Blue Chip panel puts U.S. recession odds at 50 percent

WASHINGTON (Reuters) - The odds of a U.S. recession stand at nearly 50 percent amid a spate of data showing a weakening labor market, signs of more credit tightening and turmoil in the financial markets, the latest Blue Chip Economic forecast is projecting.

A month ago, economists in this closely watched forecast put the chance the world's richest economy would fall into recession at 40 percent, but government data showing a contraction in hiring, slowed consumer spending and other reports pointing to sagging business activity have indicated a much more deteriorated outlook.

Among those economists, slightly more than 20 percent are now expecting to see the economy contract in at least one or two quarters.

"The economic malaise that originated in the housing sector during 2006 (and) spread to the financial market in 2007, now appears to be infecting Main Street," the newsletter wrote.

And even as the economy slows, inflation is expected to creep higher.

The majority of those surveyed between February 5 and 6, however, continue to say a recession will be avoided. But growth is going to be weak.

Economists are now projecting the economy will grow by just 1.7 percent in all of 2008, down from the 2.2 percent forecast a month ago.

To help avert a recession, Blue Chip economists are expecting the Federal Reserve will continue cutting interest rates. They expect the central bank will reduce its target federal funds rate by at least half a percentage point more this year.

Last month, the Fed cut benchmark interest rates by a sharp 1.25 percentage points in a bold move to support growth as weakness, which was largely contained in the housing market last year, began to spread.

The series of recent cuts took overnight rates, which stood at 5.25 percent in early September, down to 3 percent.

INFLATION PRESSURE TOO?

But those rate cuts may fuel inflation, a concern that has been voiced by a growing number of economists and some Fed officials.

"Despite lowered expectations for economic growth, consensus forecasts of inflation this year continued to creep higher," the newsletter wrote.

Consumer prices, excluding food and energy, are expected to increase 2.3 percent in 2008 and by 2.2 percent in 2009, well above the Fed's 2 percent comfort ceiling.

New home building activity is expected to drop by 25 percent from levels seen in 2007.

"All of our panelists think real residential investment will remain a drag on GDP growth during the first half of this year and 42 percent of them say it will subtract from GDP growth throughout 2008," the newsletter wrote.

The consensus predicts that sales of both new and existing homes will fall another 14 percent this year and prices will decline 9.3 percent.

Even so, the trade sector is expected to remain the bright spot in the economy, as the decline in the value of the dollar and better growth abroad has fueled demand for U.S. goods.

(Editing by Andrea Ricci)