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Wednesday, July 12, 2006

Survey: Rates, Gas Prices, Housing To Pinch Economy

By Yaser Anwar, CSC of Equity Investment Ideas

A monthly survey by Bloomberg News predicts that rising interest rates, high gas prices, and a slowing housing market will shrink consumer spending, in turn, weakening the U.S. economy for the second half of the year.

Surveyed from June 30 to July 10, 51 economists forecast that the economy will expand at an annual rate of 2.9 percent in the third quarter and 2.8 percent in the fourth quarter of 2006, says Bloomberg.

The economists, on average, agree that the Federal Reserve should raise the Fed funds rate this quarter “to prevent this year’s 35 percent jump in gasoline costs from stoking inflation.”

“With the Federal Reserve being pretty forthcoming in saying their priority is to fight inflation, there is a good chance that they will continue to raise rates despite the fact that the growth indicators will slow,” Sharon Lee Stark, chief fixed-income strategist for Stifel Nicolaus & Co., tells Bloomberg News. Stark added inflation “will continue to be elevated.”

Consumer spending, which accounts for two-thirds of the economy, should slow to a 2.8 percent annual rate this quarter and a 2.7 percent rate in the fourth quarter, according to the survey. That’s a full percentage point below the quarterly average for the past decade.

“Consumers are getting squeezed on a number of fronts,” said Mark Vitner, a senior economist at Wachovia.

Prices are rising, too. The survey predicts that prices will rise 3 percent this year, the third year in a row that prices increased at least 3 percent, points out Bloomberg.

As for interest rates, the median estimate by economists is that the Fed will raise its benchmark rate to 5.5 percent and remain there for the rest of the year.

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