U.S. Growth Prospects Fade Slightly, Poll Shows

Prospects for U.S. growth have dimmed only slightly for the first part of next year, a Reuters poll showed on Thursday, suggesting the economy will maintain its slow, steady plod despite global and domestic headwinds.

These include a recession in Europe, a slowdown in China and more restrictive fiscal policy at home.

Economists lowered their median growth forecasts to an annualized 1.6 percent for the first quarter of 2013 compared with 1.7 percent last month, the poll of more than 70 respondent found, and to 2.1 percent for the second quarter from 2.3 percent.

The slower growth outlook reflects some drag from the so-called fiscal cliff - deep automatic reductions in government spending, unless Congress agrees to a debt-and-deficit reduction package.

Most economists in the poll said, however, that Congress would act to avoid the crisis.

It also reflects continued caution about the trajectory of economic growth in the rest of the world even as many analysts expect a slow recovery in European economies, and the Chinese economy to avoid a hard landing.

"When you are growing at 2 (percent) or less and domestic demand in China and Europe slow down for whatever reason, you're getting closer to zero. Every tenth of a percentage point matters at this point," said Jay Bryson, global economist at Wells Fargo Securities in Charlotte, North Carolina.

Still, the sharper deterioration in growth expectations over the past few months appears to have arrested somewhat following encouraging signs from the U.S. manufacturing sector in September after a summer slowdown and an improving outlook for housing and employment.

The forecast for growth in the July-September period of this year of 1.7 percent is the same as the September median, breaking what was a constant deterioration in GDP forecasts in the monthly Reuters poll since April 2012.

Growth is seen picking back up above 2 percent after the first quarter of 2013, with a forecast for 2.5 percent in the third quarter and 2.6 percent in the last quarter.

The average 2013 growth projection in the poll, taken in the past week, was 2.0 percent, unchanged from last month.

"I don't think we are going to get significantly slower from here but that depends on what happens in fiscal policy towards the end of the year," said Bryson.

CLIFF EDGE

The poll showed the vast majority of economists - 29 of 31 -believe politicians will agree to stop January's automatic trigger of $600 billion of tax hikes and spending cuts.

That would avoid precipitating what the Congressional Budget Office has warned could be "a significant recession" and the loss of about 2 million jobs.

However, any deal would be likely to bring some spending cuts and tax hikes as lawmakers negotiate to trim the deficit.

"The U.S. will partially avoid the fiscal cliff," said Francis Genereux, an economist at Desjardins, the Canadian banking group. "Our base forecast involves a tax increase only for highest incomes and less federal spending cuts than requested by the debt ceiling deal."

Genereux is expecting the result of the deal will be a 1 percent drag on GDP.

The outlook for unemployment has slightly improved after a surprise drop in the unemployment rate, which fell to 7.8 percent in September from 8.1 percent the prior month, hitting its lowest level in about 4 years.

Economists see the employment rate consistently under 8 percent in every quarter next year.

The recovery in U.S. housing sector that has been a bright spot for the economy this year is set to pick up speed. Economists expect the S&P Case-Schiller house price index to rise an average 1.7 percent this year. When the question was last asked in July the estimate was for a drop of 1.2 percent.

The sector's recovery is likely to continue into next year, closing 2013 with a 3.1 percent gain, compared to an earlier forecast of just 1.6 percent, the poll shows.

Inflation expectations largely remain tame for this year and next, giving the Federal Reserve leeway as it pledges to keep interest rates low through mid-2015 and attempts to stimulate the economy through purchases of government bonds.

Economists in the poll expect inflation to run at 2.1 percent this year, up from 2.0 percent in last month's poll, before moderating back to 2.0 percent again in 2013.

Predictions for core inflation, which strips out volatile items such as food and gasoline, were down to a median of 2.1 percent this year from 2.2 percent, and steady at 1.9 percent at for next year.