SAN FRANCISCO - Low interest rates will prevail through most of next year as the U.S. economy expands modestly and the unemployment rate remains stuck in double digits, the UCLA Anderson Forecast group said on Wednesday.

Specifically, we forecast that after growing at 2.8 percent in the most recent and current quarters, real GDP growth will settle into a 2 percent growth path for much of 2010 and be closer to 3 percent in 2011, the forecasting unit said in its report.

With such sluggish growth, the unemployment rate will likely peak at 10.5 percent in the first quarter and remain at or above 10 percent for almost all of next year, the closely watched report added.

For many, the tough jobs market will obscure how the economy will be regaining its footing. Things will be improving but it won't be obvious to people on Main Street, said David Shulman, a senior economist with the UCLA Anderson unit.

People won't be spending aggressively and people will be worrying about their jobs, he said. It'll be a long, slow healing process.

Shulman said his unit's outlook mirrors Federal Reserve Chairman Ben Bernanke's comments on Monday. Bernanke said the recovery remained fragile and unemployment may be high for some time, cooling talk of an early rise in interest rates fueled by a surprise fall in the jobless rate reported last week.

The U.S. central bank was holding to its pledge to keep benchmark borrowing costs at exceptionally low levels for an extended period, Bernanke added.

Lower unemployment and more normal growth of 3 percent to 4 percent will return by mid-decade, Shulman said.

CAUTIOUS CONSUMERS AND EMPLOYERS

Consumers who had been stashing cash and reducing debt during the worst recession since the Great Depression will continue to spend cautiously for some time.

Shulman said he expects real consumer spending to grow next year and in 2011 at a 2 percent rate, well below its more historical 3 percent to 3.5 percent rate, as the labor market remains beset by layoffs and weak hiring.

The UCLA Anderson report noted that in prior recessions marketing, finance, research and administrative employees were largely immune from layoffs. Today their jobs are vulnerable and employers are in no hurry to rebuild payrolls in the face of a potential surge in regulation, the report said.

Indeed, such previously recession-resistant industries as finance, advertising and media have witnessed an unprecedented amount of job cuts. Further exacerbating the employment situation is uncertainty about tax, healthcare and energy policies coming out of Washington, the report said.

But many construction workers who lost jobs during the extended housing slump may be rehired as the homes market, propped up by bargain-basement mortgage interest rates, is finally on the road to recovery, the report said.

With 23 percent of the nation's houses with mortgages underwater, foreclosures continue to rise; but we believe that is already factored into the decision making process of both buyers and sellers, the report said.

It predicted housing starts will rise to around 850,000 units next year from an estimated 574,000 this year.

The forecasting unit cautioned that signs of economic recovery may be illusory since policy makers are highly medicating the economy with record federal deficits and a zero interest rate policy coming from the Federal Reserve.

The unit said it is uncertain how much strength the economy has without that support so it does not see the Fed tightening rates until late in 2010, amid modest 2 percent inflation . For the same reason, the unit does not expect tax hikes, except for healthcare, beyond those already scheduled for 2013.

(Editing by Andrew Hay)

Ben Bernanke Unemployment Inflation