Economists are still trimming their forecasts for growth next year but say the worst of the news appears to be behind us and a relapse into a recession appears highly unlikely.

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A survey of professional forecasters released Tuesday shows that on average economists are looking for modest growth of 2.8 percent next year, compared with an average forecast of 3.2 percent just two months ago. U.S. gross domestic product is expected to grow just 2.3 percent this year after adjusting for inflation, according to the survey from the National Association for Business Economics.

“The flight plan is the same, but the altitude is going to be a little bit lower,” said Tim O’Neill, chief economist for BMO Financial Group and president of NABE.

“Clearly expectations are that we’re going to have growth in the middling range,” he said. “It’s not Goldilocks, but certainly there is no expectation we will see a second recession.”

Since the group’s last survey was released a little more than two months ago, forecasters substantially reduced their outlook for the current fourth quarter and for the first quarter of 2003, reflecting a downturn in industrial production and the continued slow recovery in business investment. Economists expect the current quarter to mark the bottom of the economic cycle for now, with predicted growth of just 1.4 percent, about half the rate expected two months ago.

“All the ingredients are in place for a better 2003,” said Diane Swonk, chief economist for Bank One. She pointed out that the economy is in a stronger position than it was a year ago, when consumer and business confidence was reeling from the impact of recession, the 9-11 terrorist attacks and anthrax attacks.

And in general the economy has outperformed expectations over the past year, she said. “I think the economy it will continue to dazzle with its resilience, if not its brilliance,” she said.

A ‘jobless recovery'
While she and other economists have been impressed by the way the economy absorbed the blows of 9/11, the bear market and corporate scandal, it remains a “jobless recovery” similar to the modest expansion experienced in 1991-92, with the added burden of a steep and persistent stock market downturn. The economy actually lost jobs in September and October — what Federal Reserve Chairman Alan Greenspan described as a “soft patch” that triggered the central bank’s Nov. 6 decision to cut short-term interest rates for the first time in 11 months.

The 33 NABE economists were divided about the rate cut, with about half the panelists saying it was not needed, but with inflation well under control “there was no harm done,” according to the survey. Another one-third of the forecasters said the stimulus was “totally needed” because “the economy was faltering.” And three of the NABE economists thought the Fed move could backfire by frightening consumers, although none expressed concern about the low interest rates igniting inflation.

While industrial production has weakened and retail sales have been soft, there have been signs over the past several weeks that economic data trends are improving. Consumer confidence has risen and new claims for unemployment are falling slightly, a sign that the economy might be adding jobs again. Housing remains strong, buoyed by low mortgage rates. The latest sign of strength was an unexpected sharp jump in sales of existing homes in October, reported Monday by a trade group.

“The consumer seems pretty confident about big purchases,” said Kurt Karl, chief economist for Swiss Re, the giant reinsurer. “They don’t seem to be spending like they’re terribly worried.”

The results of the NABE survey were roughly in line with a similar survey of 35 forecasters released last week by the Federal Reserve Bank of Philadelphia. In that survey, economists said they were looking for growth of 2.6 percent next year on average, down from a consensus forecast of 3 percent three months earlier.

Uncertainty over Iraq
One major concern clouding the economic outlook is uncertainty over the outcome of a likely war against Iraq. A spike in oil prices would be the most damaging result, acting as a tax on consumers and dampening spending. But most economists think such an effect probably will be more muted than it was in the last Gulf War in 1991, when the economy was still in recession.

Several economists said the corporate governance scandal and related stock market downturn over the summer has been far more damaging than the Mideast tension to consumer and business confidence.

“The corporate governance scandal was a much bigger drag on growth than concerns about the war — that’s my reading,” said Karl.

With the Dow Jones industrial average up for the past seven straight weeks, there is at least the possibility that the worst is past for the equity markets as well as for the economy.

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