White House Lowers Economic Forecast

The White House revised its rosy economic forecast downward Thursday, citing a more significant housing slump than was previously predicted.

The new forecast comes despite a report from the Commerce Department that the economy climbed at a 4.9 percent growth rate from July to September, the strongest showing in four years. However, that growth is not expected to last through the current quarter because of the strains of the housing slump and credit crunch.

Under the administration's new forecast, the gross domestic product, or GDP, will grow by 2.7 percent next year. Its old projection called for a stronger, 3.1 percent increase.

"The housing market decline has been more significant than we expected," said Edward Lazear, chairman of the White House Council of Economic Advisers.

The more pronounced housing slump – along with the expectation that problems will persist into next year – was a big factor in the administration's decision to downgrade its economic growth forecast for 2008.

Housing Investments Slashed

In the third quarter alone, builders slashed investment in housing projects by a whopping 19.7 percent on an annualized basis, the biggest cut in a year. That lopped just over a full percentage point off GDP from July through September.

Lazear said he expects the drag from housing on the economy to continue at least through the first half of 2008. He also noted that the credit situation seems to have worsened in the last few weeks.

The pickup in overall national economic activity in the third-quarter – while a testament to the economy's resilience – didn't change the picture forming in the current October-to-December quarter. Indications are that the economy will lose considerable steam. Growth is expected to clock in at a pace of just 1.5 percent or less in the final three months of this year.

"Turn out the lights, the party is over," said Richard Yamarone of Argus Research. "Fourth-quarter growth is not going to be anywhere near the third-quarter's pace. It is going to be miserable, but we'll escape a recession."

GDP is the value of all goods and services produced within the United States and is the best measure of the country's economic health.

Federal Reserve officials and other economists – looking at fresher barometers of economic activity – have warned that the economy is in for some rough times.

The Fed has lowered interest rates twice this year – in September and late October — to keep the housing collapse and credit crunch from throwing the economy into a recession. Since then financial markets have suffered through another period of turmoil, the housing slump has deepened and consumer confidence has tanked. The odds of another rate cut in December are rising, analysts said.

Exports Power Growth

Businesses largely carried the economy in the third quarter, with U.S. exports powering growth. Consumer spending was somewhat subdued.

The big worry is that consumers and businesses will cut back on spending and investing, dealing a blow to economic growth. The odds of a recession have grown this year. Still, the Bush administration, Fed officials and many economists remain hopeful the country will weather the financial storm without falling into recession.

"We may see slowing of the growth, but we'll still see growth," Commerce Secretary Carlos Gutierrez said in an interview with The Associated Press. Will there be a recession? "We don't see that," he said.

With economic growth slowing, the unemployment rate is projected to move up to 4.9 percent next year. That's up from a previous forecast of a 4.7 percent jobless rate, but still would be considered fairly low by historical standards. The unemployment rate last year dipped to 4.6 percent, a six-year low.

Inflation, however, should improve. The White House expects consumer prices to increase by 2.1 percent next year, a moderation from a previous forecast of a 2.5 percent rise. That's encouraging news as oil prices have marched past $92 a barrel.

For this year as a whole, the White House expects the economy to grow 2.7 percent, helped by the strong third-quarter performance. The new projection for growth this year is up from a previous estimate of 2.3 percent. The economy grew by 2.6 percent last year, as measured from the fourth quarter of the previous year. The White House's projections are based on the fourth quarter of one year compared with the fourth quarter of the previous year.

From NPR reports and The Associated Press

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