May 13, 2008 / 3:09 PM / 12 years ago

Risk of economic contraction rises: Philly Fed

NEW YORK (Reuters) - The U.S. economy will barely expand in the second quarter and the chances of it shrinking have risen, following sluggish growth early in the year, said a Philadelphia Federal Reserve survey released on Tuesday.

The 50 economists surveyed by the regional Fed also forecast a sizable pickup in overall inflation in the next several months as a result of surging oil and food prices.

However, they expect core inflation that excludes those volatile categories to rise only modestly.

They forecast U.S. gross domestic product in the current quarter would expand at an annualized rate of 0.2 percent, sharply below their prior forecast of 1.3 percent.

“A higher risk of a contraction accompanies the forecast,” the Philadelphia Fed said in the quarterly survey.

Forecasters revised upward the prospects of a contraction in the second quarter to 49.1 percent from their earlier projection of a 42.9 percent risk.

The government’s preliminary reading of first-quarter U.S. GDP, released on April 30, said the economy grew 0.6 percent, the same as in the fourth quarter.


The housing sector, which went into a tailspin as a result of the subprime mortgage meltdown and which was exacerbated by the global credit crunch, will remain a significant drag on the economy, according to the regional Fed’s latest survey.

Forecasters said U.S. home prices will continue to decline into 2009 and not recover until 2010. They projected national home values, as measured by the S&P/Case-Shiller home price index, will on average lose 12.0 percent this year and another 0.3 percent in 2009 before rising 3.8 percent in 2010.

Economists surveyed also downgraded their outlook of the U.S. labor market in 2008.

They said nonfarm payrolls will shrink 45,000 a month in the second quarter, compared with their previous forecast of a 45,6000 monthly increase. For the year, they forecast payrolls will expand 18,300 a month in 2008, sharply lower than their prior estimate of 74,600 per month.


Overall inflation is expected to accelerate to at least 3 percent, up from prior expectations of 2.4 percent.

Core inflation will likely stay just above the top end of the Fed’s perceived comfort zone of 2 percent in coming months. Forecasters raised their second-quarter estimate for the Consumer Price Index, the government’s broadest inflation measure, to a 3.5 percent increase from their previous estimate of 2.4 percent.

The core rate on personal consumption expenditure, which the Fed sees as a more reliable gauge of underlying inflation, is predicted to rise 2.1 percent in the second quarter, unchanged from the previous forecast.

Respondents in the Philly Fed’s “Survey of Professional Forecasters” include economists at major financial institutions and research firms, universities and business groups.

Editing by James Dalgleish

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