Clamping down on spending now to cut the gaping U.S. budget deficit would be pound-foolish and derail the economic recovery, a top White House economic adviser said on Tuesday.

Immediate fiscal contraction would inevitably nip the nascent economic recovery in the bud -- just as fiscal and monetary contraction in 1936 and 1937 led to a second severe recession before the recovery from the Great Depression was complete, said Christina Romer, who heads the Council of Economic Advisers.

Romer, in a speech to the National Association for Business Economics, also said President Barack Obama's $787 billion stimulus package had been successful in pulling the economy out of a deep recession.

However, she said additional measures were necessary to bring the jobless rate down from the current level of 9.7 percent, which she called a terrible number by any metric.

In a worrisome sign for the job market, a survey released by Manpower Inc on Tuesday showed U.S. employers were slightly less willing to hire than three months ago.

One year ago, Romer addressed the same group in the same banquet room overlooking the Potomac River and Washington Monument, and said the stimulus package would probably generate more oomph than usual.

Her argument was that because credit conditions were tight, households and businesses would be more likely to spend the extra money from tax cuts and other measures.

Business spending has picked up recently, particularly in the fourth quarter of 2009 when spending on equipment and software jumped at an 18.2 percent annual rate.

Consumer spending has been slower to recover, although it has shown some signs of modest improvement in the first few weeks of 2010. It took additional measures such as the cash for clunkers auto sales incentives and the $8,000 credit for home buyers to spur demand.

Many households are still trying to pay down debt and boost savings lost in the housing and stock market slumps, which may constrain spending growth for some time.

JOBS THE WEAK LINK

The weak link remains employment. Romer's own research had predicted that the stimulus package would curtail the rise in unemployment, but the jobless rate rose far higher than the White House had anticipated.

That has created political problems for Obama and his Democratic party, which has recently lost two governors' races and the Senate seat that had been held by liberal standard-bearer Edward Kennedy, who died last year.

Nigel Gault, chief U.S. economist with IHS Global Insight in Lexington, Massachusetts, said companies were poised to resume hiring and monthly payroll reports are likely to turn positive very soon.

However, he said the pace of job growth would be slow, with just 850,000 jobs added over the course of 2010. While Global Insight expects the private sector to add more than one million jobs, that will be partially offset by continuing declines in state and local government payrolls.

Making the transition to job growth is an important step in the expansion, he said. It will not change the story that this will be a subdued recovery, due to credit and balance sheet constrains, but will reduce the odds of a relapse.

Charles Evans, president of the Federal Reserve Bank of Chicago, also predicted a sluggish labor market recovery, which he said meant the central bank was likely to keep borrowing costs low for some time.

Romer said Obama's job creation proposals -- a hiring tax credit, additional aid for cash-strapped states, and providing capital to small banks -- would help to bring down the jobless rate although she acknowledged that the economy probably would not grow fast enough to quickly close the labor gap.

A $149 billion package of tax breaks and unemployment aid cleared a procedural hurdle in the Senate on Tuesday. The Senate is expected to pass the bill within the next few days and send it to the House of Representatives.

Responding to Republicans, who have objected to additional spending measures because of budgetary concerns, Romer said that the budget problem had been years in the making.

It was not, as some have suggested, due to actions taken this past year, she said.

The sensible way to address the deficit was with a long-run plan that tackles the biggest drivers, including health care costs, while keeping necessary short-term assistance flowing to the economy and labor market, Romer said.

Failure to take additional targeted actions to jump-start job creation would lead to slower recovery and higher unemployment for an extended period, Romer said.

High unemployment is not just bad for people; it is bad for the budget deficit. It is virtually impossible to get the deficit under control when the unemployment rate remains near 10 percent, she said.

(Reporting by Emily Kaiser and Mark Felsenthal, Editing by Chizu Nomiyama and James Dalgleish)

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