updated 12/26/2006 1:47:56 PM ET 2006-12-26T18:47:56

A trade group representing the nation’s manufacturers on Tuesday predicted a soft landing for the U.S. economy in 2007, despite expectations that residential real estate will act as a drag on growth.

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In its annual forecast, the National Association of Manufacturers forecast that industrial output would decelerate to a growth rate of 2.8 percent, or slightly below the 2.9 percent rate of expansion it expects for the overall economy.

The manufacturing sector grew by 4.5 percent, on average, in 2006, while the U.S. economy expanded by 3.1 percent, according to the association.

In looking back over the past year, the association said the country’s manufacturing expansion was “likely a cyclical peak in the pace of growth.”

The association’s chief economist, David Heuther said manufacturers in general would benefit from rising exports and increased business investment, though he cautioned that producers of wood and textile products, among others, would suffer from the slowdown in the housing sector.

“After slowing to a below potential pace in recent quarters, the economy will continue decelerating toward a soft landing in the coming year,” Heuther said.

Heuther predicted that the nation’s slower economic growth would prompt the Federal Reserve to lower interest rates half a percentage point by the middle of next year.

Declining housing prices, rising interest rates and high energy prices will dampen consumer spending, hurting motor vehicle manufacturers particularly hard, the report said.

The Institute for Supply Management releases its December report on the nation’s manufacturing sector Jan. 2. The ISM’s manufacturing index for November showed that the sector had its first month of contraction since April 2003.

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