Faster U.S. Growth and Elevated Inflation to Keep Fed on Guard
By Courtney Schlisserman and Andy Burt
Nov. 10 (Bloomberg) -- Economic growth in the U.S. will pick up and inflation will remain elevated through early next year, leaving the Federal Reserve little room to reduce interest rates, according to a survey of economists.
Growth will average almost 2.6 percent from October through the first three months of 2007, up from 1.6 percent last quarter, based on the median forecast of 85 economists surveyed by Bloomberg News from Oct. 30 to Nov. 9. Consumer prices will rise 2.4 percent next year, little changed from this year's expected 2.5 percent increase.
The forecasts confirm the view of some Fed policy makers that the expansion may not slow fast enough to cool inflation. Low unemployment, rising incomes and cheaper energy will help consumers sustain the spending that makes up two-thirds of the economy, limiting the damage from the housing slump.
``You would have to see a much more measurable deceleration in inflation or growth for the Fed to come off,'' said Mark Zandi, chief economist of Moody's Economy.com in West Chester, Pennsylvania. He forecasts consumer prices to be up 3 percent in the first quarter of 2007 from the same three months this year.
The estimate for fourth-quarter growth is the same as in the previous month's survey. Next year, the economy will expand at a 2.6 percent rate in the first quarter, and growth will quicken to 2.9 percent in the fourth.
Recent signs of strength in consumer demand have dissipated concern the economy might be on the verge of recession. Growth last quarter was the slowest since early 2003, pulled down by the biggest decline in homebuilding in 15 years. The Commerce Department is scheduled to release its revised third-quarter growth estimate on Nov. 29.
Consumer Confidence
Consumer confidence stayed close to the highest level in 15 months in November, according to a University of Michigan survey released yesterday, supported by cheaper gasoline and an expanding labor market.
The unemployment rate unexpectedly fell to a five-year low of 4.4 percent in October from 4.6 percent the prior month, the Labor Department reported on Nov. 3. Workers' average hourly earnings rose 0.4 percent in October after increasing 0.2 percent.
Consumer spending is forecast to expand 3 percent this quarter, up from a previous estimate of 2.8 percent, according to the Bloomberg survey. Next year, spending will increase at an average pace of 2.7 percent.
While the unemployment rate is likely to rise, competition for labor will be strong enough to fuel further wage increases, economists said. The jobless rate is forecast to be 4.6 percent this quarter and to average 4.8 percent next year.
Wage Gains
Higher wages are helping Americans weather the housing slump, which has made it harder for them to extract equity from their homes. Declining energy costs are also leaving more money in consumers' pockets.
The average price of a gallon of regular gasoline has fallen to $2.21 from $3.04 in early August, according to the American Automobile Association. The decline is putting consumers in the mood to spend, retailers say.
``We're going to have a good holiday season,'' Myron Ullman, chief executive officer of J.C. Penney Co., said yesterday. The nation's third-largest department-store company reported profit rose 23 percent in the quarter through Oct. 28.
With growth picking up, the Fed will be on guard for signs of inflation. The central bank will keep its target rate for overnight lending among banks unchanged at 5.25 percent in the first quarter of 2007 and lower it to 5 percent in the second quarter, according to the Bloomberg survey. The Fed is expected to cut rates again, to 4.75 percent, in the fourth quarter.
`Risks Remain'
The Fed left rates unchanged for a third month on Oct. 25, saying that while growth has slowed, ``some inflation risks remain.'' It said ``the economy seems likely to expand at a moderate pace.''
Fed Bank of Chicago President Michael Moskow said this week that there is still a possibility the central bank will need to boost its benchmark rate to reduce inflation.
``My current assessment is that the risk of inflation remaining too high is greater than the risk of growth being too low,'' Moskow told business leaders in Chicago. ``Thus, some additional firming of policy may yet be necessary to bring inflation back to a range consistent with price stability in a reasonable period of time.''
Other policy makers are more sanguine about the outlook for prices.
``I do not believe inflation will accelerate further,'' Cleveland Fed Bank President Sandra Pianalto said this week. ``I expect some slowing in the rate of inflation as recent energy- price changes and the effects of monetary policy actions work through the economy.''
Economists are predicting the pace of growth will pick up in the course of next year as the housing market starts to recover and automakers including Ford Motor Co. complete planned cutbacks to production.
``By the middle of next year, both the drags from autos and housing are going to dissipate,'' said Joel Prakken, chairman of Macroeconomic Advisers LLC in St. Louis, Missouri.