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Federal Deposit Insurance Corp. Chairman Sheila Bair, with support from Federal Reserve officials, is pushing for tougher measures to curb the size and risk-taking of the nation’s largest financial firms.

The FDIC will propose slapping fees on the biggest bank holding companies to the extent that they carry on activities, such as proprietary trading, outside of traditional lending. The idea goes beyond the Obama administration’s regulation-overhaul plan, which would have the Fed adjust capital and liquidity standards for the biggest firms, without any pre-set fees.

“What we have suggested is financial disincentives for size and complexity,” Bair said in a July 9 interview. Fed Chairman Ben S. Bernanke told lawmakers last month that restricting size is a “legitimate” option.

Size limits would overturn decades of regulatory tradition that promoted the view that large, diversified institutions were more immune to risks when specific industries or regions slumped.

Bair’s proposal is another chapter in the clashes she’s had with Treasury Secretary Timothy Geithner and his department over dealing with banks and the financial crisis.

Special fees could hit firms such as Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. that expanded beyond traditional lending and deposit-taking.

Products Affected

The fees would go to a reserve fund for rescues of bank holding companies, modeled on the FDIC’s deposit-insurance fund. They would target risky assets, such as structured products, over-the-counter derivatives and assets kept off of balance sheets.

“This is a sharp about-face in how the supervisors are looking at risks in these banks,” said Dino Kos, a managing director at Portales Partners LLC and former markets director at the Federal Reserve Bank of New York. Limiting size “is a valid debate.”

Minneapolis Fed President Gary Stern has also favored expanded FDIC powers to levy premiums on large, complex financial firms and tougher merger reviews where risks posed to the banking system are an “explicit consideration.”

The Treasury’s plan would tax financial firms only after bailouts occurred, reflecting concern that a pre-funded bailout reserve would worsen moral hazard, making the firms confident of a rescue in case their bets go wrong.

Big Get Bigger

The crisis has made some firms even bigger, as regulators endorsed or encouraged mergers of weaker lenders with firms perceived to be better able to weather the turmoil. Bank of America, the Charlotte, North Carolina-based firm that is the biggest U.S. bank by assets and deposits, absorbed Merrill Lynch & Co. last year.

“The benefits to society of economies of scale and economies of scope can’t possibly pay for the costs that we pay when they fail,” said Fed historian and Carnegie Mellon University Professor Allan Meltzer in an interview us fast cash.

The FDIC suggestion follows quarrels between Bair and Geithner, who’s leading the administration’s financial- regulation overhaul initiative, and his predecessor, Henry Paulson.

Bair pushed the Treasury to use more of its $700 billion financial-rescue fund to help prevent mortgage foreclosures, and dropped support for a Treasury-led plan to merge Citigroup and Wachovia Corp. last year. Geithner sought to push Bair out after the November presidential election, people familiar with the matter said last year, before lawmaker support encouraged President Barack Obama to let her remain in office.

JPMorgan Strength

Size hasn’t always defined systemic risk. Bear Stearns Cos. had $399 billion in total assets at the end of February last year before it had to be rescued by JPMorgan — a larger firm with about $2 trillion in assets that had the management capability and financial strength to absorb the investment bank.

Even so, regulators, lawmakers and economists are rethinking the benefits of letting large financial companies merge, acquire or borrow their way to greater size after what may become the costliest bank-rescue campaign in history. The FDIC has lost more than $39 billion from its deposit-insurance fund since the start of last year as it wound down failed banks.

House Financial Services Committee Chairman Barney Frank plans a hearing on the so-called too-big-to-fail issue later this month.

The Obama administration’s proposal would allow financial institutions to continue to expand so long as they meet capital and liquidity requirements set with discretion by the Fed after discussions with other agencies.

Obama Plan

The Obama plan has come under attack in Congress, where legislators have expressed skepticism about giving the central bank more powers in the aftermath of the Fed’s failure to avert the mortgage crisis.

Stern, the outgoing Minneapolis Fed chief, said this month the Obama proposal “leaves the financial system considerably more vulnerable” and inadequately addresses the too-big-to-fail issue.

“There is nothing in the Treasury proposal designed to put creditors of large, systemically important financial institutions at risk of loss,” Stern said in a July 9 speech in Helena, Montana. Bair also favors making explicit the losses for shareholders and creditors of firms that seek federal aid.

“A financial system characterized by a handful of giant institutions with global reach and a single regulator is making a huge bet that those few banks and their regulator over a long period of time will always make the right decisions,” Bair told the Senate Banking Committee in May.

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Singapore’s government raised its economic forecast for 2009 as gains in construction and pharmaceutical output lifted the nation from its deepest recession since independence in 1965.

Gross domestic product will shrink 4 percent to 6 percent this year, less than an earlier forecast for a contraction of as much as 9 percent, the trade ministry said in a statement today. The economy expanded an annualized 20.4 percent last quarter from the previous three months, the first growth in a year.

“The Singapore economy is back, and back with a vengeance,” said Robert Prior-Wandesforde, a senior economist at HSBC Holdings Plc in Singapore. “We think other drivers of growth will come through as the year progresses, ensuring that, although bumpy, the recovery is likely to be sustained.”

Singapore stocks advanced after the report, led by the country’s biggest developer, Capitaland Ltd., on optimism a combination of tax cuts and record government spending will support the recovery. South Korea and Japan have said their economic outlook is improving and the International Monetary Fund raised its growth forecast for emerging Asia last week.

The Singapore dollar rose 0.4 percent to S$1.4605 against the U.S. currency as at 11:04 a.m. local time. The benchmark stock index climbed 1.3 percent.

“Across Asia, things are not going to be as bad as what everyone thought at the beginning of the year,” said Song Seng- Wun, regional economist at CIMB-GK Securities Pte in Singapore. “For export-oriented Asian economies, the drag from the manufacturing sector is going to be less than forecast.”

Stimulus Plans

Governments worldwide have pledged about $2 trillion in stimulus to counter the global recession, helping stabilize sales by Asian companies including Japan’s Nissan Motor Co. and Singapore’s Frasers Centrepoint Homes.

South Korea last month raised its GDP estimate for 2009 and 2010, saying fiscal stimulus and interest-rate cuts stoked consumer confidence. Goldman Sachs Group Inc., Morgan Stanley and the World Bank have raised forecasts for China in the past month. China will release GDP data on July 16.

The revised 2009 GDP prediction “reflects the less severe contraction in the first half of the year, while the underlying economic conditions remain weak,” Singapore’s trade ministry said. The expansion last quarter was better than the median estimate for a 13.4 percent gain in a Bloomberg survey.

Singapore’s $161 billion economy contracted 3.7 percent last quarter from a year earlier, better than the median estimate for a 5.4 percent decline in a Bloomberg survey.

Bouncing Back

Manufacturing, which accounts for a quarter of the economy, fell 1 cash advance no faxing.5 percent from a year earlier, after sliding a revised 24.3 percent in the three months ended March.

“Asia is bouncing back in a V-shaped fashion,” said David Carbon, head of economic and currency research at DBS Group Holdings Ltd. in Singapore. “Industrial production is 65 percent back to pre-crisis levels and exports have recovered about one-third of their lost territory.”

India’s industrial production increased at the fastest pace in eight months in May, while Malaysia’s declined the least in six months.

The Japanese government said yesterday the economy is “picking up,” and upgraded its view of exports and consumer spending. Australia’s business sentiment turned positive in June for the first time since December 2007.

‘Peter Out’

The better growth forecast for emerging Asia “owes to improved prospects in China and India, in part reflecting substantial macroeconomic stimulus and a faster-than-expected turnaround in capital flows,” the IMF said July 8. “However, the recent acceleration in growth is likely to peter out unless there is a recovery in advanced economies.”

The “volatile” pharmaceutical industry and electronics inventory restocking led to the improvement in Singapore’s manufacturing output, the trade ministry said. That may not be sustained as rising unemployment and reduced household spending in the U.S. and Europe suggest there isn’t evidence yet of a “decisive improvement” in demand, it said.

Singapore’s services industry declined 5.1 percent last quarter, after shrinking by a similar pace in the first three months of the year. The construction industry gained 18.3 percent last quarter as Las Vegas Sands Corp. and other developers worked to complete hotels and office towers.

Declines in Singapore’s home prices have slowed and companies such as Frasers Centrepoint Homes plan to start selling homes from new developments in the next six months. The unit of Fraser & Neave Ltd. said it sold 90 percent of a 330- unit condominium project in central Singapore within three days of starting sales on June 20.

“Singapore’s recovery will be more pronounced than others in the region because pharmaceuticals swung the industrial production numbers a lot more than it did in other countries,” said Vishnu Varathan, a regional economist at Forecast Singapore Pte. “We’ll really be getting ahead of ourselves to say the recession is in the rear-view mirror.”

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Federal Reserve Chairman Ben S. Bernanke will likely show how the central bank will exit the biggest monetary expansion in history when he reports to Congress next week, economists said.

The Fed pumped $1 trillion into the banking system over the past year through bond purchases and emergency loans, doubling assets on its balance sheet. Reassuring investors that inflation won’t exceed forecasts once the recession ends will give the Fed more credibility, said Dean Maki, chief U.S. economist at Barclays Capital Inc. While policy makers have spoken about specific tools they may use, they haven’t laid out a strategy.

“Now is the time to articulate the exit strategy,” said Vincent Reinhart, former monetary-affairs director at the Fed and now resident scholar at the American Enterprise Institute in Washington. “The Federal Reserve doesn’t speak with one voice and the testimony is an opportunity to present the consensus view.”

The Federal Open Market Committee will release updated economic forecasts on July 15. At their April meeting, officials anticipated inflation of between 1 percent and 1.6 percent in 2010, up from 0.6 percent to 0.9 percent this year. Their long- run forecast is for price increases of 1.7 percent to 2 percent.

Investor expectations for inflation have increased this year, as measured by the gap between yields on 10-year U.S. government notes and 10-year Treasury Inflation-Protected Securities. The spread widened to 1.52 percentage point at the end of last week from 0.09 percentage point in January.

Unemployment Projection

Unemployment is also surging: The jobless rate will exceed 10 percent early next year and average 9.8 percent for 2010, according to a Bloomberg News survey published last week. The rate was 7.6 percent in January.

Fed officials will begin to lift the benchmark interest rate in the third quarter of next year and take it to 1 percent in the final three months, the Bloomberg survey showed. The previous month’s survey estimated the Fed would hold the rate near zero until the fourth quarter of next year.

“The Fed does not want to trigger market concern about the beginning of policy tightening at this time, an objective I share,” said William Poole, former president of the St. Louis Fed. “That means that the Fed needs to be more explicit about how it will know, or what it will look for, to determine that the “appropriate” time has arrived. This explanation need not, and probably cannot, be very precise; however, there certainly can be some general guidance.”

Semiannual Testimony

Bernanke is scheduled to address the House Financial Services Committee on July 21. The chairman is required by law to testify twice a year on progress toward the Fed’s mandate to achieve stable prices and maximum employment.

“Chairman Bernanke’s semi-annual testimony would be a logical place to lay out these issues in a more detailed discussion,” said Maki at Barclays, who is based in New York. “The more credibility the Fed can cultivate with investors on the exit strategy, the freer it is to pursue stimulative policies in the near-term without leading to sharply higher inflation expectations.”

Bernanke will describe an economy that’s still reeling from the credit crisis that began in 2007 and intensified after Lehman Brothers Holdings Inc. filed for bankruptcy in September. The loss of 6.5 million jobs since the recession began has led the central bank keep pumping money after cutting the benchmark rate to zero.

Credit Expansion

The Fed has expanded credit through increased loans to banks to provide liquidity and rescues of financial companies such as American International Group Inc. It’s also begun market backstops such as the Commercial Paper Funding Facility, which holds $109 payday loans.2 billion in short-term IOUs issued by corporations, and the Term Asset-Backed Securities Loan Facility, which has lent $24.9 billion to investors to buy securities tied to auto and other consumer and business loans.

The Fed has also pledged to buy $1.75 trillion in mortgage- backed securities, Treasury notes, and federal housing agency bonds. As of July 9, the Fed had bought $200.7 billion of Treasuries.

It may take years for the Fed to sell the securities back to investors, said Lou Crandall, chief U.S. economist at Wrightson ICAP LLC in Jersey City, New Jersey. In the medium term, the Fed would need to sterilize the purchases, or find a way to prevent the increased money supply from fueling inflation, he said.

‘Years’ Before Selling

“It will be years before they can start selling, if ever,” Crandall said. “Can they raise interest rates with an expanded balance sheet? The answer is yes. Can they do it in a tidy way? The answer is, we don’t know.”

U.S. central bankers have mentioned reverse repurchase agreements, interest on reserves, and possibly sales of short- term debt as ways to sterilize reserves in the banking system. There are problems with each tool. Under a reverse repurchase agreement, the Fed would sell bonds to Wall Street dealers with an agreement to buy them back at a later date.

Reverse repurchase agreements could require firms that deal directly with the Fed to hold billions of dollars in mortgage securities. “The dealer community and the investor community does not have the appetite to hold a trillion dollars more in mortgages than they are holding now,” said Stephen Stanley, chief economist at RBS Securities Inc. in Stamford, Connecticut, one of 17 companies that deals directly with the Federal Reserve Bank of New York.

Additional Tool

Fed officials have also proposed selling their own bills to mop up cash. Congress hasn’t shown interest in the idea, which would require legislation. While the Treasury has a program of short-term bill sales to help sterilize excess reserves, it complicates the department’s regular borrowing to finance government spending.

“I am not worried at all that the Federal Reserve’s balance-sheet expansion will generate an inflation problem,” New York Fed President William Dudley said in a speech in Nashville on April 18. “The Federal Reserve has the ability to manage down the size of its balance sheet over time once financial conditions and the economy improve.”

That’s what RBS Securities’ Stanley calls the “trust us” approach. The lack of clarity may not ease inflation concerns, especially if the Fed has to increase its purchases of Treasury and mortgage-debt to provide further stimulus to the economy.

Job losses will continue even after the economy begins growing in the second half of this year, the monthly Bloomberg monthly showed.

Tellabs Inc., the Naperville, Illinois-based maker of networking equipment, said last week it’s scrapping about 150 jobs. Dow Chemical Co., the largest U.S. chemical maker, said July 1 it will permanently close three Louisiana factories and take a second-quarter charge of about $700 million. Midland, Michigan-based Dow’s charge includes the elimination of 2,500 jobs, following the acquisition of Rohm & Haas Co.

The Reuters/University of Michigan preliminary index of consumer sentiment fell by more than forecast in July to 64.6 from 70.8 in the previous month. Consumers in the survey said they are less likely to buy cars or appliances, suggesting the recovery may be weaker than anticipated.

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China’s urban home prices rose for the first time in seven months, adding to evidence that record bank lending is driving a recovery in the world’s third-largest economy.

Prices in 70 major Chinese cities gained 0.2 percent in June from a year earlier, the National Development and Reform Commission said today on its Web site. Home values increased 0.8 percent from May, the fourth straight monthly gain. The China Se Shang Property Index of 24 real-estate companies rose 1.6 percent, beating the 0.3 percent drop in the benchmark.

“China’s property market is reviving and real estate investment may rebound by 20 percent in the second half of this year, backing economic recovery,” Lu Ting, an economist at Bank of America-Merrill Lynch, said in Hong Kong.

With exports plunging, China is driving growth by lifting domestic consumption of cars, appliances and housing with a 4 trillion yuan ($586 billion) stimulus and higher bank lending. Real-estate investment grew 9.9 percent in the first half from a year ago, the National Bureau of Statistics said today.

Property sales rose 32 percent by floor space and 53 percent by value, the report said. New loans rose almost fivefold in June from a year earlier to 1.53 trillion yuan, according to preliminary calculations, the central bank said July 8.

Poly Real Estate Group Co. , China’s second-biggest developer by market value, rose 2 percent to 30.32 yuan in Shanghai, just lower than the 18-month closing high of 30.51 yuan reached on July 3. China Vanke Co., the country’s biggest builder, rose 0.1 percent to 14 free business cards.27 yuan.

Higher Sales

Part of the surge in June lending likely reflects mortgage loans, Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong, said this week.

First-half lending rose to a record 7.37 trillion yuan, more than three times the amount a year earlier. Chinese banks have extended 47 percent more loans this year than the central bank’s minimum target for 2009. Passenger-vehicle sales jumped 48 percent last month, the most since February 2006, according to industry figures yesterday.

Rising home prices may prompt the government to damp lending to cool the property market. Banks in Hangzhou, the capital of eastern Zhejiang province, are tightening requirements for second-home mortgages, the Shanghai Securities News reported July 7, without saying where it got its information.

“In Hangzhou, there’s been a 15 percent to 20 percent price appreciation since last December,” David Ng, a Hong Kong- based analyst at Royal Bank of Scotland Group Plc, said by phone today. The tightening of mortgage requirements in Hangzhou could indicate prices have risen too much, he said.

“The speed of price appreciation is raising alarm among some authorities,” said Ng, adding that most first-tier cities have posted increases of more than 10 percent this year.

Hangzhou’s home prices rose 0.7 percent in June from May, and were 0.2 percent lower from a year earlier, the NDRC figures showed today.

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U.K. producer prices dropped in June from a year earlier by the most since 2001 as the recession sapped inflation pressures from the economy.

The price of goods at factory gates fell an annual 1.2 percent, compared with a 0.3 percent decline in May, the Office for National Statistics said today in London. Economists predicted a 0.8 percent drop, according to the median of 19 forecasts in a Bloomberg News survey. On the month, prices fell 0.2 percent, the first decline since November.

The Bank of England said yesterday it will stick to its emergency plan to buy 125 billion pounds ($203 billion) of bonds with newly-created money for another month. Policy makers are fighting the threat of deflation as Britain endures its worst recession in a generation.

“Underlying price pressures in the economy will be weak for a prolonged period because of the lasting impact of the recession,'' said Jonathan Loynes, chief European economist at Capital Economics in London. “I don't think there is much of an inflation threat primarily because we're in the middle of a very deep recession.''

The drop on the month was unexpected. Economists predicted a 0.3 percent increase, according to the median of 17 forecasts in a Bloomberg News survey. The decline was led by chemicals, which fell the most since records began in 1992, officials said auto car loan.

On the year, lower costs of petroleum products and other items including scrap metal pushed down producer prices, the statistics office said.

Economic Slump

Britain's economy shrank at the slowest pace in a year during the second quarter and may now be stagnating, the National Institute of Social and Economic Research said yesterday. Gross domestic product fell 2.4 percent in the first quarter, the most since 1958. Corus, Europe's second-largest steelmaker, says it may shed as many as 366 jobs at a factory in England on expectations demand will decline.

Recent gains in oil prices are squeezing manufacturers as the recession bites. Raw material costs rose 1.5 percent on the month, the biggest increase in a year, the statistics office said. Economists predicted a 0.8 percent gain, according to the median of 14 forecasts in a Bloomberg News survey.

DS Smith Plc, owner of the Spicers office brand, said on June 25 that profit margins “were put under pressure'' by higher raw material costs.

Inflation slowed less than economists forecast in May to 2.2 percent, still above the Bank of England's target. The bank will release its next quarterly forecasts on August 12.

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The International Monetary Fund said the global economic rebound next year will be stronger than it forecast in April as the financial system stabilizes and the pace of contractions from the U.S. to Japan moderates.

The Washington-based lender said in a revised forecast released today that the world economy will expand 2.5 percent in 2010, compared with its April projection of 1.9 percent growth. A contraction this year will be 1.4 percent, worse than an April forecast for a 1.3 percent drop, the IMF said.

The improved outlook for next year boosted U.S. stocks. The forecasts reflect differing stages of recovery across the globe, with emerging economies including China helping pull the world out of the worst recession in six decades, while Europe lags behind the U.S. and Japan. The fund warned the pickup is likely to be “sluggish” and called repairing the international banking system a priority.

“The global economy is still in recession, but a recovery is coming,” IMF chief economist Olivier Blanchard said in a Bloomberg Television interview today. “A weak recovery is a way of putting it,” he said, adding that unemployment around the world may keep rising into 2010.

Stocks and Treasuries rose after the IMF released its new forecasts and an updated outlook for the global financial system. The Standard & Poor’s 500 Index gained 0.6 percent to 886.5 as of 10:22 a.m. in New York. The yield on the benchmark 10-year government note slipped to 3.44 percent from 3.46 percent late yesterday.

Exit Strategies

The fund also called on policy makers to start crafting plans to exit such support measures in order to tame inflation concerns and take steps toward balancing public finances.

Advanced economies will continue to lead the slump this year by shrinking 3.8 percent. They will grow 0.6 percent in 2010, more than forecast in April, when the fund expected no growth for next year.

U.S. gross domestic product will shrink 2.6 percent this year before expanding 0.8 percent in 2010, the IMF said. In April it expected growth to stall next year.

Asked whether the U.S. should consider a stimulus plan in addition to a $787 billion package passed earlier this year, Blanchard said it may become an option worth debate if the recession lingers.

Stimulus Efforts

“It may well be that if the recovery turns out to be very weak, weaker than we expect, governments may have to continue fiscal stimulus in 2010” and even 2011, Blanchard said in a press conference in Washington instant payday loans completely online. “These are options that they have to be thinking about.”

The outlook for Japan jumped to 1.7 percent next year from an April estimate of 0.5 percent. This year the fund sees Japan’s economy contracting 6 percent, from an earlier estimate of 6.2 percent, helped by “aggressive fiscal policies” and increased demand from other Asian partners.

Emerging and developing economies will grow 4.7 percent next year, a 0.7 percentage point increase from the previous forecasts. This year they will expand 1.5 percent, compared with a 1.6 percent expansion expected in April.

China’s growth is forecast to accelerate to 8.5 percent next year, a percentage point more than expected in April, after slowing to 7.5 percent this year. India’s economy will expand by 6.5 percent in 2010, compared with the April forecast of 5.6 percent, after a 5.4 increase percent this year that was higher than the IMF’s prior estimate.

Inflation Risks

While the fund called risks for sustained deflation “small,” the outlook for global inflation “is expected to remain subdued through 2010, held back by significant excess capacity.”

Still, risks to the outlook, which have “diminished noticeably,” are still “tilted to the downside,” the fund said, citing a possible downward pressure on asset prices resulting from rising unemployment, pressure on bond yields from concerns on public debt, and emerging economies’ vulnerability to financial stress.

A larger-than-expected drop in risk aversion and stronger demand in emerging economies could offer “some upside risk” that boosts growth, according to the fund.

In a separate report today on the state of the global financial system, the IMF said that while financial markets and confidence in an economic recovery have improved since April, risks remain and policy makers must remain vigilant until a sustained recovery is under way. Credit risks are high, bank lending to the private sector is slowing and the recovery so far has been dependent primarily on public funds, the fund said in an update to its Global Financial Stability Report.

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The Bank of England should ask the government for permission to start a further phase in its money- printing program because a recovery from the recession “is not guaranteed,” the British Chambers of Commerce said.

While Britain will return to growth in the final quarter, a recovery “is not yet secure,” the lobby group said in a report in London today. The central bank should extend its asset- purchase program to the full 150 billion pounds authorized by Chancellor of the Exchequer Alistair Darling and it should seek permission to spend even more, the BCC said.

Economists say the Bank of England may this week stick with its current plan to print 125 billion pounds ($202 billion) in new money as policy makers assess its effect in pulling Britain out of recession. The BCC’s survey of 5,600 companies showed today that manufacturing and services companies’ confidence improved in the three months through June.

“The worst of the recession is over, but the recovery is not guaranteed,” David Kern, the lobby group’s chief economic adviser, told reporters in London yesterday. “Policy is not yet effective and that has to change. They should go beyond 150 billion pounds.”

The Bank of England should print up to 200 billion pounds to spend in U.K. debt markets, Kern estimates. In a Bloomberg News survey of 36 economists, 20 said the bank will keep its current plan at the Monetary Policy Committee meeting on July 9, while the remainder said it will extend the program.

GDP Forecast

Gross domestic product will probably shrink between 0 cashadvance.com.1 percent and 0.4 percent in the second quarter before stagnating in the third quarter and growing as much as 0.5 percent in the final three months of the year, the BCC said.

While the economy shrank 2.4 percent in the first quarter, the most since 1958, there are signs that the recession is easing. U.K. manufacturing probably rose for a third month in May by 0.2 percent, according to the median of 26 economists in a Bloomberg survey. The Office for National Statistics will release the figures at 9:30 a.m. in London today.

Job losses in manufacturing remain a concern and unemployment in the U.K. will rise to 3.2 million by the middle of next year, Kern said. British carmakers have benefited from the government’s scrappage plan giving consumers a 2,000-pound subsidy to trade in old cars for new ones, and more programs of the kind are needed, he said.

A total of 29,796 vehicles have been registered under the scrappage plan since it was implemented on May 16, giving carmakers “a much needed boost,” the Society of Motor Manufacturers and Traders said yesterday.

“We should have more schemes that support businesses that are basically viable and are being forced to discard skilled labor,” Kern said. “The pressure on jobs is still very serious. It’s an area which has serious implications.”

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Manufacturing in the U.S. shrank at the slowest pace since August 2008 and pending sales of existing homes advanced for a fourth month, underscoring signs the economy began to stabilize in the second quarter.

The Institute for Supply Management’s factory index rose in June for a sixth straight month, to 44.8; readings less than 50 signal contraction. The National Association of Realtors said the number of Americans signing contracts for existing homes increased 0.1 percent in May after a 7.1 percent gain.

“We’re going to see a temporary substantial improvement” in the economy, said Martin Feldstein, the Harvard University economist and former Reagan administration adviser who is a member of the U.S. recession-dating panel. “It’s a bounce that is coming from the beginning of the fiscal stimulus,” he said in an interview with Bloomberg Radio.

Still, Feldstein warned that the economy will be “going down again” into 2010. Underscoring that danger was a survey issued today by ADP Employer Services that showed U.S. companies eliminated 473,000 jobs in June after a 485,000 drop the previous month. The report also foreshadowed a jump in the unemployment rate in tomorrow’s Labor Department report that will temper any rebound in consumer spending.

Stocks advanced on optimism the worst of the recession, the deepest in half a century, is over. The Standard & Poor’s 500 Stock Index gained 0.4 percent to 923.33 at 4:16 p.m. in New York. Yields on benchmark 10-year notes were little changed, increasing to 3.544 percent from 3.535 percent late yesterday.

Construction Slump

Spending on construction projects dropped 0.9 percent in May after increasing in April for the first time in seven months, a report from the Commerce Department also showed.

The gain in the ISM factory index was paced by improvements in production, which expanded for the first time since August, and employment. A gauge of export orders also increased, almost reaching the breakeven level of 50.

“Things are starting to look up,” Norbert Ore, chairman of the ISM’s manufacturing survey, said on a conference call with reporters. “With the exception of inventories, which were still hitting a bottom in terms of rate of decline, all of the other indexes have moved in the right direction and should get us to 50 in the next few months.”

One disappointing reading was in new orders, where the index fell to 49.2 from a reading of 51.1 in May that showed the first expansion in bookings in more than a year.

Auto Shutdowns

Bankruptcies at General Motors Corp. and Chrysler LLC have rippled through the auto industry and have also caused some suppliers to file for protection from creditors no teletrack payday loans.

“The next three months are going to be critical,” Tony Brown, purchasing chief for Ford Motor Co., said June 24 in an interview. “The Chapter 11 filings have increased the cash-flow pressure on the supply base.”

Even so, government efforts to revive auto sales may give manufacturing and the economy a boost in the third quarter. The “cash for clunkers” bill that passed Congress in June gives consumers as much as $4,500 to trade in their old cars for more fuel-efficient vehicles.

An increase in auto sales will come as automakers slashed inventories to get rid of unwanted stocks, meaning manufacturers will need to crank up production again to meet the new demand, according to Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York.

Maki last week boosted his forecast for economic growth in the second half of 2009 by half a percentage point to 3 percent.

Crisis ‘Behind Us’

Other companies are already seeing an improvement.

The period of crisis management at General Electric Co. is “behind us” and some level of economic growth will take place next year, Chief Executive Officer Jeffrey Immelt said earlier this week.

“In some way, shape or form, 2010 and beyond will see economic growth,” Immelt said at the London School of Business on June 29. “How positive it is remains to be seen.”

One reason for concern is mounting unemployment. A Labor Department report tomorrow may show employers cut 363,000 workers from payrolls in June and unemployment rose to a 26-year high of 9.6 percent. Still, following May’s 9.4 percent jobless rate, the increase would be the smallest since November.

The housing market is stabilizing after a collapse in prices, historically low mortgage rates and tax incentives made properties more affordable for Americans. Still, with unemployment forecast to reach 10 percent this year, home purchases may languish at low levels for months before a recovery emerges.

Pending resales are considered a leading indicator because they track contract signings. The National Association of Realtors’ existing-home sales report tallies closings, which typically occur a month or two later.

The agents’ association reported last week that home resales increased 2.4 percent in May, a second consecutive gain that reinforced the case that the slump in home sales may level out this year. The median price dropped 17 percent from a year earlier, the third-biggest decline on record.

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