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Spending, Housing Slump Likely To Cool Economy

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Bloomberg News

Published: December 12, 2007

U.S. economic growth will slow to 1 percent in the fourth quarter as consumer spending cools and the housing slump enters its third year, a survey showed.

Economists cut their estimates for the expansion this quarter from November's 1.5 percent forecast, according to the median of 63 estimates in a Bloomberg News survey taken Dec. 3 to Monday. Gross domestic product in the first three months of 2008 will be less than was projected.

Spending, which accounts for more than two-thirds of the economy, will grow in 2008 at the slowest pace in 17 years as higher fuel costs and falling home values limit consumers' buying power. The Federal Reserve will follow Tuesday's interest rate reduction with another early next year to fend off recession, the survey said.

"Everything is going against the consumer," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. He lowered his growth forecast to 0.5 percent for this quarter.

"Confidence is off quite a bit, and gasoline is going to take a toll. We're very, very close to a recession," he said.

The world's largest economy grew at a 4.9 percent pace from July through September.

The 1.7 percent average increase in consumer spending this quarter and next would be the weakest back-to-back rise in five years. The 2.1 percent gain projected for all of 2008 is the smallest since a 0.2 percent increase in 1991, during a recession.

"Consumers are slowing their spending quite considerably, and we have a much, much worse housing situation," said Nariman Behravesh, chief economist at Global Insight Inc., Lexington, Mass., who slashed his fourth-quarter growth forecast to zero, from 1.3 percent in the November survey.

"It wouldn't take much of a shock at this point to push us over the edge" into a contraction, he said.

Consumers face "headwinds" from reduced access to credit, higher gasoline prices and falling home values, Federal Reserve chairman Ben S. Bernanke said last month.

Policymakers' quarter-point cut in the benchmark interest rate Tuesday to 4.25 percent will be followed by a similar cut in one of the first two meetings of 2008, according to the survey median.

'Heading Into A Slowdown'

"We're definitely heading into a slowdown because the consumer is not purchasing at the level they did in the past," said Richard Kovacevich, Wells Fargo & Co. chairman. "The probability is high, if the Fed takes correct action and other things, that we avoid a recession."

The growth forecast for next year's first quarter was cut by a half point to 1.5 percent and each of the next three quarters was reduced by a 10th of a point. For all of 2008, the economy will probably expand 2.3 percent compared with 2.2 percent this year.

"It feels recessionary even if it doesn't fit into the traditional definition of a recession," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. "We'll have painfully slow growth for most of next year."

Inflation Projected To Slow

Slower growth will help cool inflation. Consumer prices will probably rise 3.8 percent this year, the most since 1990, reflecting jumps in fuel and food costs, the survey showed. Economists project the cost of living will increase 2.3 percent next year.

The Fed's preferred inflation gauge, which is tied to consumer spending and excludes food and fuel, will rise 1.8 percent in 2008 after a 1.9 percent increase this year, the survey showed. The measure, known as core prices, would be within the range forecast by policymakers.

"Core inflation will move sideways to down and headline inflation also will slow as energy prices come off," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. "Not all news is bleak."

Rising wages and more jobs may help consumers weather the jump in fuel costs and housing slump, economists said. The unemployment rate, now at 4.7 percent, will only rise to 5 percent by the second half of 2008, according to the Bloomberg survey median.

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