Analysts expect slower growth, lower inflation

U.S. economic growth will slow and inflation will ease in 2007, with energy costs and a falling dollar posing the biggest risks for a pickup in prices, a panel of Wall Street analysts forecast Monday.

“The combination of expansionary fiscal policy, supportive financial markets, reduced energy costs and moderating productivity gains provides the backdrop for sustained economic growth,” a committee of analysts from firms of the Securities Industry and Financial Markets Assn. said in their annual outlook.

The U.S. economy is likely to grow at a 2.5% annual rate next year, the analysts said. The slowdown in housing markets remains the most significant drag on economic growth, and though residential real estate has yet to recover, the most intense phase of the downturn is past, the analysts said in their report on the outlook for 2007.

Business investment and consumer spending, along with lower energy costs, should sustain steady growth, but at a slower pace than the 3.3% growth expected for 2006.

Against this backdrop, the Federal Reserve will hold benchmark interest rates steady at 5.25% before lowering them by a quarter of a percentage point once sometime in late 2007, said the group, which is drawn from securities industry and bond market firms.

Many members of the panel of analysts expect the Federal Open Market Committee to retain its focus on heightened inflation risks in the statement it issues after meeting today. However, policymakers may say they are noticing the effect of weaker manufacturing data on economic growth, other panel members said.

Core inflation should ease to 2.2% in 2007 from 2.3% this year as current monetary policy and slack in the economy, among other factors, keep price pressures muted.

However, analysts saw the possibility that higher energy prices and the effect of a weaker dollar could lead to higher inflation than forecast.

More than half of the analysts in the group were opposed to the Fed’s adopting an explicit inflation target, an approach advocated by Fed Chairman Ben S. Bernanke.

Only 8% advocated setting a specific inflation objective, and 38% recommended an inflation range target.

Separately, a 0.2% rise in U.S. industrial output in October was unchanged from what the Fed initially reported, but October capacity use was slightly lower than first estimated, according to annual revision data the Fed issued Monday.

October industrial production was unchanged from the 0.2% increase reported Nov. 16. Capacity use was revised down to 82% from an originally reported 82.2%.

The Fed revised September industrial output to a decline of 0.5% from a previously reported 0.6% decline. September capacity use was revised to 81.9% from 82.1%.

The Fed revisions left October’s industrial production excluding selected high-technology industries unchanged at an increase of 0.1% and that for September at a decline of 0.7%.

Growth in industrial output for the third quarter, compared with the same period a year earlier, was revised downward to 4% from a previously reported 4.2%.

The Fed also said the revised full-year 2005 output growth was 3.2%, compared with 3.3% reported previously.