US growth outlook deteriorates in blue chip forecast

Tighter credit, broad deterioration in the housing market and skittish consumer spending will lead to a slower US economy than earlier estimated, according to the most closely watched forecast by US economists.

The consensus forecast of 50 top economists surveyed between earlier this month in the Blue Chip Economic Indicators report called for anemic growth in gross domestic product, or GDP, of 2 per cent this year and 2.8 per cent next year.

That was down from their forecast a month earlier of 2.1 per cent last year and 2.9 per cent next year.

"Rising concern about contagion from the meltdown in the subprime mortgage market has now produced a more generalized repricing of risk," the Blue Chip Economic Indicators newsletter said.

There was some division among the economists polled but the bulk of them agreed that if the financial markets fail to stabilise soon, the economy would slow even further.

"Distress among home loan originators has grown acute and many non-depository lenders have sharply curtailed their lending or gone out of business," the newsletter said.

Pessimists in the poll contend that economic activity, already slow, will grow even softer as the downturn in residential investment re-intensifies and the pace of consumer spending continues to retreat amid slowing employment growth and declining home values.

"As consumer demand wanes, firms will again begin to curtail inventory building and shelve capital spending plans, leading to a renewed downturn in manufacturing output," the newsletter said.

And while export demand may hold up in the short run due to an expansive overseas growth and a weak dollar, this, too, will subside as overseas producers cut back in the face of weaker demand from US consumers.

However, some panelists maintain that the current market turmoil will soon subside because interest rates on corporate debt, while higher now, remain relatively low by historical standards. In addition, profits continue to grow at a fairly solid pace.

For example, default rates on corporate bonds reside at 25-year lows and balance sheets at major banks are in good shape.

Nonetheless, there will be fewer leveraged buyouts and private-equity deals.

"But those worthy of getting done will get done,' the newsletter wrote.

The inflation picture looked a bit worse than a month ago. The Consumer Price Index for this year is expected to increase 2.8 per cent from 2006, on a year-on-year basis. That was up slightly from the 2.7 per cent forecast a month ago.

But the core CPI, which excludes volatile food and energy prices and is considered a better gauge of inflation, is expected to rise 2.2 per cent, the same as in the forecast a month ago.

About 63 per cent of the panelists said that over the past month, they cut their estimates for growth in inflation-adjusted personal consumption expenditures, or real PCE, during the second half of this year, and 60 per cent reported reductions in their forecasts for residential investment.

Real PCE is expected to grow 2.9 percent this year, down from 3.2 per cent in the previous month's forecast. That would mark the smallest annual increase since 2003.