White House cuts 2008 economic forecast

WASHINGTON (Reuters) - The White House cut its forecast for U.S. economic growth in 2008 on Thursday and acknowledged that troubles in the housing market had been “more pronounced” than expected.

Holiday shoppers cross Seventh Avenue outside Macy's department store in New York, November 23, 2007. REUTERS/Ray Stubblebine

But even as private economists grow increasingly worried about the risk of a recession, the Bush administration said the economy was resilient and predicted the six-year expansion would stay on track.

In its twice-yearly forecast, which will be incorporated in the administration’s fiscal 2009 budget proposal due early next year, the White House said it now expected real gross domestic product to grow 2.7 percent in 2008, down from a June forecast for 3.1 percent growth.

“We are forecasting solid growth for 2008,” top White House economist Edward Lazear told reporters.

He added that “2.7 percent is still a good, solid growth rate and that is especially the case given that we have been hit with a pretty significant slide in the housing market.”

In housing, the decline “has been more pronounced than we forecast at the time that we were doing our midsession review and that’s built into the forecast for next year,” said Lazear, who is chairman of the White House Council of Economic Advisers.

The administration’s forecast was still above Federal Reserve policy-makers’ projection of 1.8 percent to 2.5 percent real, or inflation-adjusted, GDP growth for 2008.

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Private economists in the closely watched Blue Chip Economic Indicators survey have predicted sluggish growth through the first half of 2008.

That survey pegged GDP growth for next year at 2.4 percent, below the White House forecast. The Blue Chip panel said the odds of a recession were about one-in-three.

The administration said it thought the U.S. unemployment rate would average 4.9 percent during 2008, a few notches above the 4.7 percent forecast of the June forecast.

The White House raised its 2007 real GDP forecast to 2.7 percent from 2.3 percent, reflecting surprisingly strong third-quarter growth.

“While the difficulties in housing and credit markets and the effects of high energy prices will extract a penalty from growth, the U.S. economy has many strengths and I expect the expansion to continue,” U.S. Treasury Secretary Henry Paulson said in a statement.

Lazear said he expected housing to hurt GDP at least through the first half of next year.

Private economists have been ratcheting down their economic growth forecasts in recent months as the slumping housing market and ensuing credit crunch threaten to slow consumer and business spending.

Allan Hubbard, the top White House economic adviser, said this week that U.S. recession risks had increased, although he put the chances at less than 50-50. Hubbard announced his resignation on Wednesday.

The White House acknowledged that rising food and energy prices have pushed up inflation, and it now expects the consumer price index to rise 3.9 percent in 2007, rather than the 3.2 percent predicted earlier.

However, the administration expects inflation to ease next year. For 2008, the report estimated an inflation rate of 2.1 percent, down from the prior forecast of 2.5 percent.

Reporting by Emily Kaiser and Caren Bohan; Editing by Andrea Ricci