To foster the recovery, Bernanke and other Fed officials have repeatedly pledged to hold interest rates at record lows for an “extended period.” The hope is that low rates will entice people and businesses to spend more, generating enough economic activity to help keep the recovery going.

But Bernanke is likely to warn again that the pace of the recovery will be sluggish because Americans still face formidable headwinds: high unemployment, stagnant wages, weak home values, rising foreclosures and hard-to-get credit.

The Fed chief will offer his latest assessment on the economy when he appears before Congress Joint Economic Committee. Hell be under more pressure than usual. Its an election year for lawmakers, whose constituents - including individuals and small businesses - are anxious about their financial prospects.

The economy started growing again in the third quarter of last year, after a record four straight losing quarters. And, more recently, the economy started to finally create jobs - 162,000 of them in March, the most in three years. Nonetheless, the unemployment rate has been stuck at 9.7 percent for three straight months - close to its highest levels since the early 1980s.

Many private economists say it will take at least until the middle of this decade for the jobless rate to drop to a more normal 5.5 percent to 6 percent. Recoveries after financial crises tend to be more subdued as some credit problems linger.

With the worst over, though, the Fed has dismantled most of its special lending programs set up during the crisis. And, the Fed ended last month a $1.25 trillion mortgage-buying program that lowered mortgage rates and bolstered home sales.

At some point when the recovery is firmly entrenched, the Fed will need to start boosting rates to prevent any inflation problems.

The soonest the Federal Reserve will begin raising short-term interest rates is the fourth quarter, according to 34 of the 44 economists polled in a new AP Economy Survey that debuted on Monday.

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Water sales for the Kennebunk, Kennebunkport & Wells Water District in southern Maine fell 11 percent last year, to 1995 levels. The No. 1 reason is the sour economy, said superintendent Norm Labbe.

One of the utilitys largest customers, a catalog printer, shut its doors last year, putting 374 people out of work. Tourism also has been down - meaning fewer tourists are taking showers and flushing toilets in the motels in the regions beachside communities.

“This is happening most everywhere. Its a regional thing, its a national thing,” Labbe said. “Many, many (water utilities) around the country are seeing decreases in revenues. Because if industry goes down, revenues go down.”

A recent study by the Water Research Foundation, a Denver-based nonprofit, on the recessions impact on water utilities found that home foreclosures and business contractions have reduced water demand in many areas. Cities with high unemployment also have seen reduced water consumption as people move away in search of jobs, said Rob Renner, the foundations executive director.

“It depends on where you are in the country. Regionally, the economy is better in some places than in others,” he said.

Water companies for the most part get their money from customers. When water consumption goes up, revenues go up - but when consumption falls, so do revenues.

Water companies often raise rates to pay for high-priced capital expenditures, such as new water lines or treatment plant expansions. But they also have to hike rates when water use goes down to bring in enough money to pay their basic operating costs.

Water rates are based on a wide range of factors, such as infrastructure and water treatment costs as well as revenues from water use. When water use falls, that would be a reason to seek a rate increase, Renner said.

Water consumption can be influenced by the weather. In the Northeast, usage declined last summer in part because homeowners watered their lawns less with the rainy weather. The epic drought that gripped the Southeast in recent years also resulted in falling consumption as people were ordered to conserve water.

Nowadays, the bad economy is taking a toll.

Even after cutting costs 10 percent and laying off nine employees, the water utility in Mount Pleasant, S.C., recently raised rates 9 percent after its customer base and water sales tumbled. That amounts to about $50 a year for the average homeowner.

At the same time, impact fees the utility collects from developers have dried up, from as much as $6 million a few years ago to $500,000 this fiscal year, Duffie said.

Mount Pleasant, outside of Charleston, has been one of the states fastest-growing communities in the past 20 years, growing from about 30,000 to 65,000 residents. But development has come nearly to a halt with the down economy.

In New Jersey, the Sayreville water department recently raised rates 13 percent. One big reason was the departments biggest customer, a steel mill, suspended operations for several months because of lower demand for its products.

As a result, the water departments revenues fell $350,000 to $400,000, said Jeff Bertrand, the towns business administrator.

“That was because of the economy,” Bertrand said. “Nobody was buying the rebar because nobody was doing construction.”

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“Home equity borrowing wont be the economic crutch it was a few years ago,” McBride, based in North Palm Beach, Florida, said in an interview. “This is not an economy in which consumers are going to be able to go nuts.”

As borrowers like Hale tap into the value of their properties, lenders will make about $36 billion in new home equity loans in the next 12 months, according to a forecast by Moodys Economy.com in West Chester, Pennsylvania. That will increase the outstanding balances of the loans by 4.2 percent to $903.5 billion from a two-year low of $867.3 billion this quarter.

About $34 billion of home equity loans were made at the peak, in 2008, according to Moodys Economy.com. The difference this time around will be how the money is spent, said Frank Nothaft, chief economist of Freddie Mac, the government-run mortgage buyer based in McLean, Virginia. Borrowers are less likely now to use their homes equity for luxury purchases.

Consumer Spending

Consumers spent about $677.3 billion, or about $113 billion a year, from home equity loans on purchases such as cars or televisions during the 2000 to 2005 real estate boom, according to a 2007 paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy. Another $376.2 billion, or about $63 billion a year, went toward home renovations.

“Consumers are better managing their own personal balance sheet as a result of the difficult recession we went through,” Nothaft said in an interview. “Many households had taken on too much debt and were overextended, and now people are focused on paying that off.”

Any growth in equity lending during 2010 will necessarily be limited to homeowners whose properties are worth more than what they owe. More than a fifth of U.S. homes with mortgages had negative equity in the fourth quarter, according to Zillow.com, a Seattle-based real estate data provider.

Modest Growth

“There is a lot of distress out there, but initial claims for unemployment insurance are coming down, most of the home price declines are behind us, and banks are pretty much done tightening their lending standards,” said Chris Lafakis, an analyst at Economy.com. “Thats going to enable modest growth in 2010″ for home equity lending.

The jobless rate held at 9.7 percent in February, down from a 26-year peak of 10.1 percent in October, and employers cut fewer jobs than economists estimated in the month, the Labor Department said March 5. The U.S. economy expanded at a 5.9 percent annual rate in the fourth quarter, the biggest gain in more than six years, the Commerce Department said Feb. 26.

Loan Opportunities

“Lenders are always going to be looking for opportunities for home equity lending in areas where they think prices will go up,” said David Berson, chief economist for PMI Group Inc., based in Walnut Creek, California.

U.S. home prices fell 13 percent last year to a median of $172,500, the largest annual drop since the 1930s, according to the National Association of Realtors. The decline followed a 9.5 percent drop in 2008, NAR said.

“The people who bought in 2006 and 2007 have seen their equity wiped out because of falling prices, but if you bought in 2003 or 2004, you probably still have enough of a stake” to qualify for a home equity loan, said Economy.coms Lafakis.

Hale, the homeowner near Seattle, has seen the value of his property double since he bought it in 2000. He said he plans to use the funds from his home equity loan to renovate his living room, kitchen and bathroom. Three lenders turned him down before he was approved last month by US Bancorp of Minneapolis.

“It took far longer than I ever imagined,” said Hale, 65, who owns a business development company called J Link in Issaquah, Washington. “For people in my situation — with equity — it should be a no-brainer.”

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A change might also help defuse tensions with the United States, Europe and other trading partners that complain an undervalued yuan makes Chinas exports unfairly cheap and hurts foreign competitors, possibly prolonging the global economic crisis. Some American lawmakers are calling for punitive tariffs on Chinese goods if Beijing fails to act.

Analysts say Beijing might allow the yuan to rise against the dollar before the middle of this year. But they say any increase will be gradual and do little to narrow U.S. and European trade deficits and create jobs.

“Even if China starts to appreciate, the possibility is it will be very slow and gradual, without an immediate impact on trade,” said Nicholas Consonery, an analyst in Washington for Eurasia Group, a consulting firm.

On Friday, Premier Wen Jiabao said in a speech to Chinas legislature that the yuan will be kept “basically stable” at an “appropriate and balanced” level this year, though he gave no explanation of what that would mean.

Beijing tied the yuan to the dollar for decades but broke that link in 2005 and allowed it to rise by about 20 percent through late 2008. The government slammed on the brakes after the crisis hit and has held its currency steady against the greenback to help exporters compete as a plunge in global demand wiped out millions of Chinese factory jobs.

The United States and Europe downplayed currency complaints as they worked together with Beijing to revive global growth. But facing pressure to create jobs, they and governments as farflung as Brazil have renewed demands for China to act.

President Barack Obama vowed in early February to “get much tougher” in trade disputes with China and to press for an end to currency regimes that he said depress export prices and put U.S. companies at a disadvantage. The U.S. Treasury has the option of declaring Beijing a currency manipulator in a report due out in April, which could set the stage for a complaint to the World Trade Organization and possible sanctions on Chinese goods.

Last years U.S. trade deficit with China was $227 billion, down 15 percent from 2008 but among the highest ever. The 27-nation European Union reported a 65 billion euro ($88 billion) deficit with China for the first half of 2009.

A bipartisan group of 15 American senators urged Commerce Secretary Gary Locke in a Feb. 25 letter to investigate whether Beijing improperly helps Chinese companies by holding down the yuan. They said it is undervalued by up to 40 percent.

A stronger yuan would help Beijing get back on track to boosting household spending power after its 4 trillion yuan ($586 billion) stimulus package helped China to rebound quickly from the global crisis but worsened the tilt toward relying on investment to create jobs.

Chinese leaders worry that reckless overspending on unneeded factories and other assets could lead to financial problems, while the country can no longer count on double-digit annual export gains to drive growth.

“They are in a difficult balancing act,” said Michael Pettis, an associate professor of finance at Peking Universitys Guanghua School of Management. “The steps that need to be taken to rebalance the economy worsen the unemployment problem, and the steps that are taken to resolve unemployment worsen the imbalance.”

Analysts say a rise in the yuan could begin before the middle of this year if export growth, which revived in December, stays on track.

That might coincide with the June meeting of the U.S.-China Strategic and Economic Dialogue, where the Americans are expected to make currency a priority. It would let Beijings envoys respond to U.S. complaints by saying it was already taking action.

In a signal Beijing might be about to act, President Hu Jintao used the term “speed up” 50 times in a Feb. 3 speech to refer to building a consumption-based economy.

“There is an urgency about this. They realize this investment- and export-based economy needs to be balanced,” said Citigroup economist Ken Peng.

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Chinas property prices climbed last month at the quickest pace since July 2008, adding to concern that record lending may create asset bubbles in the worlds fastest- growing major economy. Wen isnt the only one concerned about overheating: central bank adviser Fan Gang said Nov. 18 that “double-digit” growth wouldnt be good in 2010 amid the rising risk of bubbles in stock, real estate and commodity prices.

Wen said in the interview that China isnt experiencing inflation and that consumer price increases will be kept in a “reasonable range.”

“China will keep its loose stance at least in the first half of next year as inflation is expected to stay within tolerable levels,” said Shen Minggao, chief economist for Greater China at Citigroup Inc. “There wont be significant changes to maintain policy stability, but some industries with excess capacity have seen credit tightened.”

Real-Estate Prices

Chinas growth may surge to as much as 12 percent next year, increasing the risk from inflation unless the government raises interest rates, Zhu Jianfang, chief economist at Citic Securities Co., said Dec. 23.

Residential and commercial real-estate prices in 70 major cities rose 5.7 percent from a year earlier, compared with a 3.9 percent increase in October, the National Bureau of Statistics said on Dec. 10.

The nation is poised to overtake Japan to become the worlds second-biggest economy next year, according to International Monetary Fund projections. The governments $586 billion stimulus spending, record bank lending and subsidies for consumer purchases helped the economy expand 8.9 percent last quarter, the fastest pace in a year, amid the global recession.

Growth Estimate

China raised its 2008 growth estimate to 9.6 percent from 9 percent and said this years quarterly figures will increase, narrowing the gap with Japan, the statistics bureau said Dec. 25. A record 9.2 trillion yuan ($1.3 trillion) of loans in the first 11 months of this year drove a recovery in the economy and increased the risk of bubbles in property and stocks.

The economy may be boosted by a rebound in exports and domestic spending next year, said Zhu at Citic, who expects the benchmark lending rate to increase by between 27 basis points and 54 basis points from 5.31 percent. A basis point is 0.01 percentage point.

Fragile Recovery

Chinas gross domestic product will expand 8.5 percent this year and 9.3 percent next year, according to the median forecasts of a Bloomberg News survey of economists. The government is targeting 8 percent growth in 2010 amid a “fragile” global recovery, Industry Minister Li Yizhong said on Dec. 21.

The Chinese economy grew 8.9 percent from a year earlier in the third quarter, 7.9 percent in the second and 6.1 percent in the first as the global economy recovered from the worst slump since World War II.

Economic growth in the fourth quarter will exceed the 8.9 percent of the three preceding months, Xu Xianchun, deputy head of the National Bureau of Statistics, said Dec. 23.

–Irene Shen. Editors: Richard Dobson, Lily Nonomiya

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“In the next five years, we will actively promote the diverse economic development of Macau,” said the territorys new leader, Fernando Chui, after being sworn in by Chinese President Hu Jintao.

The tiny territory, best known as a dingy casino town in the past half-century of its 400-year history as a Portuguese colony, returned to Chinese rule on Dec. 20, 1999, as its economy was shriveling and warring Chinese gangs were frightening away tourists.

Since then, violence has subsided and the economy has exploded. The one place in China where gambling is legal, Macau boomed after the government broke up a local companys long-standing monopoly seven years ago and started welcoming U.S. gambling powerhouses such as Wynn Resorts, Las Vegas Sands and MGM Mirage.

As the operators built one flashy casino resort after another, gamblers showed up by the millions - the overwhelming majority of them from mainland China - and profits surged. By 2006, the enclave less than one-sixth the size of Washington, D.C., had hauled in more revenue than the Las Vegas Strip.

“If you said 10 years ago that Macau would have accumulated billions of billions of new capital dedicated to one industry and thrived like this, few would have believed you,” said Jonathan Galaviz, an independent gaming and tourism consultant. “Now its clear Macau is an economic success story.”

Sensitive to criticism that its newfound wealth has not benefited everyone, both Chui and Hu emphasized the importance of diversifying the local economy.

Hundreds of demonstrators marched through the citys streets after Sundays ceremony, calling for greater economic equity, an end to corruption and the right to elect the territorys leader, currently appointed by Beijing and rubber-stamped by a 300-member committee in Macau.

Macau saw several relatively large worker protests in 2007, with locals upset about the influx of immigrant labor and corruption. In 2008, a former transportation and public works secretary was sentenced to 27 years in jail for taking millions of dollars in bribes.

Chui made scant mention of the casino industry in his inaugural speech except to say he would step up its oversight. He did not elaborate.

“While we strengthen the regulation of the gambling industry, we will also support the advancement and transformation of the convention, logistics, cultural and traditional industries,” Chui said.

Hu urged Macau to maintain a transparent government and pay attention to the “comprehensiveness, coordination and sustainability” of its economy.

But the casinos, thanks largely to the strength of mainland Chinas stimulus-primed economy, are teeming once again. In October, Macau posted its best month ever, raking in $1.59 billion in gambling revenues. That was about double Nevadas $800.3 million take during the period, according to government figures.

Macaus industry faces an emerging threat from Singapore, where two major casinos are expected to open in the coming months and could siphon off the big-betting VIP gamblers who make up the majority of local casino revenues.

To help Macau better compete, Chui may re-examine and ease the local gaming tax, analysts say.

A former culture minister from one of the dominant local families, the 52-year-old Chui isnt expected to change key policies governing the number of casino licenses and tables.

The man who once held Macaus casino monopoly, Stanley Ho, made his first public appearance in months at Chuis inauguration. The 87-year-old billionaire had undergone surgery in August but did not disclose what the procedure was for. Ho left Sundays ceremony in a wheelchair, pushed by his son, Lawrence, also a gambling executive.

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Treasuries climbed yesterday after Bernanke set back those perceptions, saying the economy faces “formidable headwinds.” He repeated the language of the last Fed statement in November foreseeing an “extended period” of low rates and said inflation might subside while joblessness may fall at a pace thats “slower than we would like.”

“Despite the positive surprise from last weeks employment report, it is way too early for the Fed to begin exiting,” said Mark Gertler, a professor of economics at New York University who worked with Bernanke on research on the Great Depression before he became Fed chairman. “When the time does come, however, the Fed will be prepared.”

Yields on two-year notes fell 7 basis points to 0.76 percent. The Standard & Poors 500 Index fell 0.3 percent to 1,103.25 after rising as much as 0.4 percent.

The FOMC said last month that its benchmark interest rate, which has been close to zero for a year, would remain low as long as inflation is subdued and the unemployment rate fails to decline. Bernanke said yesterday those conditions havent changed.

Inflation Expectations

“Right now we are still looking at the extended period given that conditions remain — low rates of utilization, subdued inflation trends and stable long-term inflation expectations,” the Fed chief said in response to a question after a speech at the Economic Club of Washington. “That remains where we are.”

The consumer price index, minus food and energy, rose at a 1.7 percent annual pace in October, up from 1.5 percent the previous month. The core inflation rate rose at a 1.4 percent pace in August, the lowest rate since February 2004.

“We are going to have to continue to look at the economy,” Bernanke told moderator David Rubenstein, president of the economic club and co-founder of the Carlyle Group, the private equity firm. “Obviously there has been some signs of strength recently, we will want to factor that in as we talk about this next week.”

Dudley Comments

In separate remarks yesterday, New York Fed president William Dudley said the unemployment rate is “much too high.” If labor markets remain weak and inflation low, “it will be appropriate to keep the federal funds target exceptionally low for an extended period,” he told the Columbia University World Leaders Forum in New York.

Consumer credit in the U.S. fell by $3.51 billion, or 1.7 percent at an annual rate, to $2.48 trillion in October, according to a Fed report released yesterday. Borrowing dropped by $8.77 billion in September, less than previously estimated. Consumer credit has fallen for ninth straight months.

Growth Forecast

U.S. central bankers said last month the economy will expand in a range of 2.5 to 3.5 percent in 2010, according to the central tendency of their outlook, which excludes the three highest and three lowest projections.

That rate of growth will only drive unemployment down to a 9.3 to 9.7 percent range next year, Fed officials forecast. More than 7.2 million jobs have been lost since the start of the recession.

“We still have some way to go before we can be assured that the recovery will be self-sustaining,” the Fed Chairman said. “My best guess at this point is that we will continue to see modest economic growth next year — sufficient to bring down the unemployment rate, but at a pace slower than we would like.”

Bernanke “certainly hasnt done a 180 degree turn because of one payroll number,” said Michael Feroli, economist at JPMorgan Chase & Co. in New York. Risks to the economy “dont seem balanced at all” in Bernankes view.

JPMorgan Chase predicts the Fed to leave interest rates unchanged until the second quarter of 2011. Feroli said that an expansion one percentage point faster than the economys potential growth rate, which JPMorgan estimates at around 2.25 percent, would lower then unemployment rate by around four tenths of 1 percent in a year.

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Still, the recovery is expected to remain fragile.

“In most OECD economies, growth is likely to fluctuate around a modest underlying rate for some time to come,” said the organizations top economist, Jorgen Elmeskov, in an editorial.

“It is being held back by still substantial headwinds. It is only some time down the line that the recovery will become sufficiently strong to begin to reduce unemployment.”

The OECD also reduced the expected contraction this year to 3.5 percent from an earlier forecast of 4.1 percent. The organization publishes its economic outlook twice a year, although it updated some 2009 forecasts in an interim assessment published in September.

The U.S. economy has been boosted by stimulus measures, improving financial conditions, demand from the fast-growing non-OECD economies of Asia - especially China - and the stabilization of the housing market, the OECD said. It predicted unemployment will start to ease after peaking in the first half of 2010.

It predicts the U.S. economy will expand at a rate of 2.5 percent in 2010, up from a June forecast of 0.9 percent. It also expects a smaller contraction this year: a 2.5 percent fall in output compared with an interim September forecast of a 2.8 percent drop.

In Europe, the economies of the 16 countries sharing the euro are now expected to grow by 0.9 percent next year compared to a June forecast of zero growth. However, the OECD predicts a greater contraction of 4 percent this year, more than the 3.9 percent it calculated in September.

Unemployment is not set to peak before the end of 2010 or the beginning of 2011, and is likely to sap the strength of recovery, the OECD said.

Japans economy will grow by 1.8 percent next year compared with the June forecast of 0.7 percent. The OECD reduced prediction for a contraction this year to 5.3 percent compared to a 5.6 percent rate seen in September.

Elmeskov said central banks should keep interest rates low and should beware of the dangers of deflation, while governments should work on plans to reduce debt levels as the economy recovers.

As growth picks up, policy makers will need to mop up some of the excess liquidity caused by policies designed to keep credit markets open when they threatened to freeze during the peak of the crisis.

International coordination will be needed to roll back extended deposit insurance “as few countries may be willing to move ahead alone with a measure that could weaken the competitiveness of domestic banks,” it said.

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Chairman Ben S. Bernanke and his colleagues are reluctant to raise rates until the labor market shows signs of recovery, even though a report last week showed the economy resumed growth after 12 months of contraction. The Fed isnt yet willing to signal that its ready to join central banks in Australia, Norway and Israel in pushing borrowing costs higher.

“Theyve got, for a lot of reasons, to say that it looks like what weve been doing has been working,” said former Atlanta Fed research director Robert Eisenbeis, now chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey. “But if theyre too exuberant about it, its going to trigger expectations of a policy move quicker than perhaps they might like to do.”

Members of the Federal Open Market Committee, whose two-day meeting ends today, may be concerned any hint of a change in policy would prompt investors to sell Treasury bonds, sending rates higher on consumer and business loans and endangering the recovery, analysts said. A statement is due around 2:15 p.m.

Worst Recession

The Fed, while trying to pull the economy from its worst recession since the Great Depression, has held the benchmark lending rate close to zero since December while using asset purchases as its main policy tool. The unprecedented monetary stimulus helped fuel 3.5 percent growth during the third quarter.

Much of the expansion stemmed from government incentives for the purchase of cars and homes that boosted consumer spending, which accounts for about 70 percent of the economy. Excluding sales, production and inventories of automobiles, the economy grew 1.9 percent last quarter.

Growth “looks really good on the face of it, but the key question is whether it is sustainable,” said Tom Porcelli, a senior economist at RBC Capital Markets in New York. “A large chunk of the gain was stimulus related. A lot of it was artificially generated.”

The economy will probably expand at a 2.4 percent annual rate from October through December, according to the median forecast in a survey of economists last month.

Uneven Recovery

Bernanke and Fed Vice Chairman Donald Kohn “expect a very fragile and uneven recovery,” said former Fed economist David Milton Jones, president of Denver-based DMJ Advisors and author of four books on the central bank.

Inflation “will be low in the near term,” said Eisenbeis, adding that the doubling in the Feds assets since September 2008 to $2.16 trillion may spark higher prices in the longer term. “I see, with the buildup in the Federal Reserves balance sheet, a lot of threats there,” he said.

Investors are pouring money into inflation-linked debt to prepare for a surge in the cost of living spurred by the $11.6 trillion the Fed and government lent, spent or guaranteed to bolster the economy and financial system.

Inflation Expectations

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, widened to 2.06 percentage points yesterday from 1.80 points on Sept. 23. The TIPS spread is a sign that long-term inflation expectations are rising, challenging Fed efforts to keep policy accommodative.

Record central bank liquidity has also stoked a rise in asset prices. The Standard & Poors 500 Index has rallied 55 percent from a 12-year low in March, while crude-oil futures are up 78 percent this year.

Investors, reacting to signs of a recovery, have created “bubbles in oil prices” and equities, Jones said. “Bubbles are a nightmare for the Fed.”

Still, with unemployment rising, policy makers will reiterate their intent to hold the federal funds rate at “exceptionally low levels,” analysts said. The jobless rate reached a 26-year high of 9.8 percent in September and economists project it will exceed 10 percent by early next year.

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Government efforts to boost spending and keep borrowing costs low are stoking a rebound from the worst recession in seven decades. The pickup has yet to encourage hiring, probably ensuring Federal Reserve policy makers today will reiterate plans to keep their key interest rate near zero for an “extended period” to maintain the recovery.

“The ingredients needed for sustainable growth appear to be falling into place,” said Ryan Sweet, a senior economist at Moodys Economy.com in West Chester, Pennsylvania. “While the economy has resumed growing, it is insufficient for businesses to resume hiring.”

A reading of 50 in the ISM index is the dividing line between expansion and contraction. Economists estimates ranged from 49.2 to 54.4, compared with Septembers 50.9. The Tempe, Arizona-based groups report is due at 10 a.m. New York time.

A gain in October would mark the first back-to-back expansion in non-manufacturing industries, which make up almost 90 percent of the economy, since the two months ended May 2008.

Manufacturing Rebound

The need to prevent inventories from falling even more as sales improve is giving factories a boost. The purchasing managers group said two days ago its manufacturing gauge rose in October to the highest level in more than three years.

The economy grew at a 3.5 percent rate in the third quarter following four quarters of contraction that marked the deepest recession since the 1930s. Economists surveyed by Bloomberg early last month forecast growth will cool to a 2.4 percent rate in the current quarter and for all of 2010.

Another report today may show payrolls continue to fall even after the economy began to expand. Companies probably cut 198,000 jobs last month, according to the median estimate of economists surveyed before an 8:15 a.m. report from ADP Employer Services. The reduction would be the smallest in more than a year.

The jobless rate probably rose to 9.9 percent in October, a 26-year high, and payrolls have may fallen by 175,000 workers, according to the survey median before the Labor Departments monthly jobs report on Nov. 6.

Stronger Economy

The Standard & Poors 500 Index fell 4 percent last week, paring a rally that has sent the gauge up 53 percent from a 13- year low reached March 9.

Federal tax credits of up to $8,000 for first-time homebuyers and “cash-for-clunkers” rebates of up to $4,500 to trade in gas-guzzlers for new fuel-efficient cars have helped spur consumer demand for houses and cars. Auto sales rebounded in October after slumping the previous month when the auto incentive expired in late August.

Cash for clunkers “stimulated new vehicle sales and was a psychological signal to consumers that it was safe to begin to buy again,” Michael Jackson, chief executive officer at AutoNation Inc., the biggest U.S. auto retailer, said on a conference call last week.

Auto Sales

Cars and light trucks sold at a 10.5 million annual pace in October, exceeding the median forecast of analysts surveyed and up from a 9.2 million pace the previous month, industry figures yesterday showed.

Homebuilding, which is included in ISMs services index, contributed to economic growth in the third quarter for the first time since 2005. The number of contracts to buy previously owned homes rose in September for an eighth month, signaling sales may keep rising in coming months, data from the National Association of Realtors showed this week.

Congress is debating extending the homebuyer credit after it expires at the end of November to prevent demand from retrenching.

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