anytime soon.”

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Federal Reserve Chairman Ben S. Bernanke said the worst U.S. recession since the 1930s has probably ended, while warning that growth may not be strong enough to quickly reduce the unemployment rate.

“Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time,” Bernanke said today at the Brookings Institution in Washington, responding to questions after a speech.

The remarks are Bernanke’s most explicit statement that the contraction that began in December 2007 is over. They echoed comments yesterday by San Francisco Fed President Janet Yellen and followed a report today showing retail sales rose last month by the most in three years, adding to evidence of a recovery.

“Unemployment will be slow to come down” if growth turns out to be “moderate” and not much more than the economy’s underlying potential, Bernanke said.

Stocks rallied after a report showing U.S. retail sales rose more than forecast reinforced evidence the recession is over. The Standard & Poor’s 500 Index rose 0.3 percent to 1,052.63. Asian shares also gained, with the MSCI Asia Pacific Index up 1.1 percent at 9:50 a.m. in Tokyo. Treasuries were little changed, with 10-year yields at 3.45 percent.

‘Exceptionally Low’

The central bank has kept the benchmark lending rate as low as zero since December and in August said “exceptionally low” rates are likely warranted for “an extended period.”

The policy-setting Federal Open Market Committee also said in its Aug. 12 statement that there were signs that “economic activity is leveling out.” The Fed’s Beige Book report last week said that 11 of its 12 regional banks reported signs of a stable or improving economy in July and August.

Yellen said in a speech yesterday that the U.S. summer “likely marked the end of the recession, and the economy should expand in the second half of this year. A wide array of data supports this view.”

The unemployment rate reached 9.7 percent in August, a quarter-century high, and employers have eliminated almost 7 million jobs since the recession started, the biggest drop in any post-World War II economic downturn. Banks worldwide have recorded more than $1.6 trillion of losses and writedowns since the start of 2007, data compiled by Bloomberg show.

Mortgage Purchases

The central bank in March authorized $1.45 trillion in purchases of mortgage-backed securities and other housing debt this year. Policy makers decided last month to taper off a $300 billion program buying U.S. Treasuries through October, while debating a similar move for MBS purchases. Bernanke convenes the next meeting of Fed policy makers Sept. 22-23 in Washington.

The economy will rebound at a 2.3 percent pace next year, according to the median estimate in a Bloomberg News survey of economists. The growth rate won’t be fast enough to lower the unemployment rate below 9 percent, the economists predict.

“The chairman got it about right,” Glenn Hutchins, co- founder and co-chief executive of Silver Lake, a private investment firm with $13 billion under management, said on a panel following Bernanke’s speech.

“We are experiencing stability both in financial markets and underlying corporate performance,” he said. “But the overwhelming sense of market participants right now is that we are at a very low level of activity.”

NBER Role

Before becoming a central banker, Bernanke, a former Princeton University economics professor, served on the National Bureau of Economic Research’s business-cycle dating committee, the group that determines the dates of U.S. recessions.

Stanford University Professor Robert Hall, the panel’s current chairman, said in August that declaring the recession over may take more than a year because of the risk that recent signs of stabilization will prove short-lived.

Sales at U.S. retailers rose 2.7 percent last month, led by a jump in auto purchases as consumers took advantage of the government’s “cash-for-clunkers” program. The increase exceeded the median forecast of economists surveyed by Bloomberg News and followed a 0.2 percent drop in July, Commerce Department figures showed today in Washington.

Responding to a separate question, Bernanke said he’s “pretty optimistic” on chances for an overhaul of financial regulations given a crisis that was “too big a calamity” to ignore. “I feel quite confident that a comprehensive reform will be forthcoming,” Bernanke said.

Congress is preparing the biggest overhaul of U.S. financial regulations since the 1930s, when the Fed was reorganized. The U.S. Treasury proposes to give the Fed greater authority over the capital, liquidity, and risk-management standards at the largest financial firms. Congressional leaders haven’t supported that proposal and are considering giving broader authority to a council of regulators.

“The problem we had in part was the lack of systemic oversight,” President Barack Obama said in an interview with Bloomberg News yesterday. “We want to have a systemic-risk regulator,” he said, adding that “the Fed is best equipped to do this.”

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The U.S. Treasury Department and Citigroup Inc. have begun discussing how to sell the 34 percent stake that the government acquired in the rescue of the bank, people familiar with the matter said.

The Treasury, which owns about 7.69 billion common shares after a recent stock conversion designed to shore up the bank’s capital, may start unloading the stake as soon as October, said one of the people. It aims to sell the holdings over the next six to eight months, the person said.

While the Treasury hasn’t developed a formal plan for the sale, it is considering options, the people said. Under one scenario, the shares would be sold to public investors in blocks over six to eight months. Or the government may sell a small amount of stock daily or weekly, said the people, who declined to be identified because the talks are private. Under a third option, the shares would be sold at once in a managed offering.

The Obama administration has begun efforts to wind down the government’s $700 billion financial rescue program. The Treasury purchased the stock at $3.25 a share, giving U.S. taxpayers a paper profit of about $9.77 billion based on today’s closing stock price of $4.52.

Citigroup’s bailout last year was valued at $52 billion. Even after a share sale, the government would retain a $27 billion investment. That stake is denominated in trust-preferred shares — a class of securities that ranks senior to common stock and junior to most debt.

Treasury spokesman Andrew Williams and Susan Thomson, a spokeswoman for New York-based Citigroup, declined to comment.

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The U.S. government’s auto trade- in program probably lifted retail sales in August to their biggest gain in more than three years and boosted factory output, economists said before reports this week.

Total purchases climbed 1.9 percent, the most since January 2006, according to the median of 60 estimates in a Bloomberg News survey ahead of Commerce Department figures due Sept. 15. The Obama administration’s “cash for clunkers” plan also helped industrial production in August to its first back- to-back monthly increase since 2007, economists said.

Americans flocked to auto showrooms last month to take advantage of the incentive program while purchases of other items were subdued even as evidence mounts that the worst recession since the Great Depression is ending. With unemployment forecast to reach 10 percent by the end of the year, consumer spending likely won’t lead the recovery.

“When you get to the fourth quarter, the blip from cash- for-clunkers falls out,” said Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts. “The production recession is over and the housing recession is over. When you combine those two, they add up to a fair amount of traction in the overall economy.”

Excluding automobiles, retail sales probably rose 0.4 percent, economists said.

The recession “has brought on a new focus on frugality,” Mike Duke, chief executive officer for Wal-Mart Stores Inc., said last week at a conference in New York. “Clearly customers are watching every penny.” The world’s largest retailer is offering discounts to attract shoppers, Duke said.

Beige Book

In the Federal Reserve’s Beige Book business survey, published two weeks before officials meet to set monetary policy, the central bank reported “flat” retail sales in July and August and cited some auto-industry contacts as saying the cash-for-clunkers effect may be temporary. Factories, meanwhile, showed “modest improvements” in most regions, the Fed said.

The auto plan, which ended Aug. 24, offered buyers discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles. The program produced almost 700,000 purchases, the Transportation Department said.

Cars and light trucks sold at a 14.1 million annual pace last month, up 25 percent from July, according to industry figures instant credit report. It was the biggest gain since October 2001.

Industrial Production

Last month General Motors Co. called back 1,350 union workers, its biggest one-time increase in jobs since 2006, as it ramped up second-half production in part to meet demand linked to the government trade-in program.

The Fed’s measure of production, due Sept. 16, probably rose 0.6 percent, the most since October, according to the survey. The report may also show the proportion of plant capacity in use in the U.S. climbed to 69.1 percent, the highest in five months.

Manufacturing in the New York region posted its first back-to-back monthly expansion since January 2008, economists said before a report due Sept. 15. The New York Fed’s general economic index likely climbed to 15 this month from 12.1 in August, according to the survey.

The housing market also is showing early signs of a rebound. A Commerce Department report due Sept. 17 will show builders broke ground on 600,000 new homes last month at an annual rate, a 3.3 percent gain and the fastest pace since November, according to the survey median.

The Standard & Poor’s homebuilder supercomposite index has gained 35 percent since the beginning of the year, compared with 15 percent for the broader S&P 500 index.

‘Ups and Downs’

With the jobless rate at a 26-year high and 6.9 million job losses since the recession began in December 2007, policy makers are trying to temper expectations for a robust economic turnaround. Treasury Secretary Timothy Geithner last week said the government is moving to withdraw some of its support for financial markets, while cautioning that the recovery will have “more than the usual ups and downs.”

The economy will expand at a 2.9 percent annual rate in the July-through-September period, according to the median of 61 estimates in a monthly Bloomberg News survey. Growth is projected to slow to a 2.2 percent pace during the last three months of the year.

The world’s largest economy contracted 1 percent in the second quarter, the Commerce Department said last month, the fourth straight quarterly drop. That made the downturn the longest contraction since such records began in 1947.

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An overhaul of U.S. financial regulations remains a priority for President Barack Obama and can be achieved this year along with a plan to fix the health- care system, White House economic adviser Lawrence Summers said.

Summers, director of the National Economic Council, said new rules are needed to prevent future financial crises that “have been too large a feature on our economic landscape.”

“This is the year, after what has happened, to overhaul the system of financial regulation,” Summers told reporters today in Washington.

One year after the collapse of Lehman Brothers Holdings Inc. paralyzed credit markets and contributed to the worst recession in more than 70 years, the Obama administration is stepping up efforts to sell a plan sent to Congress in June that rewrite the rules governing the financial system.

Obama will travel Sept. 14 to Wall Street in New York, where he will again make the case for tougher financial supervision, Summers said.

“He did not come here only to respond to crises or to repair that which had recently broken,” Summers said. “He came to address much longer standing economic issues.”

Obama has proposed new regulations overseeing the systemic risk posed by large financial institutions to the financial system, the creation of new government powers to dismantle failed companies and a new agency to oversee consumer financial products.

The financial regulatory proposal has been overshadowed on Capitol Hill by efforts to overhaul the U.S. health-care industry, which have dominated the attention of congressional leaders for much of the past few months.

Health-Care Debate

Summers said it’s possible for Congress to continue work on financial regulations during the health-care debate.

“The president famously said during the campaign that to be president you have to be able to do more than one thing at once,” Summers said. “I think that same idea applies to the 535 members of the Congress.”

The House Financial Services Committee is planning hearings over the next two months on financial regulations followed by committee consideration of legislation later this year. The Senate Banking Committee has held a series of hearings on the issue and its staff is in the process of drafting legislation.

“It is very important to pass financial regulatory reform this year,” Summers said.

Obama has proposed giving more power to the Federal Reserve to oversee large financial institutions, something that faces opposition from lawmakers who blame the central bank for failing to anticipate last year’s financial crisis.

Fed’s Authority

Summers said there are discussions about how much more power to give the Fed without saying how it may interact with other regulators.

“There’s a huge amount of detail in the working-out of legislation of this kind,” Summers said. “We’ve seen the Fed as the natural place for systemic regulation, but systemic risk regulation has a number of elements.”

“Proposals are never enacted as they are first submitted,” he added.

Summers said the unemployment rate of 9.7 percent, the highest in 26 years, is “unacceptably high” and “will on all forecasts remain unacceptably high for a number of years.”

Stimulus Effects

A White House report released Sept. 10 said the $787 billion economic stimulus program has created or saved 1.1 million jobs since its implementation in February. Since the slump began in December 2008, the U.S. has lost 6.9 million jobs.

Summers said the improving economy is helping the government recoup some of the investments it has made through the Troubled Assets Relief Program, with some individual transactions yielding a profit for taxpayers.

Even so, Summers said, “on the overall uses of the TARP I don’t think it would be reasonable to expect profits, in part because some of them are directed at objectives where repayment really isn’t the objective, such as the subsidies to homeowners to avoid foreclosure.”

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Confidence among U.S. consumers rose more than forecast in September as the pace of job losses slowed and the economy showed signs of pulling out of the recession.

The Reuters/University of Michigan preliminary index of consumer sentiment increased to 70.2 this month from 65.7 in August. The index was forecast to rise to 67.5, according to a Bloomberg survey of economists. A government report today showed inventories at U.S. wholesalers fell in July as higher sales helped distributors reduce excess supply.

Americans are starting to grow more upbeat after suffering the biggest destruction of wealth on record from a slump in stocks and home prices and companies are ramping up production to replenish stockpiles. Consumers may still be wary of increasing the spending that makes up 70 percent of the economy as they focus on building savings and paying down debt.

“We can be encouraged that consumer sentiment is healing,” said Jonathan Basile, an economist at Credit Suisse Holdings USA Inc. in New York, which at 70 had the closest forecast in the Bloomberg survey. “Good news continues to come through, bad news continues to diminish. It’s better, but it’s not good yet.”

The University of Michigan measure of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars and homes, rose to 71.8 from 66.6.

The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, increased to 69.2 from 65 in August.

Stocks Fell

Stocks fell after the reports. The Standard & Poor’s 500 Index closed down 0.1 percent from yesterday at 1,042.73 in New York. Earlier, the index had gained as much as 0.4 percent.

Gap Inc., Limited Brands Inc. and American Eagle Outfitters Inc. on Sept. 3 reported smaller August sales declines than analysts had forecast. San Francisco-based Gap, which also operates Old Navy and Banana Republic stores, said sales at outlets open at least a year fell 3 percent. Limited said its sales dropped 4 percent and American Eagle reported a 7 percent decline.

Starbucks Corp., the world’s largest coffee shop operator, said Sept. 9 it is removing 30 U.S. stores from a list of locations it planned to close after sales and profits improved. The Seattle-based company had planned to shutter about 800 U.S. stores and about 160 international cafes.

Wholesale Inventories

A Commerce Department report showed wholesalers’ stockpiles fell by a greater-than-forecast 1.4 percent in July, after a revised 2 free credit reports.1 percent drop in June. Wholesale inventories have had the longest series of declines since records began in 1987. Sales rose 0.5 percent, the third straight gain.

Investment in new equipment and other orders for long- lasting items may help boost U.S. gross domestic product and lead the economy out of the recession, President Barack Obama’s chief economist said today.

“I’m very encouraged by what we’re seeing, for example, in those advanced durable goods orders,” Christina Romer, chairman Christina Romer, chairman of the White House’s Council of Economic Advisers, said in an interview on Bloomberg Television. “Eventually, firms are going to say we need workers to produce these things.”

A Labor Department report today showed prices of goods imported into the U.S. rose in August for the fifth time in six months, led by petroleum costs. Prices excluding fuels rose 0.4 percent. Export prices rose 0.7 percent, indicating overseas demand is also starting to recover.

Growth Forecasts

The U.S. this quarter will emerge from the worst recession since the 1930s, economists say. The economy will grow at a 2.9 percent annual rate from July through September, according to the median of 61 estimates in a monthly Bloomberg News survey.

A Labor Department report last week showed the pace of job losses slowed in August, even as the unemployment rate rose to a 26-year high of 9.7 percent. Companies cut payrolls by 216,000 workers, after a 276,000 drop in July.

The number of Americans filing first-time claims for jobless benefits dropped last week to the lowest level since July, the Labor Department said yesterday. Applications fell by 26,000 to 550,000 in the week ended Sept. 5.

The economic recovery will probably be “lackluster,” hobbled by strains in financial markets and weak consumer spending, Federal Reserve Bank of Atlanta President Dennis Lockhart said yesterday.

The Federal Reserve said Sept. 9 that 11 of its 12 regional banks reported signs of a stable or improving economy in July and August. Five districts, including San Francisco, home to the biggest regional economy, “mentioned signs of improvement,” the Fed said in its Beige Book business survey.

Even so, “consumer spending remained soft in most districts,” according to the Fed report. “Loan demand was described as weak, and many districts reported that credit standards remained tight.”

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U.S. Treasury Secretary Timothy Geithner said the government is moving to withdraw some of its support for financial markets and cautioned that the recovery will have “more than the usual ups and downs.”

“As we enter this new phase we must begin winding down some of the extraordinary support we put in place,” Geithner told the Congressional Oversight Panel that monitors the $700 billion financial-rescue program. “We are now in a position to evolve our strategy as we move from crisis response to recovery, from rescuing the economy to repairing and rebuilding the foundation for future growth.”

Almost a year after Lehman Brothers Holdings Inc. filed for bankruptcy, Treasury officials are trying to portray their efforts to stabilize the banking system as a success and lay the groundwork for an economic recovery. Geithner said the rebound in growth won’t be quick, and he urged passage by year end of legislation to toughen oversight of financial markets.

“Given the extent of damage done to the financial system, the loss of wealth for families and the necessary adjustments after a long period of excessive borrowing around the world, it is realistic to assume recovery will be gradual, with more than the usual ups and downs,” he said.

Capital Injections

The Obama administration inherited the Troubled Asset Relief Program from the Bush administration, which used it to make capital injections into banks after scrapping an earlier plan to buy troubled assets directly. Since last year, the Treasury has invested more than $200 billion in U.S. banks; as of Sept. 4, the Treasury had received $70.4 billion in repayments.

Banks that have repaid the government include Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, according to a Treasury tally.

The Treasury expects another $50 billion to be repaid in the next year to 18 months, Geithner said.

In response to questions from members of the panel, Geithner tempered his optimism by saying that “we are not close to being through this” crisis. Even so, a banking system with “much more capital” is better insulated against losses and a weakening economy, he said.

Geithner refused to rule out extending the bailout program when it expires at the end of this year. The law, passed last October, allows the Treasury secretary to keep it running for another nine months if it is “necessary to assist American families and stabilize financial markets.”

Extending TARP

The Obama administration “is going to think that through very carefully,” Geithner said, adding that some of the efforts, such as mortgage relief, are likely to continue past Dec. 31. “The classic mistake people make is they declare victory too soon,” he told the panel.

The Treasury will continue to pursue programs that have not yet started, such as its plans to buy small-business loans and to remove toxic assets from bank balance sheets through the Public-Private Investment Program, a Treasury official told reporters earlier today on condition of anonymity. The first PPIP funds are expected to begin operating later this month or in October, the official said.

Other, unused programs will be allowed to expire, including a program guaranteeing money-market mutual funds and the Capital Assistance Program, which was established earlier this year to provide extra money to banks that needed it and couldn’t access private markets.

‘Move Cautiously’

“We can plan to reduce the government’s direct involvement in the financial system, but we must move cautiously or risk a relapse,” the Treasury said in a document distributed at the briefing in Washington.

The Treasury also has pledged TARP money for a range of other programs, from foreclosure-prevention efforts and auto- company assistance. The Treasury plans to move forward with its housing programs and is also looking at ways to help small banks through the economic downturn, the official said.

This year, the department will press Congress to pass the Obama administration’s regulatory agenda, intended to tighten supervision of financial firms that could pose a systemic risk. The future of Fannie Mae and Freddie Mac, the two government- backed mortgage companies currently in conservatorship, won’t be tackled until next year, the official said.

Geithner, 48, said that when he took office in January, the government had outstanding commitments of capital in the banking system totaling about $240 billion. That figure now is about $180 billion, he said.

Sustained Recovery

“All these steps underscore our commitment to unwind these extraordinary programs put in place during the crisis as soon as conditions permit,” the Treasury secretary said. “At the same time, though, we have to recognize that we have to continue to reinforce this process of repair and recovery until it is truly self-sustaining, led by private demand.”

The Treasury expects that unemployment may rise, financial system losses will continue and 6 million families could face foreclosure over the next three years, according to the document provided to reporters.

“Despite having pulled back from the brink, the nation still faces serious challenges,” the Treasury said.

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The Federal Reserve said 11 of its 12 regional banks reported signs of a stable or improving economy in July and August, adding anecdotal evidence that the worst U.S. recession in seven decades is over.

Five districts, including San Francisco, home to the biggest regional economy, “mentioned signs of improvement,” the Fed said today in its Beige Book business survey, published two weeks before officials meet to set monetary policy. The exception was the St. Louis district, which said the contraction’s pace “appeared to be moderating.”

The central bank survey indicates that while the worst of the downturn may be past, the economy has yet to show broader growth. The Fed reported “flat” retail sales and “weak” labor markets, and cited some auto-industry contacts as saying the sales increases from government “cash-for-clunkers” subsidies may be temporary.

“We are slowly on the road to recovery,” former Fed Governor Robert Heller said in an interview with Bloomberg Television. The Beige Book “confirms that we have turned the corner,” he said.

The Standard & Poor’s 500 Index increased 0.5 percent to 1,030.20 at 2:40 p.m. in New York after rising as much as 1.1 percent.

The outlook among many business contacts was “cautiously positive,” the Fed said. “Loan demand was described as weak, and many districts reported that credit standards remained tight.”

Phase Out

The Fed report reflects information collected through Aug. 31 and summarized by staffers at the Atlanta Fed. The Federal Open Market Committee next meets in Washington Sept. 22-23. At their prior meeting in August, officials decided to phase out their $300 billion Treasuries-purchase program through the end of October, extending buying by one month, and considered a similar move for the $1.45 trillion program to buy housing debt.

The Fed lowered its main interest rate almost to zero in December while switching to asset purchases and credit programs as its main policy tools. Investors expect the central bank to begin raising rates next year, according to trading in futures contracts.

Gross domestic product shrank at a 1 percent annual rate from April to June, following a 6.4 percent pace of contraction in the first three months of the year.

Chicago Fed President Charles Evans said in remarks in New York today that the economic recovery is “beginning to start” and he expects growth of 2 free credit report.5 percent to 3 percent over the next 18 months. At the same time, the jobless rate will rise, peaking at a “little over 10 percent” and staying “high for an uncomfortable period of time.”

Low Levels

A chief exception to the Beige Book’s reports of stabilization was the market for commercial real estate. Demand for space “remained weak,” and construction, already at “very low levels,” kept declining in all districts, the Fed said.

Fed officials expressed concern about the commercial property market at last month’s policy meeting. “Several participants noted that banks still faced a sizable risk of additional credit losses and that many small and medium-sized banks were vulnerable to deteriorating performance of commercial real estate loans,” minutes of the session said.

The residential housing market, by contrast, “remained weak” while showing “signs of improvement,” including higher sales in some areas, the Fed said. Pending sales of existing homes rose more than forecast in July, according to a report last week.

‘Cautiously Optimistic’

Manufacturing showed “modest improvements” in most regions, the Fed said today. Companies were “cautiously optimistic,” with New York among three districts reporting that contacts “expect modest growth later this year or early 2010.”

A recent report showed that in August, manufacturing expanded in the U.S. for the first time in 19 months.

Capacity utilization, the proportion of factory volume in use, remains near its historic low. It rose in July to 68.5 percent from 68.1 percent in June, its lowest level since record-keeping began in 1967.

The labor market “remained weak across all districts,” while some regions reported an “uptick in temporary hiring and a decline in the pace of layoffs,” the Fed said.

That reflects last week’s Labor Department report that employers cut payrolls by 216,000 in August, after a 276,000 drop in July. The jobless rate, at 9.7 percent, is the highest since June 1983, when it registered 10.1 percent. The so-called underemployment rate — which includes part-time workers who’d prefer a full-time position and people who want work but have given up looking — reached a record 16.8 percent.

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U.S. consumer credit plunged more than five times as much as forecast in July as banks restricted lending terms and job losses made Americans reluctant to borrow.

Consumer credit fell by a record $21.6 billion, or 10 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $15.5 billion in June, more than previously estimated. Credit fell for a sixth month, the longest series of declines since 1991.

The credit crunch, stagnant incomes and declines in household wealth are casting doubt on the strength of the economic recovery. The arrival of the government’s “cash for clunkers” program in late July wasn’t enough to keep credit that covers car loans from plummeting by a record amount, as consumers delayed other purchases.

“Lenders are restricting access to credit because risk has increased and that is intersecting with households reducing their leverage,” said Richard DeKaser, chief economist at Woodley Park Research in Washington, whose forecast of a decline of $12 billion was the most pessimistic among economists surveyed. “Cash-for-clunkers is to some extent shifting demand from one place to another, not creating it.”

Economists had forecast consumer credit would drop $4 billion in July, according to the median of 31 estimates in a Bloomberg News survey. Projections ranged from declines of $12 billion to no change from the previous month. The Fed initially said consumer credit decreased by $10.3 billion in June.

Credit Cards

Revolving debt, such as credit cards, fell by $6.1 billion in July, the Fed report showed. Non-revolving debt, including loans for automobiles and mobile homes, plunged by $15.4 billion. The Fed’s report doesn’t cover borrowing secured by real estate.

Consumer spending rose 0.2 percent in July, following a 0.6 percent increase in June, government data showed on Aug. 28. Excluding cars, purchases were little changed.

Incomes were unchanged in July after dropping 1.1 percent in the prior month. The decrease in income in June reflected the fading boost from government stimulus-related tax cuts and transfers. Wages and salaries posted the first gain of the year in July, increasing 0.1 percent after dropping 0.3 percent.

Tighter Standards

Plunging home values and stock prices have fueled a record $13.9 trillion loss in household wealth in the U quick payday loans.S. since the middle of 2007.

U.S. banks tightened standards on all types of loans in the second quarter and said they expect to maintain strict criteria on lending until at least the second half of 2010, a Federal Reserve report showed on Aug. 17.

Most banks cited reduced risk tolerance and “a more uncertain economic outlook” as the main reasons for restricting credit to businesses, with 35.2 percent saying they “tightened somewhat,” the Fed said in its quarterly Senior Loan Officer survey.

Since the survey, economists have raised their outlook for economic growth as data suggested home sales and manufacturing were stabilizing, and the Fed has said that the economy is “leveling out.”

Jobless Rate

A Labor Department report last week showed payrolls in August fell the least in a year. At the same time, the jobless rate rose to the highest in 26 years, a reminder that hiring will take longer to rebound, restraining consumer spending.

The economy has lost 6.9 million jobs since the recession began in December 2007, the biggest drop in any post-World War II economic downturn.

Credit-card defaults fell in July after breaking records for five straight months, according to Fitch Ratings statistics released on Aug. 31. Charge-offs, the cost of loans that card issuers have given up on collecting, fell to 10.55 percent as consumer credit quality showed “signs of life,” Fitch said.

Defaults are less likely to rise in the fourth quarter, as they typically do, as delinquencies stabilize and monthly payment rates improve, according to Fitch.

“The economic situation may have caused some front- loading of losses this year,” analyst Cynthia Ullrich said Aug. 31 in a statement accompanying the release of Fitch’s Prime Credit Card Charge-off Index.

Sales of cars and light trucks rose to an 11.3 million annual pace in July, according to Woodcliff Lake, New Jersey- based industry research firm Autodata Corp, in part because of the government’s trade-in incentive program. Sales increased again in August to a 14.1 million annual pace, the highest since May 2008. That compares with February’s 9.1 million rate, which was the lowest since 1981.

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European Central Bank President Jean-Claude Trichet, who chaired a meeting of central bankers today, said the global economy is showing signs of emerging from its worst recession in more than 60 years.

Latest indicators have been better than anticipated and stabilization is “something which seems to be confirmed at the global level,” Trichet said at a press conference at the Bank for International Settlements in Basel, Switzerland. “It’s not excluded that we would have a bumpy road ahead and of course alertness remains of the essence,” he said.

Central bankers have cut borrowing costs to record lows and injected billions into the financial system after the U.S. housing slump triggered the collapse of Lehman Brothers Holdings Inc a year ago, throwing the global economy into its worst slump since the Great Depression. Governments are also trying to kick- start growth with stimulus packages.

The Organization for Economic Cooperation and Development said on Sept. 3 that the combined economy of the Group of Seven nations will shrink 3.7 percent this year, less than the 4.1 percent contraction it projected in June. The U.S., Japan, Germany and France will all show growth in the current quarter while Canada and the U.K. will continue to shrink, the Paris- based group forecast.

Free Fall Over

“A number of projections had been slightly revised up, confirming that we’re probably, in a large part of the economy, out of the period of free fall,” Trichet said. Still, “we have to remain prudent and cautious.”

Trichet met in Basel with his counterparts from the world’s largest central banks including Bank of Japan Governor Masaaki Shirakawa and China’s central bank governor, Zhou Xiaochuan.

While some policy makers have stressed the need to withdraw emergency measures as soon as the economy improves in order to prevent inflation, the Federal Reserve, the Bank of England, the Bank of Japan and ECB are still in the process of implementing asset-purchase programs in a bid to encourage lending. The ECB on Sept. 3 kept its key rate at a record low of 1 percent after loaning banks as much money as they wanted for 12 months and starting to purchase covered bonds.

Trichet said there’s “a great unity of purpose” among central bankers to deliver price stability. “This unity of purpose doesn’t mean that we do the same because we’re in different situations,” he said.

‘Lessons’

Central banks and governments around the world are seeking tougher regulation after excessive risk-taking by financial institutions sparked $1.61 trillion in losses and writedowns and led to taxpayer-funded bailouts.

The Basel Committee on Banking Supervision yesterday agreed lenders should raise the quality of their capital by including more stock. Financial firms will also have to introduce a leverage ratio and devise ways to boost reserves when the economy is robust, the panel said.

Central banks and governments must “draw all the lessons from the past” in order to ensure that new bubbles aren’t created and “abnormal” risk-taking doesn’t re-emerge, Trichet said.

The Global Economy Meeting is held every two months under the auspices of the BIS, the central bank of the world’s central banks.

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