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Economists Even Gloomier on Outlook for US Recovery

Economists have soured on the U.S. economy's prospects for the second half of 2008 and have cut growth forecasts for next year as well, a closely watched survey released Monday showed.

While government stimulus payments helped the economy expand at a reasonable annual rate of 1.9 percent in the second quarter, economists polled by the Blue Chip Economic Indicators newsletter expect the air to go out of the economy as the temporary lift to consumer spending fades.

Economists expect U.S. gross domestic product to grow at a 1.2 percent annualized rate in the third quarter, down 0.1 percentage point from the consensus July forecast, the newsletter said.

In the fourth quarter, the economy is now seen expanding at a pace of just 0.3 percent -- a drop of 0.3 percentage point from July.

While the Blue Chip forecast for 2008 growth as a whole held at 1.6 percent, the projection for 2009 dropped to 1.5 percent from July's forecast of 1.7 percent.

The cut in the growth forecasts follows data showing mounting job losses, a stalled factory sector and a housing market that has yet to reach bottom.

The panel of 50 economists polled Aug. 6-7 predicts the sluggish economy will push the jobless rate to 6 percent in December and to 6.1 percent by the end of next year.

The last time the unemployment rate was as high as 6 percent was in October 2003. In July, it stood at 5.7 percent.

Of the panelists polled in the monthly survey, 78.3 percent expect the Federal Reserve to hold interest rates steady through the end of this year, while a strong majority -- 88.6 percent -- see the next rate move as up.

Separate forecasts for Treasury bill rates suggest panelists expect no rate increases until the second quarter of 2009, the newsletter said.

At their last meeting on Aug. 5, Fed policy-makers left the benchmark federal funds rate at 2 percent, where it has been since the end of April.

The percentage of economists who believe the U.S. economy is in, or will be in, a recession this year moved up to 55.8 percent from 54.5 percent in July, but was still below May peak of 60 percent.