US economy to avoid recession in 2008 due to surprising economic growth

The US economy will be able to walk across the minefield of the housing downturn, possible credit crunch and rising oil prices without blowing up, according to the official White House economic forecast released Thursday.

Photo: US economy to avoid recession in 2008 due to surprising economic growth

"While difficulties in housing and credit markets and the effects of high energy prices will extract a penalty from growth, the U.S. economy has many strengths and I expect the expansion to continue," said Treasury Secretary Henry Paulson in a statement accompanying the release of the forecast.

The White House sees a slowdown, but projects growth will average 2.7% over the four quarters of next year. This is down from the previous forecast this summer of a 3.1% growth rate.

The forecast shows the unemployment rate will only tick up to 4.9% next year from its current level of 4.7%. But job growth should average a healthy 109,000 per month next year. This is down from this year's estimated average of 29,000 jobs created per month.

"We are entering a record fifth year of continuous job growth while the unemployment rate remains low and we believe these trends will continue," said White House chief economist Edward Lazear.

Inflation is not a worry, the White House said.

After spiking up this year due to food and energy prices, inflation is expected to moderate next year.

The Bush administration's forecast is above the 2.4% growth rate forecast by the prestigious Blue Chip Economic Indicators newsletter.

Economists generally dislike forecasting recessions because it is so difficult. But Wall Street analysts have been steadily raising the odds of a serious downturn since the financial market turmoil boiled over in the summer.

For instance, economists at Goldman Sachs recently hiked their odds of a recession in 2008 to 40-45 percent, marketwatch.com reports.

Revised numbers from the government Thursday said the U.S economy grew at a surprisingly hot 4.9% pace from July through September, despite troubles in the housing market.

That makes Sara J. Walker wonder whether the increasing use of the "R" word by economists - a possible recession - might be a bit off, too. With exports booming and consumers working and spending, Walker said she finds it hard to believe the economy is slowing that much.

"The nightly news makes it look like it's really bad, but I don't think we're in that much trouble," said Walker, senior vice president and investment officer for Associated Wealth Management in Milwaukee.

Still, it appears no one, from Walker to the White House's Council of Economic Advisers, thinks the economy can keep rolling at such a brisk level. The council forecast growth of about 2.7% overall for 2008, which is down from its earlier 3.1% prediction.

"We are forecasting solid growth for 2008 - 2.7 percent still is a good, solid growth rate, and that is especially the case given that we have been hit with a pretty significant decline in the housing market," Ed Lazear, chairman of the Council of Economic Advisers, said in a news briefing Thursday.

Jay Mueller, portfolio manager at Wells Fargo Advantage Funds in Menomonee Falls, said it seems odd to even be talking about a slowing economy on the day the Department of Commerce reported a third-quarter Gross Domestic Product growth rate of 4.9%. But he said that growth was not as strong as it looked, in part because the quarterly figure included a buildup of inventories, jsonline.com reports.

"Normally we look at that number and say, 'Woo-hoo, the economy is red hot,' " Mueller said.

Source: agencies