U.S. economists cut H1 2010 growth outlook: Fed survey

By Richard Leong

NEW YORK (Reuters) - Private-sector economists pared their U.S. economic growth forecasts for the first half of 2010 and also downgraded their outlook for the labor market, a Federal Reserve Bank of Philadelphia survey said on Monday.

These weaker estimates reinforce the notion that the U.S. central bank will keep interest rates near zero and stick to its easy monetary strategy to sustain a rebound from the worst recession in 70 years.

This sluggish environment has inhibited businesses from hiring, with the unemployment rate breaching 10 percent, a 26-1/2 year high, in October. Continued job losses have hurt consumer confidence and restrained consumer spending that accounts for 70 percent of the U.S. economy.

Economists cut their growth estimates for annualized real gross domestic product (GDP) in the first quarter of next year to 2.3 percent from their earlier projections of 2.5 percent, according to the regional Fed's quarterly survey of 41 professional forecasters.

They now expect second-quarter 2010 GDP to expand at a 2.4 percent annualized rate, slower than an earlier forecast of 2.8 percent.

However, they did bump up their GDP outlook for the fourth quarter of this year to 2.7 percent from an earlier estimate of 2.2 percent amid stronger-than-expected readings on manufacturing boosted by government incentives.

Economists surveyed by the Philadelphia Fed also raised their annual GDP outlook over the next three years with growth improving to 3.3 percent in 2012.

As U.S. economic activity, which returned to growth in the third quarter, runs below its long-term average, inflation will stay tame, with economists seeing overall consumer price inflation creeping up to 2.1 percent in 2011.

However, core inflation -- which excludes volatile food and energy prices -- is expected to rise more quickly than predicted in the fourth quarter.

Core inflation as measured by the core index on personal consumption expenditures -- the Fed's preferred inflation gauge -- will likely rise 1.2 percent compared with an earlier forecast of 1.0 percent.

NEAR-TERM JOB OUTLOOK DETERIORATES

"The job market looks weaker now than it did three months ago," the Philadephia Fed said.

The analysts polled nearly doubled their fourth-quarter forecast on job losses to an average 159,500 per month from an earlier 81,000. They predicted companies axing payrolls by 35,000 in the first quarter, compared with an earlier forecast of a gain of 51,500.

Job growth now is expected to re-emerge in the second quarter, rather than the first quarter in the prior survey.

On an annual basis, the economists surveyed predicted a more severe job contraction of 426,700 in 2009, compared with an earlier forecast of 415,700.