U.S. Growth, Easing Inflation to Follow Fed `Script'


The U.S. economy will keep growing without prompting faster inflation, giving the Federal Reserve no reason to change interest rates into 2008, this month's Bloomberg News survey showed.

Economic growth will settle into a 2.5 percent to 3 percent range at an annual pace through the first half of next year, according to the median estimate of 70 economists surveyed by Bloomberg News from July 2 to July 9. The Fed's preferred inflation gauge won't sound any alarms, some also said.

``The economy has stuck very close to the Fed's script,'' said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, who forecasts central bankers will keep rates unchanged at least through the third quarter of next year. ``I don't think the Fed could ask for more.''

Gains in business investment and exports will compensate for continued declines in home construction and slower consumer spending to send the expansion into a seventh year, economists said. Fed Chairman Ben S. Bernanke and other policy makers are getting credit for the economy's performance after taking their target rate to 5.25 percent and holding it there since June 2006.

``What the Fed would like to see is growth just slow enough to keep inflation down, but not so slow as to cause the economy to be in distress,'' said David Berson, chief economist at Washington-based Fannie Mae, the world's largest mortgage buyer. ``The Fed has been able to achieve what it wants and we expect that will continue.''

Growth Rebound

Growth probably rebounded to a 3 percent annual rate last quarter after a 0.7 percent pace in the first three months of 2007 that was the weakest in four years, according to the survey median. The forecast was up 0.4 percentage point from last month.

Some economists remain concerned that the subprime-mortgage market meltdown will threaten consumer spending. Merrill Lynch & Co., UBS AG and Commerzbank AG see growth below 2 percent in the second half of the year as spending slows and business investment fails to pick up under the weight of tougher financing conditions.

D.R. Horton Inc., the second-largest U.S. homebuilder, said today it will report a fiscal third-quarter loss after orders plunged 40 percent, and sees no sign of a housing rebound.

Housing-related businesses also are hurting. Home Depot Inc., the world's largest home-improvement retailer, today cut its profit forecast for the year as the housing slump deepened. The Atlanta-based company's revenue may fall as much as 2 percent this year, the first annual decrease in its history.

Consumer spending, which accounts for more than two-thirds of the economy, probably rose last quarter at a 2 percent pace, the smallest increase since the last three months of 2005, according to the survey. Spending gains will average 2.6 percent in the last half of the year, compared with an average 3.7 percent increase per quarter over the last decade.

Rising gasoline prices, which topped $3 a gallon on a monthly average for the first time ever in May and June, and falling real estate values, are the main reasons spending will cool, economists said.

Housing Slump

The housing slump, already the worst since 1991, will probably continue into next year.

``The consumer is growing a bit more cautious about spending, in part because of the housing downturn and partly because of higher gasoline,'' Zandi said. ``This will allow core inflation to moderate further.''

Consumer prices will probably rise 3.1 percent this year after increasing 2.5 percent in 2006. Core prices, which exclude volatile food and fuel costs, have moderated in recent months and will probably continue to ease, some economist said.

The Fed will keep interest rates unchanged through the third quarter of 2008, according to the survey median. In last month's poll, economists forecast a cut in next year's second quarter.

`Doing It Well'

It's ``an economy that's steady as she goes,'' said Michael Gregory, senior economist at BMO Capital Markets in Toronto, whose firm dropped forecasts for rate cu...


Bloomberg
7/10/2007 7:53:02 AM