UPDATE 1-Philadelphia Fed survey: recovery, more job losses

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CHICAGO, June 9 (Reuters) - The U.S. economy should return to growth in the second half of 2009, but unemployment will rise through year-end and will barely fall over the next year, according to economists polled in a survey by the Philadelphia Federal Reserve Bank.

The 32 participants in the bi-annual Livingston survey, which was released on Tuesday, cut their estimates for U.S. growth compared with the previous poll and sharply pushed up their forecasts for the jobless rate.

Real gross domestic product was forecast to fall at an annual rate of 3.9 percent in the first half of 2009 before rising by 1.1 percent in the second half. For the first half of 2010, real GDP growth was pegged at 2.6 percent.

The previous forecast was for contraction in GDP of 0.9 percent in the first half of 2009 and growth in the second half of 1.8 percent.

The unemployment rate was expected to reach 9.9 percent in December, up from the 7.8 percent rate forecast earlier, and seen slipping only to 9.8 percent by June 2010.

The jobless rate in May was 9.4 percent, the highest level since July 1983.

Looking at prices, the economists forecast a brief bout of deflation this year, seeing annual average consumer price inflation at minus 0.7 percent in 2009 from an earlier 0.5 percent. Inflation was forecast to bounce back to 1.7 percent in 2010.

Deflation will be more marked at the wholesale level. The producer price index is expected to be minus 3.6 percent in 2009 before rising 1.3 percent in 2010.

The economists also marked down their expectations for U.S. interest rates, even as market rates have climbed over the past month.

The 10-year Treasury note yield US10YT=RR was forecast at 3.75 percent by year-end, versus 4 percent forecast in the previous survey. Yields were projected at 4 percent by mid-2010 and 4.28 percent by the end of 2010.

Ten-year yields are currently trading near 3.85 percent.

The Philadelphia Fed's Livingston survey has been produced since 1946, making it the oldest continuous survey of economists' expectations for the U.S. economy.

The economists projected that real GDP will grow by 2.7 percent annually over the next 10 years, and inflation, as measured by the CPI, will average 2.5 percent. (Reporting by Ros Krasny; Editing by Leslie Adler)