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Subprime Problems to Slow Down Economic Growth: NABE

Troubles in the U.S. housing market will weigh on economic growth this year even more than earlier estimated, according to a forecast of economists released on Monday.

Real gross domestic product, the government's broadest measure of economic output, is expected to advance 2.3% in 2007. That is down from an earlier estimate in February for 2.8% growth, a survey conducted by the National Association for Business Economics found.

The lower forecast came after the government reported anemic 1.3% GDP growth during the first three months of this year.

"Results for the first portion of the year indicate that the expansion has descended from its cruising altitude," said Carl Tannenbaum, NABE president and chief economist at LaSalle Bank/ABN AMRO in Chicago.

However, growth in 2008 is expected to pick up to 3.1% after the housing market bottoms out.

The survey of 48 economists taken between April 19 and May 8, found that housing market troubles, particularly those in the risky subprime mortgage lending market, will drag out through this year.

"Residential investment remains a dominant force dampening growth in 2007," NABE wrote, adding that almost half of those surveyed expect the bottom in housing will not be reached until the fourth quarter.

A third of those surveyed think problems in the subprime market are delaying or deepening the housing correction.

Among those surveyed more than half see at least a 25% chance of a recession getting under way within the next year.

Employment growth is expected during both this year and next to be moderate. The forecast called for an increase in private employment of 1.3% this year, or about 1.5 million new jobs.

But productivity growth is expected to slow, with output per hour seen rising just 1.6% in 2007, down from 2.0% forecast in the February survey. But still, most of the panelists do not see a major risk that rapid growth in labor costs will stand in the way of moderation in inflation.

In fact, core personal consumption expenditures, a government measure of inflation that excludes volatile food and energy prices, will grow by a slower 2.1% this year, just slightly above the Federal Reserve's perceived target level.

Overall inflation, as measured in the Consumer Price Index, is expected to advance by a bigger 2.9%, reflecting a huge run-up in energy prices, particularly gasoline.