Clouds Added to Many Economic Forecasts

By Nell Henderson
Washington Post Staff Writer
Friday, March 2, 2007

A few weeks ago, Wall Street was praising the Federal Reserve for cooling the economy just enough to tame inflation without chilling it into a recession. Now, after several days of financial market turmoil and conflicting economic reports, analysts are having second thoughts.

Yesterday, several said they saw rising risks of higher inflation and much weaker economic growth.

Consumer prices jumped in January, while home construction fell sharply, the Commerce Department reported yesterday. That combined with falling stock prices, distress in some credit markets and declining business investment to sour many forecasts.

"I think the odds of a recession have gone up in the last two weeks," said David Shulman, a senior economist with the Anderson Forecast at the University of California at Los Angeles.

But more-optimistic observers pointed yesterday to a Commerce Department report that consumer spending, which accounts for two-thirds of the nation's economic activity, rose briskly in January, while incomes climbed even more rapidly.

The nation's factories also produced more goods, hired more workers and booked more new orders in February, the Institute for Supply Management, a business association, said yesterday.

And the labor market remains tight, with unemployment at a low 4.6 percent in January, though many forecasters expect that rate to edge higher in coming months.

"I think that overall the economy is in great shape," said Bernard Baumohl, managing director of the Economic Outlook Group, who argues that buoyant consumer spending will more than offset the economy's soft spots.

The disagreement is typical of a time when the figures are mixed, and it is unclear how consumers will respond to falling stock prices. If consumers pull back now, the economy is likely to falter, several analysts said.

That hasn't happened yet. Consumer spending rose 0.3 percent in January, after adjusting for inflation, fueled by a 0.5 percent increase in after-tax income.

Before adjusting for taxes and inflation, personal income rose 1 percent in January, the fastest rate in a year, partly reflecting big bonus payments, stock market gains and pay raises for federal workers, the Commerce Department said.

This fits with Fed Chairman Ben S. Bernanke's statement Wednesday that the central bank still foresees moderate economic growth this year -- about 2.5 to 3 percent. That would be slower than last year's 3.3 percent expansion but enough to keep unemployment low.

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