WASHINGTON (Reuters) - The U.S. economy will likely contract during the first half of this year as a recession becomes more likely, a growing number of economists surveyed for the Blue Chip economic forecast predict.
By Joanne Morrison
WASHINGTON (Reuters) - The U.S. economy will likely contract during the first half of this year as a recession becomes more likely, a growing number of economists surveyed for the Blue Chip economic forecast predict.
The dismal outlook comes amid expectations of weaker consumer spending and the first decline in corporate profits since 2001, when the economy last fell into recession.
Prior to last week's dismal employment report showing the economy in February lost the biggest amount of jobs in nearly five years, roughly 40 percent of the economists surveyed in the closely watched forecast predicted a downturn during the first half.
!ADVERTISEMENT!"Indeed, we suspect that based on what we have heard and read from some panelists since our survey, at least 50 percent now believe the economy will shrink during the first half of this year," the newsletter wrote in the forecast, released on Monday.
Those economists who believe the economy will still skirt a recession have nonetheless downgraded their growth outlooks.
The latest Blue Chip consensus forecast -- taken two days ahead of the March 7 unemployment data -- called for the economy to grow at an annual rate of just 0.1 percent in the first quarter and by 0.5 percent in the second quarter.
These estimates are down substantially from forecasts a month earlier.
For all of 2008, the economy is expected to grow by 1.5 percent on a year-to-year basis, which is 0.2 of a percentage point lower than estimates made a month ago and more than a full percentage point lower than forecasts made last September.
"Recent data suggest the U.S. economy is in or teetering on the brink of a recession," the newsletter wrote.
Much of the expected decline in growth will stem from weaker consumer spending, which accounts for roughly two-thirds of economic output. The economists polled do not expect tax rebates and other measures in a multibillion stimulus package to have a big impact on growth.
"Consumer spending is expected to be especially subdued this year despite passage of the federal tax rebate program that will put a bit more than $100 billion in household pocketbooks beginning in May," the newsletter wrote.
In the wake of the last recession in 2001, consumers spent roughly a third of the tax rebates issued them, but with heavy debt, inflation pressures, rapidly falling home values and fear of job security, the bulk of consumers are expected to use the tax rebates to pay down debt or save, surveys such as the Reuters/Zogby poll have shown.
The Blue Chip survey projects that consumer spending adjusted for inflation will grow only 1.5 percent on a year-to-year basis, which is 0.2 of a percentage point less than estimated a month ago and 0.6 percent of a point less than forecast in January.
At that pace, spending would be half what it was in 2007.
BUSINESS SPENDING WEAKENS
Business investment is also expected to weaken, the Blue Chip survey found, particularly in construction.
While equipment and software investment this year will likely be helped by tax breaks associated with the stimulus package, investment in structures is expected to slow "dramatically" following 13.1 percent growth in 2007.
"Given the eroding outlook for consumer spending and business investment, the consensus predicts pretax corporate profits will contract by 1.4 percent this year, the first decline since 2001," the newsletter wrote.
Inventories, already at low levels, will likely be trimmed further, the economists forecast. That, in turn, will slow factory production.
"As a result, the consensus now predicts total industrial production will grow only 1.0 percent this year, less than half the gain in 2007," the newsletter wrote.
On the housing front, new building activity is expected to fall to 980,000 units in 2008, the lowest figure since at least 1959, the newsletter stated.
Residential investment is expected to remain a drag on economic growth throughout much of this year. But because new home building has already fallen to such low levels, the drag will be less than it was in 2007.
Trade is expected to remain the bright spot of the economy, the survey found. A weaker dollar and slowing domestic demand are expected to help further narrow the U.S. trade deficit both this year and next.
(Reporting By Joanne Morrison; Editing by Dan Grebler)
