Top forecasters cut their outlooks for U.S. growth this year and next but said inflation seems to be leveling off and consumer spending should strengthen in the months ahead, a survey out Friday showed.
More than 70 percent of the economists surveyed in the Blue Chip Economic Indicators newsletter cut their projections for 2004 growth but most expect the Federal Reserve to raise interest rates again at its Sept. 21 policy-setting meeting.
The consensus from the closely watched survey of 50 professional forecasters was for gross domestic product growth of 4.3 percent in 2004, down from 4.4 percent projected a month ago. It was the third straight monthly downgrade.
The outlook for 2005 growth was also lowered a notch, to 3.6 percent, on concerns that higher oil prices have taken a bite out of consumer spending.
"The sharp upward spike in energy prices has helped cap real growth in personal incomes and dampened consumption, especially among lower and middle-income households. It may have also made some firms more cautious about hiring and investment," the newsletter said.
"The good news is that inflation appears to be flattening out."
The panel forecast the consumer price index would grow at a 2.6 percent annual rate in the third quarter and 2.3 percent in the final three months of the year, a sharp slowdown from the oil-driven 4.8 percent clip of the second quarter.
"In good part, these forecasts are premised on the consensus expectation that crude oil prices will fall to the upper $30 per barrel level by the end of this year and to the low $30 per barrel level by the end of 2005," Blue Chip said.
Despite the relatively benign inflation outlook, the panel said monetary policy remains "far too accommodative," with 64 percent of panelists predicting the Fed would raise rates by another quarter point later in September.
The consensus forecast a federal funds rate of at least 2 percent by the end of the year, up from the current 1.5 percent, with another 150 basis points of tightening in 2005.
That would imply the Fed will stand pat at at least one of the three meetings that remain this year.
Higher energy costs fueled inflation in the second quarter and dampened consumer spending, but the panel said GDP should rebound as oil prices ease and shoppers spend again.
"Solid gains in underlying hours and earnings figures for July and August suggest an acceleration in income growth -- particularly in real terms now that energy prices have flattened out -- providing consumers the wherewithal for significantly stronger spending in the months ahead," it said.
Real GDP was forecast to grow at an annual rate of 3.5 percent in the third quarter and 3.9 percent in the fourth, rebounding from the second quarter's disappointing 2.8 percent pace, the panel said. The forecasts were downgraded from 4.0 percent and 4.1 percent, respectively, a month ago.