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Consumer Spending to Slow Due to Housing Slump: Survey

U.S. consumers will curb spending this year after being hit by continued troubles in the housing sector, but business investment is set to pick up, adding to economic growth later this year, according to a survey of economists released on Sunday.

Economists surveyed in the closely watched Blue Chip economic forecast downgraded their expectations for GDP growth in 2007 on a year-over-year basis to 2.1 percent from their forecast a month ago of 2.2 percent.

Slowed consumer spending, said the economists who were surveyed last week, will be the main factor behind slower growth, as well as continued troubles in the housing and subprime mortgage markets.

"Consumer spending was the economy's stalwart performer over the past year but is poised to slow markedly in the current quarter," the Blue Chip Economic Indicators newsletter said.

The consensus forecast from the economists surveyed was for consumer spending, as measured by the government's Personal Consumption Expenditures Index, to grow by a moderate 2.1 percent annual rate in the second quarter, followed by growth of 2.5 percent in the third quarter and 2.6 percent in the final three months.

That compares with PCE growth of 3.5 percent over the last year.

Due to slower consumer spending, unit sales of autos will hit the lowest level since 1998, the group forecast.

Troubles in the housing market are expected to continue through this year, according to the survey.

"Sky-high inventories of unsold homes, tighter lending standards and rising mortgage rates suggest it will remain a drag on growth throughout the remainder of the year," said the newsletter, which released the forecast.

However, economists expect that the degree of drag the housing market will exert on GDP growth will diminish as the year wears on.

Even with slowing consumer spending, economists are expecting businesses to pick up the slack.

Manufacturing activity picked up in March and April and, as a result, the consensus forecast now is for total industrial production to grow at annualized rates of 3.2 percent in the second quarter, 2.8 percent in the third and 3.1 percent in the final three months of this year.

That compares with an outright contraction at the end of 2006 and tepid growth of 0.9 percent in the first quarter.

"Helping to prompt the revival in manufacturing are signs of a distant rebound in new orders for capital goods that this month led to small increases in consensus forecasts of 2007 and 2008 in non-residential fixed investment," the newsletter wrote.

The economists polled foresee a better-than-$20 billion positive swing in business inventories this quarter that may add about a percentage point to the rate of real GDP growth.

Also set to contribute to GDP growth is net exports. While a widening of the trade deficit subtracted a full percentage point from the first quarter's rate of growth, healthy export growth and a diminishing impact from crude oil imports will help narrow the trade deficit over the remaining three quarters of this year.

On the inflation front, a rate cut from the Federal Reserve is less likely. In fact a growing number of respondents --although well below 50 percent surveyed -- believe the next move will be to raise rates.

The consensus forecast called for the Consumer Price Index to register a year-over-year increase of 2.5 percent both this year and next, slightly higher than forecast a month ago.

The Core CPI, which strips out volatile food and energy prices, is expected to register an increase of 2.3 percent this year and next. That is close in line with the previous forecast.