WASHINGTON (Reuters) – U.S. President Barack Obama gave a spirited defense of his economic strategy on Tuesday, saying there were signs of progress in battling the recession, but “by no means are we out of the woods just yet.”

In his most comprehensive speech on the U.S. economic downturn, now in its 16 month, Obama offered no new policies but gave a detailed review of the steps he has taken to rescue the economy and rebuffed critics who say he is spending with “reckless abandon.”

“History has shown repeatedly that when nations do not take early and aggressive action to get credit flowing again, they have crises that last years and years instead of months and months — years of low growth, years of low job creation, years of low investment, all of which cost these nations far more than a course of bold, upfront action,” he declared.

U.S. stocks fell Tuesday after an unexpected drop in retail sales dampened recent optimism on the U.S. economy. New data showed sales dropped 1.1 percent after two months of increases. Producer prices also fell unexpectedly.

“There is no doubt that times are still tough. But by no means are we out of the woods just yet. But from where we stand, for the very first time, we are beginning to see glimmers of hope,” Obama said in his 45-minute speech at Georgetown University.

He said his $787 billion economic recovery package, steps to recapitalize banks, unfreeze credit markets, stabilize the housing market and shore up the ailing U.S. auto industry were “starting to generate signs of economic progress.”

Schools and police departments had canceled planned layoffs, clean energy companies and construction companies were rehiring workers, and home-owners were refinancing at lower interest rates, he said.

“This is all welcome and encouraging news, but it does not mean that hard times are over. 2009 will continue to be a difficult year for America’s economy,” Obama said.

There would be more job losses and more people would lose their homes, he warned. White House spokesman Robert Gibbs said later the administration expected to see “many more months of hundreds of thousands of jobs lost.”

The U.S. economy lost 663,000 jobs last month, pushing the unemployment rate to a 25-year high of 8.5 percent. The economy shrank at an annual rate of 6.3 percent in the last quarter of 2008, the steepest decline since the first quarter of 1982.

Asked at a news conference to explain the timing of Obama’s speech, given that it contained little new, Gibbs said it was a progress report, telling Americans what had been achieved and what lay ahead.

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Some 71 percent of Americans say they are confident that Obama will manage the economy properly, according to a Gallup poll released Monday.

“I know there is criticism out there that my administration has somehow been spending with reckless abandon, pushing a liberal social agenda while mortgaging our children’s future,” Obama said.

But he said the worst thing his government could do in a recession was cut spending, and it was not good enough to concentrate on simply fixing the immediate crisis. Reforms had to be made now to grow the economy over the long-term.

Congress has passed a record $3.5 trillion budget that Obama says invests in America’s economic future, by funding a sweeping reforms of health-care and education and boosting investment in environmentally forms of energy production.

Obama also rebuked critics who said his refusal to nationalize banks was another example of Washington “coddling Wall Street.”

He said it was crucial to ensure banks had the capital to start lending again, but, preemptively taking over troubled banks would end up costing taxpayers more money and undermine already shaky confidence.

(Editing by Alan Elsner, additional reporting by Andy Sullivan, Lucia Mutikani and Emily Kaiser)