Philadelphia Fed: Economists Trim Growth Forecast

NEW YORK – The outlook for U.S. economic growth darkened over the past three months and private sector economists expect weaker growth and higher unemployment in the months ahead than previously thought, according to a Thursday Federal Reserve bank report.

Despite 3 percentage points of Fed interest rate cuts, the economy has yet to show convincing signs of improvement from a recession in manufacturing, a sharp slowdown in capital spending and sagging profits, although economists still expect lackluster growth to pick up later this year and into 2002.

The Federal Reserve Bank of Philadelphia said its quarterly survey of 33 professional forecasters showed economists again downgraded their growth projections for the current year to 1.7 percent, down sharply from May's forecasts for 2.3 percent.

The same group estimated the economy will grow by 2.6 percent next year, also cut from forecasts for 2.8 percent growth in the May survey.

The report showed lower growth estimates than the White House's own expectations for 3.2 percent growth in 2002, a figure on which the government has based projections for budget surpluses going forward.

Forecasters said the U.S. unemployment rate, currently at 4.5 percent, will rise to 4.9 percent by the fourth quarter and will average 4.9 percent throughout 2002, both up from forecasts for 4.8 percent in the May survey.

The report also showed economists were more worried that gross domestic product (GDP) might contract in the current quarter, with 35 percent of respondents expecting third-quarter GDP to shrink compared to 29 percent in the previous survey. Consensus forecasts were for 1.2 percent growth in the current quarter, down from 2.0 percent in the May survey.

GDP grew by an annualized 0.7 percent in the second quarter, its weakest performance in eight years.

Expectations for tame inflation going forward remained mostly unchanged from the prior survey. Forecasters estimated the consumer price index (CPI) would register 3.0 percent annualized growth in 2000, unchanged from the prior survey and 2.7 percent in 2002, up slightly from 2.5 percent from May's forecasts.

The Blue Chip survey of economists published earlier this month showed similar results, with experts reducing forecasts for growth in the third quarter of this year compared to July.

But while the Blue Chip survey showed economists reduced forecasts for fourth quarter GDP to 2.8 percent from 3.0 percent, the Philadelphia Fed survey disclosed an increase in expectations to 2.8 percent from 2.6 percent.