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U.S. growth forecasts cut
September 10, 2001: 12:10 p.m. ET

But most economists in latest NABE survey see recovery by end of 2001
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NEW YORK (CNNfn) - The U.S. economy will grow at a slower pace than previously thought but a recovery from the yearlong slowdown is likely to come by the end of 2001, a panel of economists said Monday.

The National Association for Business Economics said its panel of economists cut the estimate for 2001 gross domestic product (GDP) growth to 1.6 percent from 2.0 percent. But two-thirds of the 31 economists expect the economy to recover by the end of the year.

The panelists also cut their expectations for 2002 GDP growth to 2.7 percent from 3.1 percent. GDP, the output of goods and services produced in the United States, is the broadest measure of the world's largest economy.

The economists also said they thought the Federal Reserve raised rates too much in 1999 and 2000 in an effort to put the brakes on what the Fed saw as a runaway economy. The central bank raised its target for short-term interest rates 1.75 percentage points between June 1999 and May 2000, from 4.75 percent to 6.5 percent.

"The participants did believe that the prior overstatement of economic strength in 2000 prompted the Fed to engage erroneously in an extra [quarter-point to half-point] of tightening," the report said.

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Still, 74 percent of the economists surveyed said they thought the Fed's actions this year to bring rates back down were "just right."

The Fed has cut rates seven times in 2001 in an effort to stimulate the sluggish economy and avoid a recession, commonly defined as two consecutive quarters of negative GDP.

The Commerce Department recently cut its estimate of second-quarter GDP growth to 0.2 percent from 0.7 percent, meaning the economy was nearly stagnant but still growing.

The NABE survey noted U.S. households had responded much better to the slowdown than U.S. businesses. The economists expected sharp downward revisions in estimates for business spending and profits in 2001 and 2002, but upward revisions for consumer spending and residential construction. Ordinarily, these indicators rise and fall in tandem, the report said.

"The mix of diverging revisions reflects the degree to which the resilience of the household sector to deteriorating business conditions has caught economists by surprise," the report said.

Consumer spending, which fuels two-thirds of the economy, has been relatively strong despite hundreds of thousands of job cuts this year and has been largely credited with keeping a recession at bay.

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President Bush, at least, thinks the country will avoid a recession, according to David Hubbard, chairman of the White House Council of Economic Advisers, who attended an NABE conference of economists in New York.

"We believe the economy will turn around by the fourth quarter and be growing respectably in 2002," Hubbard told CNNfn. "We don't see a recession coming."

Hubbard also said the administration has no plans for further economic stimuli, such as more tax cuts, despite the increasing impatience of Congressional leaders who aren't sure Fed rate cuts and a tax cut passed earlier this year are helping quickly enough.

Particularly alarming to many observers and to Wall Street was a report by the Labor Department Friday that the U.S. unemployment rate jumped to 4.9 percent, far worse than economists had expected.

"The stimulus already in the pipeline is sufficient," Hubbard said. He did acknowledge a capital-gains-tax cut could give a short-term boost to the economy and said the administration is open to such measures.

"The question in the current environment is when, and how do you pay for it?" Hubbard said.

Fed policy makers optimistic

Also attending the NABE conference was St. Louis Fed President William Poole, who spoke optimistically about the economy's chances.

"No one knows for certain whether the economy can escape an actual decline in real GDP, but the fact that we have done so to date and that many adjustments are now well along suggests that we have an excellent chance of doing so," Poole said.

Poole, a voting member of the Fed's policy making committee, which sets the central bank's target for short-term rates, objected to the Fed's quarter-percentage-point interest-rate cut in June out of concern that the Fed was increasing the risk of inflation.

"The central bank ought not to pursue the goal of stabilizing economic activity so aggressively that it runs any substantial risk of compromising the goal of low inflation," he said Monday.

Another cautious policy maker, Kansas City Fed President Thomas Hoenig, speaking at a conference in Wichita, Kan., said he also expected the economy to improve through the rest of 2001 and into 2002.

But he added that "There are significant risks any time you're in an economy like this."

Hoenig objected to the Fed's half-percentage-point cut in May, saying it was too aggressive. He did not object to the June cut, according to minutes of the meeting. Minutes of the Fed's August meeting are not yet available. graphic

-- from staff and wire reports


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