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America resilient 5 years after worst GDP loss since ’30s

– Ethan Harris, former chief U.S. economist at Lehman Brothers Holdings, recalls packing his family photos and top research into a suitcase five years ago on the Friday before the company went under.

Anticipating he might not be able to go back to his office in New York, he exchanged phone numbers with colleagues and talked to his supervisor, Paul Sheard, who agreed it would be disastrous for markets if Lehman wasn’t rescued.

“My boss at the time said to me: ‘Well, we know it’s going to be a devastating event, and therefore they’re not going to let it happen.’ And I said: ‘Well, I don’t know; maybe they will’,” said Harris, now co-head of global economics research at Bank of America Corp.

While Harris’ premonition proved true – Lehman’s bankruptcy filing on Sept. 15, 2008, exacerbated the worst financial crisis since the Great Depression – the economy, with help from the Federal Reserve, has emerged from the ruins “in much better health,” he said. The United States is weathering federal budget cuts and higher payroll taxes, growth is picking up and some economists predict the expansion, now in its fifth year, may last longer than most.

The signs of resilience are everywhere: Households continue to spend. Businesses are investing and hiring. Home sales are rebounding, and the automobile industry is surging. Banks have healthier balance sheets, and credit is easing. All this coincides with the economy shedding the excesses of the past, such as unmanageable levels of consumer and corporate debt.

“We are in a much better place than we were five years ago,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pa. “Consumers are feeling much, much better; certainly investors are.”

Confidence is hovering around a five-year high, and the Standard & Poor’s 500 Index has climbed 80 percent since the 18-month recession ended in June 2009. In August, the share of Americans who say jobs are currently hard to get decreased to 33 percent, the lowest since September 2008, the month of Lehman’s collapse, according to a report today from the Conference Board.

“Considering the trauma we went through and the panic in the markets, the economy has really done pretty well,” and is “strong enough to support higher equity prices,” said John Carey, a portfolio manager at Pioneer Investment Management Inc. in Boston, which manages about $200 billion.

“Stocks look attractive relative to bonds,” and shares of consumer-related and regional banks will benefit the most from growth in spending and demand for credit.

After months of political wrangling, Congress worked out a deal with President Barack Obama on Jan. 1 that let the payroll tax revert to 6.2 percent from 4.2 percent while avoiding broad- based income-tax increases. Across-the-board cutbacks in federal spending began in March.

Even with these restraints, GDP kept growing, and as their effects fade, the expansion will accelerate in the second half of 2013, according to a Bloomberg survey.

“Given how well the economy’s done in the last year, in spite of everything that’s happened in Washington, that’s a pretty good sign” of its underlying strength, said New York-based Harris, who projects a 2.7 percent growth rate next year after an estimated 1.5 percent this year and a step up to 3 percent in 2015.

Zandi’s more optimistic forecast shows the pace almost doubling to 3.3 percent in 2014 after 1.7 percent this year and reaching 4.1 percent in 2015.

A growth rate of 3 percent or more would be the best since 2005, and exceed the 2.2 percent average since the recovery began.

“As we move into next year, the better private economy will start to shine through,” he said.

Improving job prospects, together with rising stock and home prices, are bolstering consumer spending, which accounts for about 70 percent of the economy. Households, after recouping wealth lost during the severest recession since the 1930s, now have record net worth, and a ratio of liquid assets to cover liabilities is the strongest since 2000.

Americans’ finances are in the best shape in decades and they’re ready to borrow again as credit conditions thaw, signaling the start of a “stronger growth phase,” said Joseph Carson, director of global economic research at AllianceBernstein in New York.

“Consumers’ ability to take on more risk is greatly improved,” he said. “They can go out and spend, take that vacation, do home repairs and buy more durable goods. All those things kick in.”

The Fed’s attempt to keep borrowing costs near historically low levels has revived demand in interest-rate sensitive industries, which is sustaining manufacturing. Combined purchases of new and existing homes are the highest since 2009, according to data compiled by Bloomberg. Car and light truck sales are headed for the best year since 2007, figures from Ward’s Automotive Group show.

The vehicle industry “has been a very significant participant” in the general economic recovery, said Steven Rattner, a New York financier who led the bailouts of General Motors and Chrysler predecessors in 2009.

“The automakers have gone from being unprofitable, with huge excess costs and very restrictive union agreements and dealer arrangements, to being a group of companies that is now highly profitable, very lean and exceptionally competitive,” he said.

Banking, which bore the brunt of the Lehman collapse, has come a long way, helped by higher standards in the 2010 Dodd-Frank Act. Regulators have been compelling banks to retain earnings, and new international and domestic rules are prompting stronger capitalization.

The 18 largest U.S. banks had more than doubled one measure of capital at the end of 2012 compared with the end of 2008, and 17 of the 18 had enough funds to withstand a deep recession, according to Fed analysis this year.