Survey says economy low on energy

August 23, 2004

NEW YORK (CNN/Money) - Economists are scaling down their forecasts for economic growth for the rest of the year as they factor in the impact of higher energy prices and a cooldown in consumer spending, according to a survey by USA Today.

The median forecast for the survey of 61 top economists, conducted Aug. 13-18, is for annual growth of 3.6 percent in the third quarter, and a 3.8 percent growth rate in the final three months of the year, the report said.

While still healthy, that's a decline from May projections for a 4.1 percent and 4 percent growth, respectively.

Higher energy and commodity prices have cut into consumer spending, especially as higher prices at the pump this year forced many middle- and low-income consumers to reduce discretionary spending. Another side effect is higher inflation.

But nearly 80 percent of economists polled agreed with Federal Reserve Chairman Alan Greenspan that factors pushing inflation are largely "transitory," the newspaper said, and expect the Fed to carry on its policy of "measured" increases in interest rates.

The Central bank has boosted short-term interest rates to 1.5 percent from 1 percent since June to keep inflationary pressures at bay.

The median forecast of economists polled, 84 percent of whom said the Fed's policy is right, is for the central bank to raise short-term interest rates to 2 percent by the end of 2004 and 3 percent by late 2005, the report said.

The median forecast of a "neutral" Fed interest rate -- not too low to spur inflation nor too high to stymie growth -- is 4 percent, the report said.

While some economists believe the economy is resisting external pressures, others are less convinced.

"Energy costs have been so high for so long that businesses aren't confident anymore that they'll fall or fall significantly," the paper quoted Joel Naroff of Naroff Economic Advisors as saying. "It's made them look toward trying to push through some smaller price increases."

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