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Economists further scale back U.S. growth outlook

Stubbornly high unemployment and signs of persistent weakness in the housing market have prompted economists to further cut their outlook for U.S. growth in the second half.
/ Source: Reuters

Stubbornly high unemployment and signs of persistent weakness in the housing market have prompted economists to further cut their outlook for U.S. growth in the second half of the year, a Reuters poll showed on Wednesday.

The September poll marked the third consecutive month economists had scaled back expectations for gross domestic product in the second half, and followed the U.S. government's announcement on Friday that unemployment ticked up to 9.6 percent in August.

Lower growth expectations means the U.S. Federal Reserve is unlikely to raise interest rates until the third quarter of 2011, according to the poll, not the second quarter as forecast in a poll a month ago. However, the chances of the world's biggest economy falling back into recession have fallen to 20 percent, from 25 percent a month ago.

The median of forecasts in a survey of more than 70 economists puts annualized U.S. GDP growth at 1.8 percent in the third quarter of this year and 2.1 percent in the fourth quarter.

A similar poll conducted in early August forecast third-quarter growth at 2.4 percent and fourth-quarter growth at 2.5 percent. A poll taken in July forecast growth of 2.6 percent and 2.7 percent during the respective quarters.

Struggling homes sales, weak consumer confidence and the lofty unemployment levels are prompting economists to rein in growth expectations.

"The real risk is sub-par growth for an extended period," said Michelle Girard, senior economist at RBS in Stamford, Connecticut.

Overall, GDP is forecast to average 2.7 percent in 2010, down from 2.9 percent in the August poll and 3 percent in the July poll. The median of forecasts in the most recent poll was for average GDP growth of 2.4 percent in 2011, down from an August forecast of 2.7 percent and a July forecast of 2.8 percent.

The government said on Friday that U.S. employment fell for a third straight month in August, with 54,000 jobs lost during the month. The drop was less than expected, however, and private hiring increased.

Still, the lack of substantial job creation troubled some economists. Jonathan Basile, economist at Credit Suisse in New York, said his bank on Friday reduced its expectations for third-quarter GDP to 2 percent from 2.5 percent, and for the fourth quarter to 2.2 percent from 3.2 percent.

"There has been a downshift in private jobs growth, and that is consistent with our new forecast which has just been downgraded," Basile said.

Fed on hold
The slower growth will probably mean the U.S. Federal Reserve will hold recommended interest rates at their current level near zero until at least the second half of next year, according to the results of the poll.

The median of forecasts is for the central bank to increase rates to 0.25 percent in the third quarter of 2011 from the current range of zero to 0.25 percent.

In the early August poll, the median called for an initial rate increase to 0.5 percent in the second quarter of 2011.

The Fed is now expected to increase interest rates to 0.75 percent in the fourth quarter of next year, down from an original estimate of a hike to 1.25 percent during the quarter.

And while growth is expected to slow, the median of forecasts from economists assigns only a 20 percent chance the U.S. will tip into a double-dip recession, down from a 25 percent chance in an August 27 poll.

Inflation was also forecast to remain subdued. The third- and fourth-quarter consumer price index was forecast at 1.2 percent and 0.9 percent respectively, which were virtually unchanged from the August poll. The overall CPI index was expected to be 1.6 percent higher for 2010, in line with August's forecast.

Core CPI, which does not include food or energy costs, was estimated at 1 percent in the third quarter of this year, up from 0.9 percent in the August poll, while fourth-quarter core CPI was pegged at 0.9 percent, which was unchanged from the previous poll.