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Blue Chip raises US growth forecast (not by much), cuts inflation
http://yahoo.reuters.com/financeQuoteCompanyNewsArticle.jhtml?duid=mtfh68004_2005-12-10_05-59-37_n09...

Sat Dec 10, 2005 12:59 AM ET

WASHINGTON, Dec 10 (Reuters) - Top forecasters raised their U.S. growth outlook and cut inflation expectations for the fourth quarter and into 2006, but warned consumer spending could drop in the final months of 2005, a survey released on Saturday showed.

Panelists surveyed in the Blue Chip Economic Indicators newsletter bumped up their projection for gross domestic product growth in the fourth quarter to a 3.2 percent annual rate, up from 3.0 percent predicted a month ago but still well below the third-quarter's robust 4.3 percent pace.

They also raised their outlook for 2006 growth to 3.4 percent from 3.3 percent forecast in November, saying inflation would be lower than first thought and corporate spending and profits stronger.

The panelists remained pessimistic about consumer spending in the final three months of the year, predicting an anemic 1.0 percent increase, and said personal consumption expenditures could even shrink once inflation is taken into account.

"Unless spending picks up considerably in December, real consumer spending risks suffering its first quarterly contraction in 15 years," the newsletter said.

But they said a rebound in business inventories and still-healthy capital spending would offset some of the consumer weakness and a probable drag from trade on growth in the fourth quarter.

Housing was seen as a wildcard in the fourth-quarter outlook. Building permits have fallen to the lowest level since April, suggesting the pace of growth in residential investment might slow appreciably in the final three months of the year.

"However, reconstruction efforts along the hurricane-ravaged Gulf Coast could produce a rebound, if only temporarily, in housing starts for November and December," Blue Chip said.

As 2006 begins, lower inflation, improving job growth and faster wage gains are expected to boost consumer spending, fueling 3.5 percent economic growth in the first quarter and 3.4 percent in the second, the survey showed.

"While near-record high natural gas prices will produce some nasty home heating bills this winter, headline inflation is set to decline in coming months, boosting gains in real incomes and spending," the newsletter said.

It forecast the Consumer Price Index to increase only 2.3 percent on a fourth-quarter over fourth-quarter basis in 2006, down from its predicted 3.9 percent rise in 2005, as energy prices decline. Core inflation, which strips out energy and food costs, will rise 2.4 percent on a December-over-December basis in 2006, similar to the 2005 gain.

The Blue Chip consensus said the Federal Reserve will raise interest rates at least three more times -- slightly more than anticipated by financial markets -- taking the federal funds target to between 4.75 percent and 5.0 percent. It currently stands at 4 percent after 12 straight quarter-point increases since June 2004.

About 23 percent of the panel think the Fed will cut rates by the end of 2006, however.

While the housing market is expected to cool next year, the job market should be healthy, Blue Chip said. Nonfarm payrolls were forecast to post average monthly gains of 179,000 in 2006, slightly higher than in 2005.

"However, the unemployment rate is not expected to fall much from current (level of 5 percent) as more people seek to rejoin the labor force," the newsletter noted.

Business investment was projected to grow 7.9 percent next year, down from 8.9 percent in 2005, with equipment and software spending up 8.6 percent.