U.S. News

Poll Sees GDP Growth At 2.5% In 2007, 3.0% In 2008


The U.S. economy will easily skirt recession this year as consumer spending remains sufficiently sturdy to offset the effects of a housing downturn, a Reuters poll showed on Tuesday.

This resilience may even allow the Federal Reserve to leave interest rates unchanged this year -- a 40% chance, according to respondents -- although a majority still expect them to come down by the end of June.

The poll of 58 economists showed they expected growth tocoast along at a rate of about 2.5%in 2007, picking up to 3.0% next year. That is little changed from 2.6% for this year in a poll taken one month ago.

Fears that the housing slump would drag middle-America into the gutter appear to have faded, with signs of incipient stability in the sector bolstering sentiment about U.S. economic prospects as a whole.

Manufacturing, another sore spot in the outlook, seems to be faring just well enough not to threaten the benign growth picture. Rising incomes, which took some time to catch up to
productivity increases, should offer some help.

"As the economy continues to exhibit strength against the backdrop of slowly fading adjustments in housing and manufacturing, market expectations of significantly weaker growth are ebbing," said Robert Mellman, economist at JP Morgan.

Less Sure About Rate Cuts

As for interest rates, most still see the Federal Reserve pushing them lower them before the year is over. The first rate cut will likely come in the second quarter, the survey indicates, followed by another in the fourth.

That would bring the federal funds rate to 4.75% from its current 5.25%, but hinges on a continued gradual moderation in the rate of inflation.

Economists forecast core CPI to average 2.3% this year compared with 2.4% projected in last month's poll.

The very gradual nature of such a drop in interest rates indicates many of those polled have become less convinced of the certainty of looser monetary policy this year as pockets of
resilience have emerged in the economic data.

Futures markets have already acknowledged the shift, and are now pricing in just one rate cut for 2007 as a whole -- down from more than three late last year.

"The Fed's rate-setting behavior contains a significant amount of inertia: a Fed at rest tends to stay at rest," said John Shin, economist at Lehman Brothers.

Don't Forget The Umbrella

Those with bearish views on the economy warn, however, that weather may have been a big part of a late-year surge in activity, which could have been more of a last hurrah for
consumer spending than a sign of renewed vigor.

Last year was the warmest on record in the United States. The spring-like temperatures surrounding the Christmas season may have not only artificially boosted holiday shopping but also given false hope that the housing market was stabilizing.

Lower energy prices, a key boost to consumption, may also not be around forever. Despite a drastic recent slide, cooler temperatures were pushing the cost of an oil barrel back up toward $53.

To be sure, the labor market seems to be holding fairly well at this stage in the business cycle. With around 160,000 jobs being created per month over the past six months and the unemployment rate at just 4.5%, this key marker of economic performance gives reason for cautious optimism.

Cautious, because the Reuters survey indicates conditions will worsen in coming months -- the unemployment rate is expected to average 4.8% for the year.