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US economy to skirt recession, but barely

NEW YORK - U.S. economic growth will flirt with stagnation over the next two quarters but the likelihood of recession has receded over the past month to around 50:50, according to a Reuters poll of economists.

An eventual recovery, helped by the sharp recent pullback in energy costs, should allow the Federal Reserve to boost interest rates by mid-next year to keep inflation under control, the poll found.

The survey indicated analysts have become slightly more downbeat about growth for this year as a whole but also more sanguine toward a possible 2009 rebound.

Economists polled Aug. 14-19 are looking for U.S. gross domestic product to grow 1.2 percent this year, accelerating to a still subdued 2.0 percent next year. The July poll foresaw 1.3 percent growth for 2008 and 1.8 percent for 2009.

The rosier outlook for next year comes from the view that oil prices, which have fallen by about $35 a barrel to $113 in the past month, will no longer take such a big slice of U.S. consumer or corporate spending.

Many economists also believe residential construction could hit a bottom by the end of the year, even if such predictions have proven premature before.

"It's a combination of those two forces with some sense that the credit stress(es), while continuing to be in place, are not going to be as severe," said Bruce Kasman, chief economist at JP Morgan Chase.

The risk of recession also appears to have eased, according to forecasters. The mid-range forecast now puts the chance of recession at 53 percent, down slightly from 60 percent in July.

This may partly explain the sudden rally in the dollar since the last poll was taken. It has soared to a 6-month high against the euro and a 2-year high against a battered pound.

While most investors are convinced that the next move in interest rates from the Fed will be up, given this backdrop, any rises will be incremental and won't come until the middle of next year.

The Reuters poll points to modest rate hikes that would leave the federal funds rate at 3.0 percent by the end of 2009 from the current 2.0 percent.

Inflation moderating

The United States has been in the grip of a credit drought that has already lasted over a year, as investors jolted by hundreds of billions in losses on assets backed by real estate have curtailed lending across the economy.

In part because of the debilitating effects of this crisis, inflation is expected to moderate rather quickly over the coming year. The poll predicts it will bottom out at 2.1 percent in the third quarter.

That would be a pretty impressive retreat given that the inflation rate jumped to 5 percent in the year to June. Still, core inflation, which excludes food and energy, is expected to hold above 2 percent through next year.

Average core inflation is predicted to mark 2.4 percent in 2008 and 2.3 percent in 2009, each median forecast up 0.1 percentage point from the July poll.

Experts say whether the economy tilts into recession hinges upon what happens in the housing market. How much further home values fall will determine both the extent of lending constraints and the pullback in consumer spending.

On that front, the evidence is not encouraging.

"Domestic demand in the United States is likely to weaken over the next several months, as consumer spending suffers from the fade-out of fiscal stimulus and a variety of other pressures," said Jan Hatzius, chief U.S. economist at Goldman Sachs.

Housing shows few signs of a turnaround. An index of homebuilder sentiment held at a record low in August, according to an industry report published on Monday.