By Martin Wolk Executive business editor
updated 9/26/2005 1:00:05 PM ET 2005-09-26T17:00:05

Soaring crude oil costs, driven to new record highs by Hurricane Katrina, will take a bite out of U.S. economic growth this year and next, even if prices moderate in coming months as expected, according to a survey of business economists.

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The economists on average predict crude will decline to $55 a barrel by the end of next year from the current level of about $64, which is down from a post-Katrina peak of about $70. But opinion on the future pricing of oil is sharply divided. About half of the 43 economists surveyed predicted oil will remain over $60 by the end of 2006, and 15 percent are looking for oil to rise over $80.

Even if oil prices remain at current levels, the impact will cut 0.6 percent off U.S. growth this year and 0.7 percent next year compared with what could have been achieved with oil trading at last year’s average of $41 a barrel, according to the survey released Monday at the annual meeting of the National Association for Business Economics.

The high price of oil means consumer inflation will be running at a 3.5 percent rate by late this year, sharply higher than predictions made even a few months ago. But little of that change is expected to pass through to so-called "core" inflation, which is expected to remain at a moderate level of 2.3 percent this year and 2.4 percent next year.

The quarterly survey was taken in the two weeks after Katrina struck the Gulf Coast but before Rita, which in any case was far less damaging. But economists said Rita, which sharply curtailed energy production in the key region, was far from an insignificant event.

"If we hadn't had Katrina we'd be saying what a bad hurricane (Rita) was, but in the aftermath of Katrina we're saying, 'Boy, aren't we lucky,'" said Stuart Hoffman, chief economist for PNC Financial Services.

Despite the higher price of oil and the devastating impact of Hurricane Katrina on the Gulf Coast, forecasters have barely adjusted their overall growth forecasts from earlier levels, predicting the economy will grow 3.5 percent this year and 3.4 percent next year, about at its long-term, non-inflationary potential.

In part that is because the economy grew faster in the first half of the year than originally predicted. The panel estimates Katrina will trim GDP growth by 0.4 percent in the third quarter and 0.2 percent in the fourth quarter.

That is slightly more optimistic than the outlook from the Congressional Budget Office. CBO director Douglas Holtz-Eakin told the conference Sunday that Katrina would cut GDP growth by 0.75 percent in the current quarter and 0.5 percent in the fourth quarter.

In general, the forecasters expect the Fed to raise short-term interest rates one more time this year, although about a quarter of those surveyed are expecting two more quarter-point rate hikes. The survey was taken before the central bank pushed up the benchmark overnight rate last week by a quarter-point to 3.75 percent.

Chicago Fed President Michael Moskow, who addressed the conference Monday, made clear he thinks there is still room to raise rates, saying "core" inflation, which excludes energy prices, is at "the high end of  the comfort zone." "The fundamentals of the economy are strong," he told reporters, adding that any effects of Katrina are likely to be "short-lived."

The forecasters in the survey, including consultants, academics and economists for financial firms and manufacturers, also predicted that home price increases would moderate sharply from their recent double-digit levels as mortgage rates rise.

U.S. home prices are expected to rise by an average 5 percent next year, compared with about 10 percent this year, according to the forecasters.

So far, however, there is no sign of the projected moderating in the market. The median price of an existing home surged to $220,000 in August, up 16 percent from year-ago levels, the fastest appreciation rate in 26 years, a trade group reported Monday. Sales of existing homes rose to the second-highest pace on record.

Housing starts are projected to decline about 7 percent next year from this year's level as demand moderates in response to the rising mortgage rates, according to economists surveyed by NABE.

The economists also formed a consensus about the choice for a new Federal Reserve chairman to succeed Alan Greenspan. In the estimation of half of those surveyed, he is Ben Bernanke, chairman of President Bush’s Council of Economic Advisers and a former Fed governor.

A minority of the forecasters believe the nod will go to Glenn Hubbard, a predecessor of Bernanke’s in the White House post, or Harvard economist Martin Feldstein.

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