Chances of recession rise in Blue Chip forecast
WASHINGTON (Reuters) - The chances of an economic recession are increasing as troubles in the housing sector and credit markets take their toll, according to a survey of economists released on Monday.
Forecasts from economists put the odds of a recession in the next 12 months at one-in-three, according to the Blue Chip Economic Indicators newsletter.
A month earlier, the odds were at one-in-four.
The survey of about 50 private-sector economists was taken Wednesday and Thursday, just ahead of the government's release of August employment data on Friday, which showed the first decline in payrolls four years.
The newsletter stated that this dismal employment picture did not impact an already-weak growth outlook but it did solidify expectations for an interest rate cut from the Federal Reserve.
The economists lowered their forecasts for growth due to concerns about credit market turmoil spilling into the economy. The panelists said they expect GDP growth to remain modestly below trend through the first half of next year.
Gross domestic product, the government's broadest gauge of economic activity, is expected to grow just 2 percent this year and 2.6 percent in 2008. While the forecast for this year was the same as a month ago, the outlook for 2008 was lower than the 2.8 percent real GDP the panelists forecast just a month earlier.
Central to the economists' concerns is that consumer spending will expand more modestly and that a drag on GDP from residential investment will be greater and last longer than previously thought.
A return to trend growth will no doubt be helped by the Federal Reserve, the survey found, with the consensus expecting a 50 basis-point reduction in the near future in the central bank's benchmark overnight Fed Funds rate to help boost the economy.
"Although that (employment) report undoubtedly added to concerns about the economy, we suspect this month's consensus forecasts of real GDP and its major components would have been little different had our survey been conducted after its release," the newsletter wrote.
"However, the employment report does appear to have solidified expectations that the Federal Reserve will cut interest rates by at least 25 basis points on September 18 and is likely to follow up with an additional rate cut at its late-October meeting," the newsletter wrote.
CONSUMER SPENDING?
Amid the turmoil from a troubled housing market and tightening credit, the consumer may rein in a bit on spending, the economists forecast.
Consumer spending, adjusted for inflation, is expected to grow at the slowest pace in four years during 2007 and slow further in 2008.
At the same time, the economists forecast that disposable personal income will outpace spending, the first time since 2002.
"Underlying this development is a belief among our panelists that households will attempt to rebuild savings in the face of increased uncertainty about job growth, the value of their homes and possibly the worth of their equity portfolios," the newsletter wrote.
