Nov. 16 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke has succeeded in returning the U.S. economy to growth after the longest contraction in more than six decades. So far Wall Street, not Main Street, has been the primary beneficiary.

Bernanke, who spoke today at an Economic Club of New York luncheon, has helped spark a 62 percent rally in the stock market since March 9 by pledging to keep borrowing costs “exceptionally low” for “an extended period.” His efforts haven’t stopped unemployment from reaching a 26-year high of 10.2 percent in October.

The Fed’s benchmark rate is already near zero and its balance sheet is just below a record at $2.14 trillion, leaving Bernanke, 55, with little room to maneuver. He may be faced with growth that doesn’t generate many new jobs, while stocks keep rising because companies including Caterpillar Inc. and Home Depot Inc. are cutting costs and meeting demand by improving productivity.

“It’s a good news, bad news story,” says Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. “The corporate sector is going to be in very good shape financially, and that’s good for the stock market. The bad news is that we’ll continue to see job losses through next spring.”

The labor market, along with bank lending, are “two of the principal factors that may constrain the pace of the recovery,” Bernanke said in his a speech. “As the recovery becomes established, however, payrolls should begin to grow again, at a pace that increases over time.”

Stronger Economy

The economy strengthened for the first time in more than a year during the third quarter, expanding 3.5 percent. Much of the growth came from a surge in productivity that is helping employers meet demand without hiring. Worker output per hour rose at a 9.5 percent annual rate for the period, the fastest in six years, according to Labor Department figures released Nov. 5 in Washington.

“My sense is that the increases in productivity we have seen so far are so large, so strong, that I’m a bit skeptical that they can be maintained going forward,” Bernanke told the Economic Club.

The increased efficiency has boosted corporate earnings and stock prices. The Standard & Poor’s 500 index has jumped 62 percent in the past eight months. During the most recent quarter, more than 80 percent of the companies in the index reported profits that exceeded the consensus analysts’ estimates, Bloomberg data show.

Surpassing Forecasts

Caterpillar, the world’s largest maker of bulldozers and excavators, earned $404 million, or 64 cents a share, in the third quarter, far surpassing the analysts’ forecast of 5 cents a share.

The Peoria, Illinois-based company, which saw sales fall 44 percent to $7.3 billion in the period, has slashed inventories and production and cut about 37,400 full-time and temporary workers since December 2008. Its stock closed at $58.78 on Nov. 13, up 165 percent since the March 2 low of $22.17.

Net income at Home Depot, the largest home-improvement retailer, dropped 7.2 percent in the second quarter to $1.12 billion. Overall expenses were $20 million less than the company planned, and it earned 66 cents a share, 7 cents better than analysts had estimated. Shares of the Atlanta-based company, which closed at $27.34 on Nov. 13, have risen 52 percent since the March 6 low of $18.

‘Seed Corn’

Rising corporate profits will be the “seed corn” for a sustained economic recovery and future hiring, and will justify continued stock purchases, says James Paulsen, who helps oversee about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis.

The Fed’s promise to keep interest rates very low is also helping to buttress stock prices. The central bank is likely to hold its benchmark rate at near zero percent through all of next year, according to Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York.

“The Fed doesn’t raise rates while the unemployment rate is rising,” says Christopher Low, chief economist at FTN Financial in New York.

The recent gains in productivity have been “so large, so strong, that I am a bit skeptical that they can be maintained going forward,” Bernanke said in his New York speech. Still, the economy must create 100,000 jobs a month just to keep up with new entrants to the workforce, he said. “So even though jobs are likely to be created next year, I’m concerned that the unemployment rate still might remain quite high by the end of the year.”

Profit Focus

Wall Street’s focus on quarterly profits may also mean job growth will be slow because companies won’t add workers who don’t immediately contribute to the bottom line, says Edmund Phelps, who won the 2006 Nobel Prize in economics and teaches at Columbia University in New York.

“There’s a whiff of joblessness in the recovery, because as long as firms are only looking in front of their nose, they’re not going to reconstitute forward-looking jobs,” he says.

The credit crisis has also changed the dynamic of the recovery, says Diane Swonk, chief economist at Mesirow Financial in Chicago. Large companies that relied on commercial-paper borrowing to finance payrolls have to keep more cash on hand, while tighter bank-lending standards are crimping expansion plans for small companies, she says.

Small-Business Loans

“It’s hard to get a small-business loan; we’re still talking about tightening credit conditions in the sector that creates the most jobs,” Swonk says. “This is a recovery that is very different, inhibited by the role that credit plays.”

Commercial and industrial loans at U.S. commercial banks dropped to $1.37 trillion as of Nov. 4 from $1.6 trillion at the end of 2008, according to Fed data. Consumer loans have fallen to $842 billion from $857 billion at the end of last year.

Many borrowers are being charged more than double on some loans relative to what banks pay for funds. A five-year auto- loan rate was 4.49 percentage points higher on Nov. 13 than the rate on a similar-maturity certificate of deposit that a bank can sell to raise cash, according to Bankrate.com data. That is up from an average of 2.05 percentage points in the five years through 2007. Spreads between so-called jumbo 30-year mortgages and 10-year Treasuries averaged 2.49 percentage points, up from 1.58 percentage points in the same period.

Stronger Growth

Treasury-bond rates are rising on signs of stronger growth, with the difference between 2- and 30-year yields at 3.59 percentage points on Nov. 12, the most since July, according to Bloomberg data. The spread was 1.91 percentage points at the end of 2008.

Tight credit remains a threat to Bernanke’s success at helping sustain expansion, partly because Fed officials don’t see prospects for immediate improvement in unemployment, which was 4.9 percent when the recession began in December 2007.

“It may be some time before significant job growth occurs and even longer before we see meaningful declines in the unemployment rate,” Richard Fisher, president of the Federal Reserve Bank of Dallas, said Nov. 10 in Austin, Texas.

The dichotomy between the surging stock market and lagging jobs market may end up posing problems for the central bank, says Mohamed El-Erian, chief executive officer of the Newport Beach, California-based Pacific Investment Management Co., which runs the world’s biggest bond fund.

“In seeking to avoid a depression occasioned by the financial crisis, the Federal Reserve now finds itself having inadvertently placed a large bet on a recovery driven by asset prices,” he says.

‘Collateral Damage’

The danger is that the Fed’s accommodative policy will push stock prices further out of line with the economic fundamentals of modest growth and high unemployment, according to El-Erian. The Fed’s strategy, coupled with the federal government’s $787 billion stimulus package, also “faces the risk of collateral damage, including dollar pressure,” he adds. The dollar has fallen 15 percent since March against a basket of the most- traded currencies.

Rising unemployment poses political perils for President Barack Obama and his fellow Democrats ahead of Congressional elections next November.

Exit polls during state balloting earlier this month showed the economy was the chief concern of voters who elected Republicans to replace Democratic governors in New Jersey and Virginia.

Obama said Nov. 12 that he will convene business executives and experts for a jobs forum next month at the White House.

“The economic growth that we have seen has not led to the job growth that we desperately need,” he said. “We have an obligation to consider every additional responsible step that we can to encourage and accelerate job creation in this country.”

To contact the reporters on this story: Michael McKee in New York at mmckee@bloomberg.netRich Miller in Washington rmiller28@bloomberg.net

Last Updated: November 16, 2009 15:13 EST