New York, August 13--Economists slashed their forecasts for third-quarter growth, but they see the weakness as short-lived and anticipate job growth ahead, according to the latest Wall Street Journal Online economic-forecasting survey.
About four out of five economists surveyed cut their forecasts for growth in the nation's gross domestic product -- the broadest measure of economic activity -- for the third quarter. The last time the survey showed such a dramatic drop in GDP estimates -- six-tenths of a percentage point -- was less than two weeks before the start of the Iraq war.
Still, half of the 55 economists queried said they expect the "soft patch," as characterized by Federal Reserve Chairman Alan Greenspan in congressional testimony last month, to end in three months or less. Among the other respondents, 19% said the slowdown is already over and another 19% said it will last three to six months. None expressed concerns that it would be prolonged and lead to a recession.
"Economic fundamentals for the six months ahead and for 2005 are extremely positive," said Bill Hummer, chief economist at Wayne Hummer Investments LLC, one of the economists surveyed. He cited expectations for an increase in the creation of new businesses, "vibrant" capital spending, higher exports, the abatement of terrorism concerns and the stabilization of energy prices. He pegs growth at 3.8% through year end and slightly lower than that early next year.
Economists still expect economic expansion to pick up near the end of this year, but slightly lowered their estimates for fourth-quarter growth to 4.1%, from 4.2% in the June survey.
One-third of the economists surveyed said oil prices would have to top $50 a barrel to seriously jeopardize the economic recovery and push the economy back into a recession; nearly one-third said that tipping point was above $60 a barrel.
Despite recent signs of a cooling economy, economists still expect the Fed to take a gradual approach to raising its target for the federal-funds rate to 2% by year end and near 3% by June 2005, from its current level of 1.5%.
Nearly all economists surveyed said they believe the November election will have no bearing on the Fed's decisions on interest rates. Of the three economists that said they expect the election to impact the Fed's decision, two said they thought it would cause the Fed to hold off on raising rates at the September meeting. The third, William Dudley, an economist at Goldman Sachs, said the election could put pressure on the Fed to raise rates, "so as to not appear political."
Economists continued to bump up their inflation forecasts. On average, economists expect inflation, as measured by the consumer-price index, to rise at a 3% annual rate by November, up from their 2.9% forecast in June, and a full percentage point higher than their 2% estimate in December 2003.
Most economists don't see rising oil prices leading the economy into recession, but a new concern has emerged: stagflation -- or stagnating growth combined with higher inflation.
A "new risk to the economy, 'stagflation,' creates a real problem for the Fed," said Allen Sinai, chief global economist of Decision Economics Inc.
Economists lowered their forecasts for payroll gains, in the wake of last week's disappointing employment report. That report showed only 32,000 jobs were added to payrolls in July, and that fewer jobs were added in the previous two months than initially estimated.
Forecasts for average monthly payroll additions in the next 12 months ranged from a high of 300,000 jobs to a low of 75,000 jobs. On average, economists expect 194,000 jobs to be added each month through year end, down from May's estimate of 207,000 per month.
