NEW YORK – U.S. economic growth and inflation should cool a little next year as interest rate hikes from the Federal Reserve begin to bite and the housing market comes off the boil, a Reuters poll shows.
The year should get off to a strong start, helped by the reconstruction efforts in the wake of Hurricanes Katrina and Rita, but growth is likely to moderate in the second half of 2006, according to a poll of 31 economists.
The economic slowdown may also give the Federal Reserve reason to take a break from its relentless string of interest rate rises which have so far taken the benchmark federal funds rate to 4.0 percent from 1.0 percent in June of last year.
"The headwinds of high energy prices, rising interest rates, and slower house price appreciation will begin to weigh on consumer spending and housing market activity next year," said Scott Anderson, senior economist at Wells Fargo & Co.
The November 14-17 survey economists gave median forecasts for gross domestic product (GDP) growth of 3.5 percent in 2005, moderating to 3.3 percent in 2006.
Over the course of next year, growth is seen slowing from a 3.5 percent pace in the first quarter to 3.0 percent in the final quarter of the year.
The results of the poll are in line with those in the last survey in October.
Consumption, which has been the main engine of growth over the past two years, is generally forecast to slow as the boom in housing comes to an end.
But it is the extent of the housing slowdown, after at least 12 interest rate hikes, that will hold the key.
"In 2006, the main risks to the economic outlook will come from housing," said Ed McKelvey, senior economist at Goldman Sachs.
"The impact that the declining housing market has on consumer spending could have a large impact on the general economic picture," he said.
McKelvey said he expects a downturn in spending from the deflating of the housing boom, and a consequential pause in Fed tightening sometime in mid-2006.
Although some economists have ratcheted up their expectations for future Fed tightening in response to hawkish comments from Fed officials over the past month, the Reuters survey implied two or three more rate increases. Forecasts for rates at end-2006 ranged from 3.5 percent to 5.0 percent.
The Fed has been raising rates to keep a lid on inflation, worried that the recent surge in energy prices will begin to feed through to broader inflation if companies start raising prices for a variety of goods.
The poll found economists expect the headline consumer price index, which includes volatile food and energy costs, to gradually decline next year, to 2.9 percent from 3.4 percent this year. But core inflation is likely to remain near the top of the Fed's perceived comfort zone of 1-2 percent for several months at least, analysts said.
With the risks for inflation seen to be on the upside, the central bank is forecast to raise official rates again at its policy meetings in December and January.
"Because of the very high uncertainty over the future path of inflation, the Fed will need to continue raising interest rates," said Kurt Karl, chief economist at Swiss Re.
But there is still debate over whether the likely new Fed chairman, Ben Bernanke, will continue with the hikes at his first meeting in March.
Some in the survey saw the risk the Bernanke Fed could go a little further than strictly necessary in raising rates.
"The new Fed chairman will also need to polish his inflation fighting credentials with the financial markets, increasing the (likelihood) that the Fed will rather err on the side of higher interest rates and slower growth, than lower interest rates and higher inflation," said Anderson at Wells Fargo.