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Fed Can Help U.S. Avoid Recession: Economists

Economists are clearly worried about the U.S. falling into a recession, but they also believe the Federal Reserve can help prevent one by cutting interest rates.

A survey by the National Association of Business Economics showed economists believe recession is the biggest risk to the economy right now and that the Fed will cut rates by half a percentage point by March in the face of sluggish economic growth.

A separate survey by the Blue Chip Economic Indicators newsletter also said the chances of a recession are increasing as troubles in the housing sector and credit markets take their toll.

"Over 60 percent of the respondents cited recession as the major risk facing the economy over the next year, while only a third cited inflation as the greatest problem," the NABE said.

Those most concerned about a recession tended to cite problems in the subprime mortgage market and potential declines in home values as likely triggers.

Can Be Avoided

Still, many thought that recession, while a risk, could most likely be avoided -- with some help from the Fed. The survey, reflecting the estimates of 46 economists, was taken Aug 2-23.

That period began with relative calm before descending into a global credit meltdown capped by a cut to the Fed's discount rate and the issuance of a special Federal Open Market Committee statement that effectively shifted the bank to rate-cutting bias.

Only a third of respondents guessed that "domino effects" were under way where losses in the subprime mortgage market would spread to many other sectors.

The panel trimmed its outlook for 2008 consumer spending growth to 2.5 percent from 2.8 percent and also cut its estimate for business fixed investment.

The economists forecast a 50-basis-point cut in the federal funds rate by the end of the first quarter of 2008, up from May's forecast of 25 basis points.

Meanwhile, the Blue Chip survey put the odds of a recession in the next 12 months at one-in-three. A month earlier, the odds were at one-in-four.

The survey of about 50 private-sector economists was taken Wednesday and Thursday, just ahead of the government's release of August employment data on Friday, which showed the first decline in payrolls four years.

Solidify Expectations

The newsletter stated that this dismal employment picture did not impact an already-weak growth outlook but it did solidify expectations for an interest rate cut from the Federal
Reserve.

The economists lowered their forecasts for growth due to concerns about credit market turmoil spilling into the economy. The panelists said they expect GDP growth to remain modestly
below trend through the first half of next year.

Amid the turmoil from a troubled housing market and tightening credit, the consumer may rein in a bit on spending, the economists forecast.

Consumer spending, adjusted for inflation, is expected to grow at the slowest pace in four years during 2007 and slow further in 2008.

At the same time, the economists forecast that disposable personal income will outpace spending, the first time since 2002.

"Underlying this development is a belief among our panelists that households will attempt to rebuild savings in the face of increased uncertainty about job growth, the value of their homes and possibly the worth of their equity portfolios," the newsletter wrote.

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