U.S. Economy to Stall at Year-End as `Perfect Storm Returns'

By Bob Willis and Kristy Scheuble

July 10 (Bloomberg) -- The U.S. economic expansion may slow to the weakest pace in six years in the fourth quarter, after the impact of federal tax rebates fades, according to a Bloomberg News survey.

The world's largest economy will slow to a 0.5 percent annualized growth rate from October to December, down from a 1 percent estimate last month, according to the median forecast of 63 economists surveyed from June 30 to July 9. Analysts anticipate consumer spending will rise 0.2 percent next quarter, the smallest gain since 1991.

Federal Reserve policy makers will forgo raising interest rates until next year as the expansion stalls, the survey shows. That contrasts with traders, who estimate 68 percent odds of at least a quarter point rate increase by year-end.

``Consumers are poised to pull back'' as the ``perfect storm returns,'' said Richard Berner, co-head of global economics at Morgan Stanley in New York. He cited the credit crunch, record energy costs and declines in payrolls and house prices.

Berner and his team this week shifted their forecast for the start of a recession to the fourth quarter, postponing it from the first half of the year because of the fiscal stimulus.

Tax rebates, totaling more than $100 billion, will be enough to keep the expansion going at a 1.4 percent pace this quarter, after a 1.5 percent expansion the previous three months, before the effect subsides, the survey shows.

Bernanke, Paulson

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson may be questioned on the economic outlook in a House Financial Services Committee hearing on financial regulation today. They testify from 10 a.m. in Washington. Bernanke said last month the danger of a ``substantial downturn'' had receded.

A 0.2 percent gain in consumer spending next quarter would be the worst since a decline was recorded for the final three months of 1991. Last month, analysts predicted a 0.5 percent increase. Economists see spending rising 1.5 percent this quarter at an annualized rate, compared with average gains over the past decade of 3.4 percent.

The economy will continue to teeter on the edge of a downturn, the survey shows. The odds of a recession occurring within the next 12 months are 50 percent, the same as last month, after climbing as high as 70 percent in the April survey.

``We don't have a recession in our forecast, but it'll sure feel like a recession to many folks,'' said Jay Bryson, chief global economist at Wachovia Corp. in Charlotte, North Carolina.

Unemployment Rate

The survey indicates the U.S. unemployment rate will rise to 5.8 percent by the end of 2008, from 5.5 percent currently. The economy in June lost jobs for a sixth month, for a total of 438,000 job cuts so far this year.

Pier 1 Imports Inc., the biggest U.S. retailer of imported furniture, clothing-store chain Men's Wearhouse Inc. and Office Depot Inc. are among companies this week reporting weaker sales or plans to close stores.

Slower growth may help alleviate inflation. Consumer prices will rise 3.9 percent in the fourth quarter from a year before, down from a 4.5 percent pace in July through September. That's still up from projections of 3.4 percent and 4.1 percent in the June survey.

Consumer price gains have been led by the surge in fuel and other commodity costs. Crude oil reached a record of $145.85 on July 3. Regular unleaded gasoline prices touched a high of $4.11 a gallon last week, according to AAA.

Confidence Slides

Rising costs contributed to a slump in consumer confidence to a 28-year low in June, according to the University of Michigan/Reuters survey. Sentiment also deteriorated after home values in 20 major metropolitan areas fell for 16 straight months through April. The S&P/Case-Shiller index of house prices dropped 15 percent in April from a year before.

Consumers are seeking out bargains. Cincinnati-based Kroger Co., the biggest U.S. grocery chain, on June 24 said sales at stores open at least 15 months may climb as much as 5.5 percent as buyers are drawn to cheaper prices.

``Customers are responding to offers that really hit home with them,'' Kroger Chief Executive Officer David Dillon said on a conference call.

The Fed will keep its benchmark interest rate at 2 percent through March 2009, before raising it by a half point by the end of June, according to the survey. That compares with a quarter- point increase in the second quarter of 2009 projected last month.

Investors see a 63 percent chance of a Fed rate boost at the Oct. 28-29 Fed meeting, according to futures quoted on the Chicago Board of Trade.

Economists also anticipate little rebound in growth next year, with the expansion picking up to just 1.7 percent from a 1.5 percent pace for 2008 as a whole.

``The recession is hiding behind the tax rebate checks,'' Roger Kubarych, chief global economist at Unicredit Research in New York, said in an interview with Bloomberg Radio.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net