Forecasters look for economy to slow while inflation retreats in 2007

Monday, November 20th 2006, 6:37 am

By: News On 6

WASHINGTON (AP) _ The U.S. economy has been battered by a bigger-than-expected slump in housing but will keep growing next year as consumers get relief from soaring energy costs.

That is the view of a panel of 50 top forecasters in a survey released Monday by the National Association for Business Economics.

The NABE panel predicted that the overall economy, as measured by the gross domestic product, would expand by 2.5 percent in 2007.

That is down slightly from the previous survey in September which forecast that the economy would grow by 2.7 percent next year. The expectations for 2006 were also marked down with GDP growth now put at 3.3 percent instead of 3.4 percent forecast in the previous survey. The economy expanded by 3.2 percent in 2005 and 3.9 percent in 2004.

A bigger-than-anticipated slump in housing was the primary reason for the reductions. The NABE panel said that housing construction would fall by 3.5 percent this year and an even larger 5.5 percent in 2007.

Both of those figures are larger declines than the NABE forecasters had previously predicted. Both would represent quite a reversal from the 8.6 percent increase in residential investment for all of 2005 compared to 2004.

Housing is currently in a steep slump following an extended five-year boom powered by the lowest mortgage rates in a generation. Sales of both new and existing homes, which set records for five straight years, have been falling. Construction of new homes and apartments has declined, with construction activity in October down 27.4 percent from a year ago.

The Federal Reserve engineered the current economic slowdown with a two-year campaign to push interest rates up. The Fed's goal was to achieve a soft landing in which economic growth slowed enough to reduce inflation without bringing on a recession.

The NABE forecasters predicted the Fed would achieve that soft landing. They saw consumer prices, which rose by 3.7 percent last year, rising by just 2.7 percent this year and an even lower 2.5 percent in 2007.

Part of the good news on inflation will come from lower oil prices. NABE forecasters looked for a barrel of West Texas intermediate crude oil to sell for $60 at the end of this year, instead of the $70 they were forecasting two months ago. Crude oil was forecast to be at $56 per barrel at the end of 2007.

The NABE panel forecast a 2.8 percent increase this year in core inflation, which excludes food and energy, and a 2.4 percent rise in 2007. All the inflation rates were measured from the fourth quarter of one year to the fourth quarter of the next.

"Despite the hindrance of the housing correction, the economy is expected to continue gaining ground in 2007," said Carl Tannenbaum, NABE president and chief economist at LaSalle Bank/ABN AMRO in Chicago.

The slower growth will have an impact on the job market. The NABE panel forecast that the unemployment rate would rise from an expected average for all this year of 4.7 percent to 4.9 percent in 2007.

The forecasters, however, said the fall in inflation pressures will mean that the Fed will not feel the need to raise interest rates further. They predicted that the federal funds rate, the interest that banks charge each other, will remain at the current 5.25 percent for an extended period. After raising rates at 17 consecutive meetings, the Fed has kept rates unchanged since August.

The NABE panel said the central bank's next move would likely be to cut rates, once inflation pressures retreat further. The forecasters saw two quarter-point rate cuts occurring in the second half of next year.

The latest NABE consensus survey was prepared from the responses of its forecasting panel submitted from Oct. 20 through Nov. 6. NABE, with 2,400 members, is a professional association for people who use economics in their work.