Survey: US economy to avoid slump

The US economy will skirt recession even as the housing slump takes a bigger bite from growth, according to a survey of economists.

The economy will grow at an annual rate of 1.8 percent in the fourth quarter, 0.4 percentage point less than forecast last month, according to the median of 71 analysts participating in Bloomberg News' monthly survey. Estimates for the first six months of next year were also reduced.

Sales of furniture, appliances and building materials will slow as plunging home sales and falling property values erode consumer confidence, economists said.

The Federal Reserve will follow last month's interest rate cut with a quarter-point reduction before the end of December, the survey shows.

Housing is an "ongoing train wreck", said Seamus Smyth, an economist at Goldman Sachs Group Inc in New York.

"The Fed is forward looking, and things aren't going to get better in housing any time soon."

Economists at Goldman Sachs reduced their estimate for growth this quarter to 1.5 percent, a half point less than they predicted last month.

They slashed the growth rate for the first half of next year by a full percentage point to 1.25 percent.

The world's largest economy grew at a 3.8 percent pace in the second quarter and has advanced 3 percent a year on average since 2003.

The rout in subprime-mortgage lending during August and subsequent credit restrictions and increases in borrowing costs will delay a recovery, economists said.

The number of Americans who may lose their homes to foreclosure more than doubled in August from a year earlier, according to RealtyTrac Inc.

Confidence falls

Dropping property values and rising foreclosures pushed consumer confidence in September to the lowest level in almost two years, according to a report from the Conference Board. Declining home prices also mean fewer owners can tap equity for extra cash.

A spending slowdown may already be on track. Retail sales probably increased in September at the slowest pace in five months, according to preliminary figures released yesterday by the International Council of Shopping Centers and UBS Securities LLC.

The report raised concern the holiday season may be the worst since 2002.

Consumer spending, which accounts for more than two-thirds of the economy, will grow at a 2.1 percent pace in the final three months of the year, 0.2 percentage point less than forecast last month, according to the Bloomberg survey median. Forecasts for the period from January to June were also trimmed.

Housing woes

"The bottom is falling out of the housing market," Steve Sanghi, chief executive officer of Chandler, Arizona-based Microchip Technology Inc, said in a conference call this week.

"Sales associated with the US housing market continued to be weak."

Microchip's semiconductors control appliances ranging from air conditioners to garage-door openers.

A drop in gasoline prices last quarter gave demand a final boost before the projected slowdown, economists said.

Spending increased at a 3 percent pace from July to September, almost a percentage point more than forecast last month. The gain helped the economy grow 2.7 percent.

Fed policymakers on September 18 cut the benchmark interest rate by a half-percentage point to 4.75 percent and didn't commit to any future policy action because they were uncertain about the economic outlook, according to minutes of the meeting released on Tuesday.

Fed Vice-Chairman Donald Kohn warned last week that the credit turmoil will probably have lasting effects on consumers, with credit not "as easily available and as inexpensive for many borrowers as it was a few months ago."

"Financial markets have improved, but they're not back to normal," said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.

"As an insurance move, the Fed can ease once more and speed up the process of getting things back to normal." Stanley's year-end fed funds forecast of 4.5 percent matched the survey median.

Less inflation will give policy makers room to lower rates, economists said.

Bloomberg News

(China Daily 10/11/2007 page16)