Economists Say, Growth in U.S. to Firm Through 2007

The U.S. economy will strengthen during the year, overcoming declines in housing, business investment and stock markets, a survey of economists showed.

The world's largest economy may expand at a 2.4 percent annual rate this quarter, and accelerate to 3 percent by year's end, according to the median estimate of 75 economists surveyed by Bloomberg News from March 1 to March 7. The economy grew at a 2.2 percent pace in the last three months of 2006.

American consumers, whose spending accounts for more than two-thirds of the economy, show no sign of turning frugal as incomes keep growing, economists said. Such an outcome, which is consistent with forecasts by Federal Reserve Chairman Ben S. Bernanke, will prompt central bankers to keep interest rates unchanged for much of the year, the survey showed.

``When the economy is in this kind of slow growth, you expect to get patches of strong and weak data,'' said Bill Cheney, chief economist at John Hancock Financial Services in Boston. ``Consumer spending is critical, and I think it'll be just fine. I don't see any evidence that consumers are suddenly ratcheting up their savings.''

The rate of growth will improve to 2.5 percent next quarter before accelerating to a 2.9 percent pace from July through September, according to the survey medians. The forecast for the first and second quarters were a 10th of a percentage point lower than last month, while those for the last six months of the year were unchanged.

Cooler Job Market

The job market is one area of the economy that may be showing signs of cooling. Initial claims for jobless benefits fell by 10,000 to 328,000 in the week ended March 3, the Labor Department reported today. Even with the drop, the four-week average, a less volatile measure, rose to 339,000, the highest since October 2005 and well above the 2006 average of 313,000.

The outlook is in line with Bernanke's comments last week that growth will accelerate later in the year. The Fed expects the economy to grow between 2.5 percent and 3 percent this year, and 2.75 percent and 3 percent next year, according to forecasts presented to Congress last month.

``There's a reasonable possibility that we'll see some strengthening of the economy sometime during the middle of the year,'' Bernanke said Feb. 28 in response to lawmakers' questions in Washington.

Economists boosted estimates for consumer spending this quarter and next. Spending may rise at an annual rate of 3.2 percent this quarter, up from February's 3 percent forecast, and 2.6 percent from April to June, a 10th of a percentage point more than previously forecast.

`More Momentum'

``There may be more momentum in consumer spending than it appears,'' said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. ``That mitigates some downside from housing and business investment.''

The most recent government reports showed those risks were still prevalent. Homebuilders started work in January on the fewest number of new houses since August 1997 as a glut of unsold homes and colder weather discouraged new projects, the Commerce Department reported last month.

Orders placed with factories fell by the most in more than six years in January on lower demand for aircraft, computers and construction machinery, government data this week showed.

``The risks are building, but they're still only risks at this stage,'' Gregory said. ``People aren't yet prepared to make the call'' to reduce their forecasts on growth.

Stock Drop

Economists retained their optimism even as stock prices dropped. The Standard & Poor's 500 index fell 4.4 percent last week, the biggest weekly decline since January 2003.

Stocks today rose for the second time in three days as investors speculated mergers and an accelerating economy will boost equities. The Standard & Poor's 500 Index added 12.04, or 0.86 percent, to 1404.1 as of 9:51 a.m. in New York.

Economists were more sanguine about the economy's prospects than former Fed Chairman Alan Greenspan. In a March 5 interview, Greenspan said there was a ``one-third probability'' of a U.S. recession this year and the current expansion won't have the staying power of its decade-long predecessor.

Similar comments to a Hong Kong audience on Feb. 26 were said to have contributed to a global selloff in stocks that began the following day.

Economists this month were more concerned about inflation. Consumer prices will probably rise 2.5 percent this year, compared with a 2.3 percent increase forecast last month, the survey showed. The projected gain would match last year's increase in prices.

That's part of the reason economists still forecast the Fed will hold its target interest rate at 5.25 percent through the third quarter, the survey showed. They estimate the Fed will cut the rate once this year to 5 percent in the fourth quarter.

`Exactly Right'

``There's no reason for the Fed to change rates in the foreseeable future,'' John Hancock's Cheney said. ``So far, it seems they've got things exactly right.''

One thing that may shake economists' optimism would be an increase in firings that leads to smaller income gains.

A Labor Department report due tomorrow is forecast to show employers last month added 95,000 jobs, the fewest in two years, according to the median estimate is a separate survey.

``If we get a nasty-looking number in the Friday employment report, then I'd start to be concerned,'' Cheney said.

Hiring may be less of a worry if company finance leaders follow through on their plans. Chief financial officers this quarter said they planned to spend and hire more as the economy improves, according to the Duke University/CFO Magazine Business Outlook survey released yesterday.

source:www.bloomberg.com