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Washington’s so-called "pay czar" Kenneth Feinberg cautioned lawmakers against extending his authority to the hundreds of other companies that accepted government bailout money.

Speaking before the House Committee on Oversight and Government Reform Wednesday, Feinberg said his recent review of executive pay packages at the seven biggest bailout firms was "justified" given the government’s massive stake in these companies.

Appointed by President Obama in June, Feinberg has spent the past five months carefully reviewing pay practices at those companies in order to both protect American taxpayers’ investment and position the firms to pay back bailout money as soon as possible.

Still, he indicated that intervening in how banks and other companies that accepted money under the Treasury Department’s Troubled Asset Relief Program, or TARP, would amount to nothing more than "micromanaging."

"That is where my authority should end," Feinberg said, according a copy of his prepared remarks before lawmakers. "I do not believe it necessary or wise to broaden my jurisdiction or make my legal authority more pervasive."

That sentiment was echoed by some lawmakers Wednesday who expressed concerns by the government’s unprecedented level of oversight into how workers in the private sector are paid.

"The successes of the past in America should not, in fact, be wiped away because of the sins of a few on Wall Street who perhaps, realizing that bulls and bears were both making money, decided to become pigs," said Rep. Darrell Issa, R-Calif., the ranking member for the committee.

Last week, the pay czar issued his first in what will be a series of rulings on compensation, ordering 50% pay cuts, on average, for 136 executives at AIG (AIG, Fortune 500), Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500), General Motors, its former finance arm GMAC, as well as Chrysler and Chrysler Financial.

Feinberg now turns to the pay plans for the next 75 most-highly paid employees at each firm . He also will need to review pay plans for 2010 for all seven companies.

Last week’s ruling only applies to compensation during the months of November and December but will serve as a base for determining how these executive are paid next year.

Feinberg warned Wednesday that issues like "grandfathered" retention contracts and other guaranteed forms of compensation could be particularly thorny issue in the months ahead.

"There will undoubtedly be new compensation issues which will confront us in 2010," he said.

He also faces the tough task of sorting through some $198 million in retention payments owed to workers in AIG’s Financial Products division, the unit that led to that company’s near collapse.

Feinberg said Wednesday that this issue remained a "top priority" for him and that he hoped to resolve it through negotiations with AIG in the coming months.

More pay changes to come?

There are also signs that Feinberg’s ruling is reviving the debate over whether lawmakers need to implement their own legislative constraints on pay.

One key proposal, which has the support of President Obama, would give shareholders at public companies a so-called "say on pay" for senior management by providing them a non-binding vote on executive pay packages.

Feinberg, a long-time Washington attorney who was thrust into the public spotlight earlier this decade after overseeing compensation payments to September 11 victims, said Wednesday the issue was "worthy of consideration" by lawmakers.

One key hope, however, was that other companies on Wall Street and across corporate America, would use his pay ruling as a model for how they reward employees going forward.

"Hopefully the model that is created in my report will trickle and expand beyond these seven companies," he said. 

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Sales of new U.S. homes unexpectedly fell in September as the end of a tax credit for first-time homebuyers approached, highlighting the importance of government aid to the emerging economic recovery.

Purchases dropped 3.6 percent to a 402,000 annual pace that was lower than the most pessimistic economist’s forecast, according to Commerce Department figures issued today in Washington. Other data showed orders for durable goods climbed 1 percent in September, the fourth gain in the last six months.

Stocks fell as the home-sales report reinforced concerns a recovery from the worst recession since the 1930s may cool after programs such as the $8,000 tax credit and Federal Reserve purchases of mortgage-backed securities expire. Economists say a recovery in housing is a key to rebuilding the confidence and finances of American consumers, whose spending makes up 70 percent of the world’s largest economy.

The drop in sales “does raise some questions about where the housing market is going to be in six months, arguably without any more support,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. “Whatever you think about the economy, it’s not going to be a straight line” toward recovery.

The Standard & Poor’s 500 Index declined 1.1 percent to 1,051.86 at 11:57 a.m. in New York, extending a global slump. The S&P Homebuilder Supercomposite Index, which includes companies such as Lennar Corp. and KB Home, dropped 4.2 percent to 243.63.

New-home sales were forecast to rise to a 440,000 annual rate, according to the median forecast of 75 economists in the Bloomberg survey. Estimates ranged from 412,000 to 460,000 after an initially reported 429,000 rate the prior month.

Possible Extension

Sales of new homes, which make up less than 10 percent of the market, are tabulated when a contract is signed. Purchases of existing homes, which account for the remainder, are counted when transactions close and thus reflect contracts signed a month or two earlier.

Contracts signed last month to buy a new house may not be able to close before the tax credit expires at the end of November. A proposal to extend the credit as part of an unemployment-benefits measure has significant support, Senate Majority Leader Harry Reid said today.

Previously owned homes in September sold at a 5.57 million pace, up a record 9.4 percent from the prior month, the National Association of Realtors reported last week. The level of sales was the highest in more than two years.

Lower Prices

The median price of a new house fell to $204,800, compared with $225,200 at the same time last year. The value was up 2.5 percent from the prior month, reflecting a plunge in the share of houses selling for less than $150,000, a category that often includes first-time buyers payday advance lender.

Sales fell 11 percent in the West and 10 percent in the South. Purchases in the Midwest jumped 34 percent and were unchanged in the Northeast.

Builders had 251,000 houses on the market last month, the fewest since November 1982. It would take 7.5 months to sell all homes at the current sales pace, the same as in August.

A report from the Commerce Department tomorrow may show the economy grew at a 3.2 percent annual pace last quarter, according to the median estimate of economists surveyed. It would be the first positive reading in more than a year and the strongest performance since the third quarter of 2007. Growth is forecast to slow to a 2.4 percent pace in the fourth quarter.

‘Temporary Factors’

“Much of the strength in the economy is due to temporary factors such as fiscal stimulus initiatives like the home- buyers credit,” said Dana Saporta, an economist at Stone & McCarthy Research in Skillman, New Jersey.

Fed policy makers meeting next week are likely to repeat their commitment to keeping interest rates low for an “extended period.” The Fed last month decided to slow purchases of $1.25 trillion in mortgage-backed securities while extending the end-date of the program by three months, to March 31.

The gain in durable goods orders illustrates how manufacturers such as Caterpillar Inc. are benefiting from $2 trillion in global stimulus spending.

The 1 percent increase in bookings for goods meant to last several years matched the median estimate of economists surveyed by Bloomberg News and followed a 2.6 percent drop the prior month.

Better Forecast

Caterpillar, the world’s largest maker of bulldozers and excavators, issued a full-year profit forecast exceeding the highest prediction from analysts. Peoria, Illinois-based Caterpillar is considered a bellwether for its ties to construction and mining and its overseas presence.

“We are seeing encouraging signs that indicate a recovery may be under way,” Chief Executive Officer Jim Owens said in a statement on Oct. 20. “We’ve already started planning for an upturn.”

Shipments for non-defense capital goods excluding aircraft, used in calculating gross domestic product, fell 0.2 percent in September. For the quarter, such shipments dropped at a 1.9 percent annual pace compared with a 14 percent plunge in the prior three months, indicating business investment stabilized after plunging over the past four quarters.

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Sales of existing U.S. homes surged a record 9.4 percent in September as Americans rushed to take advantage of a tax credit for first-time buyers before it expires next month.

Purchases rose to a 5.57 million annual rate, more than forecast and the highest in more than two years, the National Association of Realtors said today in Washington. The median price fell at the slowest pace in a year as the number of houses on the market shrank.

While sales may cool unless Congress decides to extend the $8,000 credit due to expire Nov. 30, lower prices and mortgage rates have also made houses more affordable and may cushion any decline. Smaller price decreases show the market is stabilizing as demand improves, easing the strain on consumer finances that deepened the worst recession since the 1930s.

“The excess supply of unsold homes has declined a lot and this reduces the downward pressure on home prices,” said Harm Bandholz, an economist at UniCredit Global Research in New York. “An improvement in house prices is an important condition for an increase in housing wealth and therefore higher willingness of households to start spending again.”

Stocks retreated, wiping out the week’s gains, as a decrease in oil prices hurt energy shares and disappointing results from the largest U.S. railroad hurt industrials. The Standard & Poor’s 500 Index closed down 1.2 percent at 1,079.60 in New York.

Record Gain

The September increase in combined sales of single-family houses and condominiums was the biggest since comparable records began in 1999.

Existing home sales were forecast to rise to a 5.35 million annual rate, according to the median forecast of 76 economists in a Bloomberg News survey. Estimates ranged from 5 million to 5.6 million, after an initially reported 5.1 million rate in August. Resales reached a 4.49 million pace in January, their lowest level since comparable records began in 1999.

Purchases of existing homes were up 9.2 percent compared with a year earlier. The median price fell to $174,900, down 8.5 percent from a year ago and the smallest decrease in 13 months.

The number of previously owned homes on the market dropped 7.5 percent to 3.63 million in September. At the current sales pace, it would take 7.8 months to sell those houses, the lowest level since March 2007. A seven months’ supply is usually consistent with stabilization in prices, NAR chief economist Lawrence Yun said in recent months.

Distressed Sales

The share of homes sold as foreclosures or otherwise distressed properties was 29 percent in September from 31 percent in August, Yun said.

Today’s report showed sales of existing single-family homes climbed 9.4 percent, the biggest gain since 1986, to an annual rate of 4.89 million. Sales of condominiums and cooperatives increased 9.7 percent to a 680,000 rate.

Purchases increased in all four regions, led by a 13 percent surge in the West. Purchases climbed 9.6 percent in the Midwest, 9 percent in the South and 4.4 percent in the Northeast.

Purchases of previously owned homes, which make up more than 90 percent of the market, are tabulated when sales close and therefore reflect contracts signed a month or two earlier. Sales of newly built residences, which make up the rest, are counted when a contract is signed, and may therefore cool months before the tax credit expires. Buyers must close before the Nov. 30 deadline to be eligible for the tax credit.

Extend Credit

Last month’s sales were “heavily dependent” on the tax credit, the NAR’s Yun said in a press conference.

The Realtors’ group and the National Association of Home Builders are lobbying to extend the first-time homebuyers credit on concern demand will wane after it lapses. Lawmakers this week took up the call.

“The work of stabilizing the housing market won’t be done” when the credit expires next month, Senate Banking Committee Chairman Christopher Dodd said during a panel hearing. “We still need to use every tool at our disposal to fix this problem.”

Dodd, a Democrat from Connecticut, and Republican Senator Johnny Isakson of Georgia, a former real estate agent, urged their colleagues to extend the credit through next June.

The Federal Reserve this week said its 12 district banks saw “stabilization or modest improvements” in many areas of the economy, led by housing and manufacturing. “Most districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle-priced houses,” the Fed said in its Beige Book of economic conditions in September and early October.

Housing-related companies are still trying to recover. USG Corp., North America’s largest maker of gypsum wallboard, posted its eighth straight net loss last quarter as sales dropped 32 percent from the same time last year.

“The residential housing market appears to have stabilized, but it has done so at a very low level,” Chief Executive Officer William Foote said Oct. 21 on a conference call with analysts.

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European Union nations should begin cutting budget deficits swollen by emergency government spending by 2011 “at the latest,” according to a draft of a statement to be issued after next week’s summit in Brussels.

“The bold policy response to the economic and financial crisis is now starting to bear fruit,” according to the draft, prepared by the Swedish government, which will chair the Oct. 29-30 meeting. “To anchor expectations and reinforce confidence, it is necessary to prepare a coordinated strategy for exiting” stimulus policies so that budget deficits are cut “beyond the benchmark 0.5 percent” of output, it said.

At least 20 EU governments, including those of Germany and the U.K., will breach the 27-nation bloc’s deficit ceiling of 3 percent of gross domestic product this year and next, the European Commission estimates. The EU’s average budget shortfall is forecast to be twice the limit both years.

The statement would be the first time EU leaders set a deadline to begin budget restraint since the region entered the recession last year. By doing so, the region’s governments are signaling their seriousness about trimming borrowing over time without choking off the nascent recovery next year, said Stephane Deo, chief European economist at UBS in London.

“A lot of people were worried that there would be tightening next year; now we know that that’s not going to happen,” he said. “Yet the current situation is totally unsustainable. You have to do fiscal tightening at some point” and 2011 is an “appropriate” time to do so, he said.

Deficit Spending

Deficit spending can only be successful in stabilizing the economy as long as financial markets and the public view it as temporary, the European Commission, the EU’s Brussels-based executive, said on Oct. 14. The commission forecasts that debt among the 16 nations using the euro will rise to 77.7 percent this year and 83.8 percent in 2010 from 69.3 percent last year.

“The new and main challenge is to get public finances in order as soon as possible after the crisis, and to prepare the social-security system for an aging population,” Alexander Kockerbeck, a senior European analyst at Moody’s Investors Service, said today in an interview.

At the same time, the EU is being careful not to stifle growth. The euro-area economy will shrink 4 percent this year, the commission estimated on Sept. 14. The latest forecast for 2010, issued in May, projects a 0.1 percent contraction.

Central Banks

“Support by governments and central banks should not be withdrawn until the recovery is fully secured,” according to the draft summit statement.

Even 2011 will be more of a turning point on deficits rather than a sudden about face on taxes or spending, Deo said.

“The next debate will be about whether this will cause a double dip in 2011,” he said. “I don’t think so because I don’t think politicians will all of a sudden jump on the breaks and kill the recovery. It’s more about smoothing this out over a number of years, about entering a phase of consolidation.”

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Bank of England Governor Mervyn King opened a rift with Prime Minister Gordon Brown’s government by signaling the biggest banks could be broken up to prevent taxpayers having to shoulder the cost of future bailouts.

King’s suggestion to separate investment banks from operations that take deposits from consumers and manage payment systems was ruled out by Chancellor of the Exchequer Alistair Darling as recently as yesterday.

“It’s clear King’s not happy with where we are now,” said Colin Ellis, an economist at Daiwa Securities SMBC and a former central bank official. “He said the regulatory structure was inadequate, and coming from the governor of the Bank of England that’s as damming as it could be. He’s saying something and advocating something the Treasury has decided not to do.”

It’s the second time in seven months that King has broken ranks with the government and sought to publicly discuss the direction of policy. King in March said Brown needed to tackle the budget deficit with greater urgency, a policy that has since become the centerpiece of the Conservative opposition’s agenda.

The Conservatives, who lead in U.K. opinion polls less than a year before the next election, embraced King’s remarks without saying how they’d rein in banks that are too big to fail. They have pledged to move financial regulation powers from the Financial Services Authority to the Bank of England if they win power and form the next government.

King ‘Persuasive’

“His analysis of how the government’s system for regulating banks failed and how there has been ‘little real reform’ since is one I share,” said George Osborne, the opposition lawmaker who speaks on finance, adding that King was “powerful and persuasive.”

King’s comments were meant to catalyze a debate within the Group of 20 nations about how to rein in banks that triggered the credit crisis, resulting in $2.4 trillion of credit losses and writedowns in the U.S., U.K. and Europe.

Britain’s four biggest banks — Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc, HBSC Holdings Plc and Barclays Plc — have the most at stake. Their lobby group is resisting talk about dividing the industry.

“The key issue is not one of breaking up banks but of financing the economy,” Angela Knight, chief executive officer of the British Bankers’ Association, said in an e-mail. “Big businesses may want big banks which offer a range of products and services while individuals may look to something smaller. Large universal banks are the way forward.”

G-20 Talks

The G-20, whose finance chiefs meet in two weeks for talks in Darling’s native Scotland, is focusing on pushing banks to raise capital and restrain pay rather than devising an international approach to curbing the size of banks. Darling is writing laws to make banks write a “living will” that enables a quick wind-down of institutions that fail.

“We’ve got to make sure that whatever we do, we do it that looks after the taxpayer interest here, that we have a strong and stable banking system, but also that action is taken in other parts of the world,” Darling said in response to a question on the issue after a speech in London today payday loans no fax.

Former Federal Reserve Chairman Paul Volcker and Nobel laureate Joseph Stiglitz are among those urging governments to curtail the size of banks or risk future crises. Barclays Chairman Marcus Agius told the Financial Times that restraining the banks would drive up credit costs and hurt the recovery.

‘Capital Will Walk’

“If the banks are overregulated and returns are regulated out then the capital will walk,” said Mike Trippitt, a London- based banking analyst at Oriel Securities Ltd. The ongoing debate over regulations are “muddying the water in terms of the investment decision,” he said.

King said yesterday that, while global efforts to bail out banks had prevented economic disaster, they had created “possibly the biggest moral hazard in history.” He said that it is “hard to see why” proposals such as those made by Volcker to separate proprietary trading from retail banking are “impractical.”

“What does seem impractical are the current arrangements,” King said. “Anyone who proposed giving government guarantees to retail depositors and other creditors and then suggested that such funding could be used to finance highly risky and speculative activities would be thought rather unworldly. But that is where we are now.”

Government Position

Brown, Darling and other ministers have repeatedly said such a split would have failed to prevent the collapse of Lehman Brothers Holdings Inc. or Northern Rock Plc.

“The difference between having a retail and investment bank is not the cause of the problem, the cause of the problem is that banking has not been sufficiently regulated,” Brown told lawmakers in London today.

“You regulate according to risk,” Darling said yesterday before King’s speech. “The greater the risk, the greater the capital requirement. I don’t think an arbitrary split would deal with the problem.”

Treasury Minister Paul Myners today dismissed suggestions of a rift with the central bank, saying legislation mapped out in July already makes provision for altering an institution’s structure to split its deposits from its investing operations.

“The governor and the government are in agreement,” Myners told BBC Television today.

Simon Lewis, a spokesman for Brown, said: “The governor of the Bank of England set out some interesting thoughts. That is fine. The most important thing is that we move forward so that we are protected for failures in the banking system.”

King’s comments carry additional weight because the Treasury is beefing up the Bank of England’s role in overseeing stability of the economy.

“The governor made the point in his speech last night that there are no simple answers to how you deal with banks that are large and complex,” Darling said today. “You cannot have a regulatory regime that excludes the risk of failure.”

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Treasury Secretary Timothy Geithner said the U.S. must reduce its record budget deficit as soon as the economy returns to a sustainable growth rate without relying on government assistance.

“Americans understand that we have to go back to living within our means as a country,” he said in an interview broadcast today on CNBC. “When we have an economy that’s growing again and we get unemployment down, we’re going to have to bring those deficits down.”

The U.S.’s 2009 budget gap widened to $1.42 trillion as the deepest recession since the 1930s crippled tax revenue and the administration increased spending to rescue the economy. The shortfall for the 12 months ended Sept. 30 was more than triple the $455 billion record set a year earlier, the Treasury Department said today in Washington.

Geithner cautioned that a lack of confidence that the U.S. will return to fiscal sustainability may lead to a weaker economic recovery, higher interest rates and constrained investment.

“That’s why deficits matter. That’s why deficits in the end can be very damaging to growth,” he said. “That’s why you cannot live with future deficits as large as ours are likely to be.”

The Treasury chief said he hasn’t decided yet whether to extend the $700 billion Troubled Asset Relief Program, adding that it’ll be important to businesses and the housing market that the government has the ability to “continue to put in place programs to help make sure they get credit.”

Asked whether tax cuts enacted during the Bush administration should be allowed to expire next year, he said, “it does not make sense to raise taxes in a recession” and that “getting growth on track led by the private sector is still our most important priority.”

Geithner also said he sees a “good case” for Congress to pass legislation extending unemployment benefits.

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The U.S. Treasury Department criticized China for the “lack of flexibility” of the yuan and a buildup of foreign-exchange reserves while stopping short of branding the nation a manipulator of its currency.

“The recent lack of flexibility of the renminbi exchange rate and China’s renewed accumulation of foreign-exchange reserves risk unwinding some of the progress made in reducing imbalances,” the Treasury said in its semiannual report to Congress on the currency policies, using another name for the yuan.

The report released yesterday, which found that no major U.S. trading partner illegally manipulated its currency in the first half of 2009, comes after Group of 20 leaders adopted a “framework” for sustaining global growth and reducing lopsided flows of trade and investment. The framework could see China boosting domestic demand, the U.S. saving more and Europe increasing investment.

“Both the rigidity of the renminbi and the reacceleration of reserve accumulation are serious concerns which should be corrected to help ensure a stronger, more balanced global economy consistent with the G-20 framework,” the report said. “The Treasury remains of the view that the renminbi is undervalued.”

China’s foreign-exchange reserves, the world’s biggest, surged in the third quarter as an economic recovery attracted speculative capital and a weak dollar boosted valuations of its yen and euro assets.

Record Reserves

The holdings climbed about $141 billion to a record $2.273 trillion, the People’s Bank of China said this week. That was less than the unprecedented $178 billion gain in the second quarter.

The Obama administration wants China to “pursue policies that permit greater flexibility of the exchange rate and lead to more sustainable and balanced economic growth,” the report said. The U.S. will continue to push China to allow the yuan to appreciate in two-way meetings and through meetings of officials from the Group of 20 nations.

Peoples Bank of China officials have called this year for an alternative to the dollar as a global reserve currency. At the same time, the issue hasn’t been a central point of debate at recent international summits like a meeting of Group of 20 leaders in Pittsburgh last month.

Geithner this year has reiterated the U.S. commitment to a “strong dollar,” and a “special responsibility” to make sure the currency maintains its leading role in the global financial system.

Backing Away

“Both the U.S. and China have backed away from their more strident foreign-exchange positions,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.

“The U.S. is no longer using nearly every international forum to push for Chinese reforms,” he said. “For its part, China has not pressed with the PBOC musings about the need to replace the dollar.”

Under a 1988 law, the Treasury is required to report to Congress twice a year on international economic conditions and exchange-rate policies. The Treasury is required to enter direct talks with a country deemed to be manipulating its currency, and also seek redress through the International Monetary Fund. The last time a country was branded as a manipulator was China, in 1994.

Yesterday’s report also said that “there are clear signs that the economy is stabilizing” and notes improvement in financial markets and economic growth. Still, “the global economic recovery remains incomplete,” it said.

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Some Federal Reserve policy makers were open last month to boosting the central bank’s $1.25 trillion mortgage-backed securities purchase program to stimulate the economy amid concerns the recovery may fade.

“Some members thought that an increase in the maximum amount of the committee’s purchases of agency MBS could help to reduce economic slack more quickly,” according to minutes of the Federal Open Market Committee’s Sept. 22-23 meeting released today in Washington. One member said the improvement in the outlook could warrant a reduction in purchases, the minutes said, without identifying the policy maker.

Chairman Ben S. Bernanke said last week the Fed will be prepared to tighten credit when the economic outlook “has improved sufficiently.” Fed officials in last month’s meeting considered the risks of an anemic recovery with unused capacity leading to “subdued and potentially declining wage and price inflation.”

“Members discussed the importance of maintaining flexibility to expand the asset purchase programs should the economic outlook deteriorate or to scale back the programs should economic and financial conditions improve more than anticipated,” the minutes said.

The Standard & Poor’s 500 Index was up 1.4 percent to 1,088.10 at 2:10 p.m. in New York. Yields on two-year Treasury notes were unchanged at 0.9 percent.

Revised Up

Policy makers raised their economic projections based on improved housing markets, stabilizing consumer spending and a recovery in growth outside the U.S., the minutes said.

“Despite these positive factors, many participants noted that the economic recovery was likely to be quite restrained,” the minutes said. “Credit from banks remained difficult to obtain and costly for many borrowers; these conditions were expected to improve only gradually.”

Consumers were likely to be cautious in spending and businesses were likely to be careful in hiring and investing even if demand for products and services increased, the minutes said.

Vice Chairman Donald Kohn said yesterday inflation and growth will probably stay below the central bank’s objectives for some time, warranting low interest rates for an “extended period.”

Slowing Inflation

The risk of slowing inflation will exceed the chance of accelerating prices “for a while,” and there will be a gradual recovery that helps curtail joblessness, Kohn said in a speech to economists in St. Louis.

Policy makers are debating the timing for a withdrawal of the central bank’s record monetary stimulus, including an increase in the benchmark interest rate from close to zero.

Kansas City Fed President Thomas Hoenig said last week the central bank should start raising interest rates “sooner rather than later,” and Fed Governor Kevin Warsh said on Sept. 25 the Fed may need to tighten “with greater force than is customary.”

Fed officials unanimously decided at their Sept. 22-23 meeting to keep the benchmark interest rate near zero and repeated their pledge to keep rates low for an “extended period.” The Fed also committed to complete its $1.25 trillion in purchases of mortgage securities and extended the end-date of the program to March from December.

The U.S. economy probably expanded at a 3.2 percent annual pace in the three months ended Sept. 30, according to the median estimate in a Bloomberg News survey of 64 analysts earlier this month. That would mark the first quarter of growth after declines over four consecutive quarters.

Sales Fell

Economists predicted 2.4 percent growth in the fourth quarter and the same pace for all of 2010, the Bloomberg survey showed. Sales at U.S. retailers fell less than anticipated in September. The 1.5 decrease in purchases followed a 2.2 percent gain the prior month, figures from the Commerce Department showed today in Washington.

Economists forecast the unemployment rate to peak at 10.1 percent in the first quarter. The jobless rate will average 9.9 percent through next year and decline to 9.1 percent in 2011, according to the median estimates from the Bloomberg survey.

In a departure from previous releases of meeting minutes, the Fed released numbers of a staff economic projection, instead of only describing the direction of the forecast.

“The staff still projected only a slow improvement in labor markets, with the unemployment rate moving down to about 9.25 percent by the end of 2010 and then falling to about 8 percent by the end of 2011,” the minutes said.

Jobs Cut

Employers cut 263,000 jobs in September after a 201,000 drop in August, while unemployment climbed to 9.8 percent, the highest level since 1983. The U.S. has lost 7.2 million jobs since the recession started.

The core consumer-price index, which excludes food and energy, rose 1.4 percent in August from a year earlier, down from a 2.5 percent increase in September 2008.

The volume of delinquent commercial mortgages jumped sevenfold last month, Credit Suisse Group AG analysts said in a report Oct. 9. Data from Moody’s Investors Service show prices have plummeted 38.7 percent from October 2007 peaks.

U.S. consumer credit in August fell for a seventh straight month as banks maintained restrictive terms and households were reluctant to borrow.

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German investor confidence unexpectedly declined for the first time in three months in October amid concerns that the pace of the nascent recovery in Europe’s largest economy may ease.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months ahead, dropped to 56 from 57.7 in September. Economists had forecast an increase to 58.8, the median of 36 forecasts in a Bloomberg News survey showed.

Germany’s benchmark DAX index has surged around 57 percent since early March as the economy pulled out of the worst recession since World War II. While growth probably accelerated in the third quarter, according to the Bundesbank, the pace of the recovery may be tempered by rising unemployment, the fading of stimulus measures and the euro’s increase against the dollar.

“Enthusiasm is now gradually giving way to realism and the German economy is about to enter calmer waters,” said Carsten Brzeski, an economist at ING Groep in Brussels. Today’s reading is “no reason to fall back into depression.”

ZEW’s gauge of the current economic situation fell to minus 72.2 from minus 74 in September.

The euro pared its gains after the report and was up 0.1 percent to $1.4792 as of 10:43 a.m. in London, having earlier risen to $1.4804. Bonds were little changed, with the yield on the 10-year German bund at 3.17 percent.

‘Too Much’

The performance of the DAX has been matched across Europe, where the Dow Jones Euro Stoxx 50 has risen around 60 percent since early March. In the U.S., the S&P 500 has surged 59 percent.

The stock-market gains may reverse if the recovery isn’t sustained. Nouriel Roubini, the New York University professor who predicted the financial crisis, on Oct. 3 said that markets have “gone up too much, too soon, too fast.”

“Analysts have given the recovery an early round of applause, which the economy has to live up to now,” said Andreas Scheuerle, an economist at DekaBank in Frankfurt who correctly forecast the ZEW reading bad credit pay day loans. “The recovery is still a fragile little plant but overall, it’s doing well.”

Economic Support

Germany’s economy probably expanded around 0.75 percent in the third quarter from the second, when it grew 0.3 percent, Bundesbank President Axel Weber said Oct. 3. Still, the recovery “continues to rely on support from fiscal and monetary policies, and that shouldn’t be withdrawn too quickly,” Weber said.

The government is spending 85 billion euros ($125 billion) to revive growth, including a 2,500-euro payment for people who scrap an old car to buy a new one. The 5-billion-euro car- purchase fund ran dry last month. The Bundesbank projects unemployment will rise to 10.5 percent in 2010 from 8.2 percent in September.

The euro-area economy is also facing rising unemployment and a “bumpy” recovery, European Central Bank President Jean- Claude Trichet said on Oct. 9.

In addition to joblessness, the euro’s appreciation against the dollar may hinder the recovery by eroding export competitiveness. Aurelio Maccario, chief euro-area economist at UniCredit Group in Milan, estimates that the euro’s 2 percent appreciation in trade-weighted terms since the start of the third quarter is enough to shave 0.2 percentage points off euro- area growth through 2010.

“We’ve had quite a remarkable summer with catch-up processes that boosted economic activity,” said Laurent Bilke, an economist at Nomura in London. “Now we expect a normalization and a come-back toward the underlying trend, which is obviously lower. But it won’t be a relapse.”

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Retail sales in the U.S. probably fell in September as auto showrooms sat empty after the “cash for clunkers” program expired, economists said before a report this week.

Purchases dropped 2.1 percent, the biggest decrease this year, after rising 2.7 percent in August, according to the median forecast of 56 economists surveyed by Bloomberg News ahead of Commerce Department figures due Oct. 14. Other reports may show inflation and factory production cooled last month.

Plunging auto sales in September are a sign household spending may not be sustained without government incentives as long as unemployment keeps climbing. The financial health of consumers, whose purchases make up the biggest part of the economy, will go a long way in determining when Federal Reserve policy makers raise interest rates again.

“We’re not necessarily going to get huge growth from the consumer,” said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. “Income growth is going to be restrained, and that’s going to translate into modest gains in spending.”

Excluding automobiles, sales probably rose 0.2 percent after a 1.1 percent increase the prior month, according to the Bloomberg survey. The government’s program allowing consumers to trade in older models for new, more fuel-efficient ones ended in late August, translating into a 35 percent drop in auto sales last month. Industry data showed declines at General Motors Co., Toyota Motor Corp. and Ford Motor Co.

Bernanke Pledge

A broad-based increase in sales of other goods would indicate consumers are becoming more confident that the economy is rebounding. A decline would show households are relying on stimulus measures to justify spending.

Fed Chairman Ben S. Bernanke on Oct. 8 said the central bank will be prepared to tighten monetary policy when the outlook for the economy “has improved sufficiently.”

“As economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road,” Bernanke said in a speech in Washington.

Minutes of the Fed Open Market Committee’s September meeting, scheduled to be released on Oct. 14, may shed more light on policy makers’ assessment of the economy at the time. The Fed last month reiterated its pledge to keep the benchmark lending rate low “for an extended period.”

The Standard & Poor’s 500 Index rallied 4 no faxing payday loan.5 percent last week, its best weekly performance since July, as investors grew more optimistic about the economic recovery. Stocks also rose because Alcoa Inc., the biggest U.S. aluminum producer, kicked off third-quarter earnings season with an unexpected profit.

Retail Earnings

Retailers’ results last week showed sales at chains open at least a year climbed 1.1 percent in September from the same month in 2008, the first year-over-year increase in 13 months, said Swampscott, Massachusetts-based Retail Metrics Inc.

Menomonee Falls, Wisconsin-based Kohl’s Corp., the fourth- largest U.S. department-store chain, raised its profit forecast for the third quarter after comparable sales rose, defying projections of a decrease.

Industrial production expanded by 0.1 percent in September after increasing 0.8 percent the month before, reflecting the end of the clunkers program, according to the survey. The proportion of plant capacity in use, meanwhile, was probably little changed. These figures are due from the Fed on Oct. 16.

Fed Reports

A day earlier, a pair of regional Fed reports may show New York area manufacturing slowed this month after growing in September at the fastest pace in almost two years, while a factory gauge for the Philadelphia region likely dropped from the highest reading since June 2007, economists said.

On Oct. 16, a report may show the Reuters/University of Michigan preliminary index of consumer confidence for October dipped from the highest level since January 2008. The index may slip further: economists surveyed by Bloomberg from Oct. 1 to Oct. 8 projected unemployment would exceed 10 percent in the first quarter of next year.

Levi Strauss & Co., the San Francisco-based closely held maker of blue jeans and Dockers pants, said mounting joblessness cut third-quarter profit and may crimp holiday sales.

“While there’s a general feeling that we’re in a better market today than we were six or nine months ago, there’s still just a huge overhang from unemployment,” Chief Financial Officer Blake Jorgensen said by telephone on Oct. 8. “It’s going to be a slow recovery in 2010.”

The Labor Department on Oct. 15 may report the cost of living in September rose 0.2 percent, half the pace of the prior month, according to the Bloomberg survey.

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