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Fewer Economists Call for Second Half Rebound

Reuters
Monday, 21 Jul 2008 | 3:57 AM ET

The U.S. economy may have avoided a recession but will grow below trend for some time as firms face higher prices for a range of goods that will cut into profits, according to a panel of economists surveyed.

Economists in the quarterly National Association for Business Economics survey were less pessimistic about the economy's outlook in the June 19 through July 10 survey than they were in April, but price pressures will weigh on growth.

AP

"More firms reported higher sales, but also higher material costs and lower profits, in the second quarter than in the first quarter," said Ken Simonson, chief economist at the Associated General Contractors of America.

According to the survey, a record 75 percent of the economists surveyed, representing a wide range of industries, said their firms paid more for materials during the second quarter and expect to see higher prices now as well.

The 101 NABE members surveyed come from all sectors ranging from manufacturing to financial services. NABE has been conducting this quarterly survey since 1982.

According to the latest survey, more firms are planning increases in capital spending, but continued slowing in the housing and tighter credit have had an impact.

"More respondents than in the past two surveys said tighter credit market conditions have affected their business negatively for the most part," Simonson said.

Still, 44 percent of the respondents said they expect inflation-adjusted gross domestic product (GDP) to grow at an annual rate above 1 percent in the second half of this year. But 45 percent expect growth to be below 1 percent and 10 percent expect a decline.

Demand for goods and services increased at 44 percent of the respondents' firms and fell at 19 percent, a rebound from the dramatically low levels seen in first quarter.

But weakening U.S. market conditions and soaring commodity prices are squeezing profit margins. For a second quarter in a row, reports of falling profit margins outnumbered those of rising margins.

Among the panelists, 30 percent reported falling profits while 17 percent reported rising margins.

And amid wide-ranging cost increases for commodities and goods, 35 percent of the respondents said their firms raised prices in the latest quarter, the highest such share since April 2007.

Tighter Credit

"Tighter credit market conditions appear to continue to be having an impact on the economy," the NABE survey stated.

Among those surveyed, 41 percent stated that tighter conditions have affected business, an increase from 39 percent in the last April survey, and 26 percent in the January survey.

But the share of respondents who expect a further substantial slowdown in the housing market over the next six months dropped to 29 percent from 45 percent.

Even with slow growth to continue, employment levels are holding up, particularly in the services sector, the survey showed.

During the second quarter 27 percent of all respondents reported rising employment at their firms, while just 12 percent reported job cuts.

But hiring plans for the next six months will involve caution, the survey showed.

"Respondents to the July NABE Industry Survey were more varied than in the decidedly downbeat April survey about resent results and the next few quarters, but they were far from ebullient," said Simonson.

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