Growth seen picking up, jobs to remain scarce

NEW YORK (Reuters) - The economy is still expected to perk up in the second half of this year, though economists nudged their forecasts down a notch with high unemployment likely to stunt growth, a Reuters poll showed.

While economists cited political wrangling by U.S. lawmakers over raising the $14.3 trillion debt ceiling as a major risk, there are still very few who say some sort of agreement won't be reached in time to avoid a default.

Market jitters intensified late on Wednesday, however, as Moody's Investors Service said the United States may lose its top-notch credit rating in the next few weeks if the debt limit is not raised.

A poll of more than 60 respondents showed broadly lower expectations for growth throughout the rest of the year, although they still expect a rebound in the second half.

They slashed their forecasts for the second quarter just ended by the biggest amount, to an annualized 2 percent from 2.5 percent in last month's poll. That would be only a tiny improvement over 1.9 percent growth in the first quarter.

Growth in the third and fourth quarters is expected to improve to an annualized 3.1 percent each, but still below the 3.2 percent consensus just one month ago.

The economy slowed sharply in the first half of the year as higher energy prices dented spending, and supply chain disruptions after the devastating Japanese earthquake in March hit businesses and manufacturers.

"It was the surge in oil and gasoline prices that hurt the economy the most in the first half, and now that they're down, that should take the weight off," said Mark Zandi, chief economist of Moody's Analytics.

The view that the slowdown in the first half was only temporary is in line with the Federal Reserve's stance.

Fed Chairman Ben Bernanke said on Wednesday the central bank is ready to ease monetary policy further if the economy weakens and inflation moves lower.

"We expect a re-acceleration in growth from the summer, and 2012 might be a year of solid gains in activity levels, although job creation will remain subdued," said Diane Swonk, economist at Mesirow Financial.

Even so, the recovery remains fragile and faces a number of uncertainties, including the sovereign debt crisis raging through Europe. <ECILT/EU>

In the United States, failure to raise the debt limit by early August could push the nation into a technical default, potentially disrupting financial markets and the global economy.

Moody's on Wednesday was the first among the big-three rating agencies to place the United States' Aaa rating on review for a possible downgrade.

Nonetheless, economists remain confident that lawmakers will reach a deal to raise the government's debt ceiling. All but two of 40 economists polled said a deal would be reached.

"They will squeak something out, but the odds of failure have increased," said Chris Lowe, chief economist for FTN Financial and one of the economists surveyed.

The poll was conducted from Friday to Wednesday and was completed before House Republican leader Eric Cantor said President Barack Obama walked out of a meeting on Wednesday evening, escalating concerns about the negotiations.

Lawmakers disagree over budget deficit reduction measures that are a condition for extending the legal borrowing limit -- needed so the U.S. government can fund its commitments next month.

INFLATION STILL TAME

Economists' inflation expectations were relatively stable, averaging 3.1 percent for the year, in line with the June poll.

The consensus for growth in the core consumer price index -- which strips out volatile food and energy prices -- was also unchanged from last month, averaging 1.5 percent for the year.

That should leave the Fed with plenty of room to keep interest rates at record lows near zero well into next year.

Economists say the bar is high for additional economic stimulus. The Fed completed its second round of bond purchases last month -- $600 billion of a $2.3 trillion total "quantitative easing" program.

Poll respondents again pushed back their expectations for when interest rates will rise from near-zero. The Fed is expected to hold them until the second quarter of 2012. Previously, they had forecast a rise in the first quarter.

Stubbornly high unemployment and a weak housing market remain two of the biggest obstacles to growth. Recent data showed the economy added a scant 18,000 jobs in June, while the unemployment rate climbed to a six-month high of 9.2 percent.

Economists raised their forecasts for the unemployment rate to average 8.9 percent this year, up from 8.7 percent expected in April. Unemployment is forecast to average 8.5 percent next year, compared to earlier forecasts for 8.2 percent.

(Reporting by Leah Schnurr; Additional reporting by Alexandra Alper; Polling by Bangalore Polling Unit; Editing by Leslie Adler)