Economy near contraction in 1st quarter: Philly Fed

A security guard at the Port of Los Angeles in a file photo. The U.S. economy will barely manage to grow in the first quarter this year while inflation will remain somewhat elevated, a quarterly survey issued by the Philadelphia Federal Reserve Bank showed on Tuesday.

NEW YORK (Reuters) - The U.S. economy will struggle to grow in the first quarter of this year and faces an almost 50 percent chance of contracting, a quarterly survey issued by the Philadelphia Federal Reserve Bank showed on Tuesday.

Unemployment will edge higher given feeble job creation in the first three months of the year as the world's largest economy teeters on the brink of shrinking for a second consecutive quarter.

Forecasters saw a 47 percent probability of contraction in gross domestic product this quarter and a 43 percent chance in the second quarter, levels not seen since the recession in 2001 in the wake of the dot-com bubble, the survey said.

"Although the forecasters' median estimate for real GDP this quarter and the next suggests slow but positive growth, they think the risk of a contraction is high," it said.

"These current-quarter and one-quarter-ahead risks have not been this high since the survey of 2001 Q4, when they were 82 percent and 49 percent, respectively," the survey added.

The 50 forecasters pegged current-quarter growth in real GDP at a rate of just 0.7 percent, a sharp drop from the previous forecast of 2.2 percent.

According to the government's initial estimates, U.S. GDP grew just 0.6 percent in the fourth quarter of 2007.

Respondents in the Philadelphia Fed's "Survey of Professional Forecasters" included economists at big financial institutions and research firms, universities and business groups.

Inflation will remain somewhat elevated, which could complicate deliberations at the Fed over the possibility of more interest rate cuts to revive the moribund economy.

Forecasters expected inflation, as measured by the price index for core personal consumption expenditures, of 2.2 percent in the first quarter of 2008, above the Fed's perceived comfort zone that tops out at about 2 percent.

Other measures will also register worrying levels of price growth. Headline PCE inflation is seen at 2.8 percent in the first quarter. The forecasters expected closely watched consumer price inflation of 3.5 percent overall and 2.4 percent on a core basis, which excludes food and energy prices.

The survey put the unemployment rate at 5.0 percent in the first quarter, up from a previous forecast of 4.8 percent.

The survey put U.S. payrolls growth at 39,400 per month in the first quarter, well down from a previous view of 100,600.

STIMULATING RESPONSE

In response to Washington's efforts to shore up the economy with a stimulus package, the survey asked economists when the effects would be felt and how large they would be.

Of 38 forecasters addressing this issue, 13 said the plan's results would start to be felt in the second quarter, while 19 expected the effects on growth to start in the third quarter.

The survey participants expected the stimulus plan to give a boost of 0.3 percentage point to 2008 GDP growth and 0.1 point to 2009, according to median forecasts.

U.S. President George W. Bush is expected to sign the $152 billion package on Wednesday.

The questions were asked before the package passed.

The expected start of the stimulus impact also coincides with economists' forecasts for improvement in the economy, though the labor market will lag.

Growth will edge up to 1.3 percent in the second quarter and hit a more respectable 2.8 percent in the third and fourth quarters.

Price pressures will let up a bit, with core PCE inflation easing to 2.1 percent in the second quarter and then 2.0 percent to finish out the year, the survey forecast.

The forecasters saw the unemployment rate edging up to 5.1 percent in the second quarter and then 5.2 percent in the third and fourth quarters as payrolls growth remains lackluster.

(Editing by James Dalgleish)