updated 2/26/2007 12:02:16 AM ET 2007-02-26T05:02:16

Restrained by a worse-than-expected slump in housing, the economy will grow at the slowest pace in five years in 2007, leading economic forecasters say. They predict consumers will get a break on inflation from falling energy prices.

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The survey of 47 top forecasters, released Monday by the National Association for Business Economics, found a greater expected impact from the ailing housing market this year than did the previous forecast in November. Stronger consumer spending will help offset the housing drag, according to the survey.

The panel predicted that the overall economy will grow by 2.7 percent this year. It would be slowest annual increase in the gross domestic product since a 1.6 percent rise in 2002, when the economy was pulling out of the last recession. In 2006, the GDP rose by 3.4 percent.

GDP measures the value of all goods and services produced in the United States. It is the broadest gauge of the country’s economic health.

NABE’s November forecast put GDP growth this year at 2.5 percent.

The slight upward revision occurred even though the forecasters now believe housing construction will plunge by 14.9 percent this year. That would be nearly three times bigger than the 5.5 percent fall in residential construction they had projected in the earlier survey.

Construction spending dropped by 4.2 percent for all of 2006. That decline was a chief factor in the economy’s sluggish growth in the second half of last year. Thousands of construction workers lost their jobs and home builders struggled with slumping sales as the five-year housing boom ended abruptly.

But the economic forecasters see a cushion to the sharp drop in housing: stronger than previously expected consumer spending. This measure will grow by 3.2 percent in 2007, the same as last year, the panel said.

The forecasters also saw good news on inflation.

They predicted that consumer prices will rise by just 1.9 percent this year, down sharply from the 3.2 percent increase on an annual basis last year and the best showing in five years.

The Federal Reserve had lifted interest rates for two years, with the last increase in June 2006, in hopes of slowing growth enough to dampen inflation, but not too much that it would cause a recession.

“The forecast we are presenting is the picture of a soft landing,” said Carl Tannenbaum, NABE’s president and the chief economist at LaSalle Bank/ABN AMRO in Chicago.

As housing stabilizes, the forecasters are looking for GDP growth to rebound to 3 percent in 2008.

Because of the slowdown in growth, the forecasters predicted the unemployment rate will tick up modestly to 4.7 percent this year and 4.8 percent in 2008. The rate averaged 4.6 percent last year, the lowest in six years.

The forecasters now believe the Fed will be content to remain on hold for the entire year. In November, they predicted the Fed would cut interest rates twice in 2007 to jump-start a sluggish economy.

“The economic expansion seems to be facing fewer risks today than it did when we took past surveys,” Tannenbaum said. “The drop in risks plus the moderation in inflation will allow the Fed to stay on hold.”

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