Economists warn of recession risk from housing, credit woes

WASHINGTON — Strained by an ailing housing market and credit woes, the economy in 2007 is expected to log its worst growth in five years and should be somewhat sluggish next year.

The No. 1 risk, though, is that the economy will lose its footing altogether and fall into a recession, forecasters say.

A forecast released today by the National Association for Business Economics puts the growth of gross domestic product (GDP) at 2 percent for this year. The pace was 2.2 percent in the group's previous survey, in May.

If the latest prediction proves correct, growth would be the weakest since 2002. Back then the fragile economy was emerging from a recession and grew by just 1.6 percent.

Economic growth for next year also was downgraded slightly. The economy is now projected to grow by 2.8 percent in 2008, versus 2.9 percent in the previous survey.

GDP is the value of all goods and services produced within the United States. It is considered the best barometer of the country's economic fitness.

With the weaker outlook, the forecasters are concerned about the risk of recession. More than 60 percent of those responding cited recession "as the major risk facing the economy over the next year, while only a third cited inflation as the greatest problem," the group said.

Those most concerned about the threat of recession tended to cite problems in the higher-risk "subprime" mortgage market and potential declines in home values as the most likely forces that could short-circuit the 6-year-old economic expansion, the group said.

Mortgages entering foreclosure hit a record in the spring. Higher interest rates and weaker home values have made it difficult for a growing number of people to pay their mortgages. As defaults have soared, lenders have been forced out of business. A spreading credit crisis has roiled Wall Street.

To help the economy, the forecasters predicted the Federal Reserve will lower its key interest rate, the federal funds target rate, now at 5.25 percent. Cuts this year and next would drop this rate to 4.75 percent, the forecasters said.

The survey of 46 forecasters was taken from Aug. 2 through Aug. 23, the period that the credit markets really seized up. That forced the Fed to pump billions of dollars into the financial system and to cut its interest rate to banks for loans.

Forecasters' projections, however, were gathered before Friday's release of a Labor Department report that showed that for the first time in four years, employers actually cut jobs. The economy lost 4,000 positions over the month.

That weak employment report prompted some economists to predict the Fed might slice its key rate by as much as half a percentage point on Sept. 18, its next regularly scheduled meeting. Others, however, think the Fed will lower by one-quarter percentage point at that time.

Just a month ago, at the Fed's last meeting on Aug. 7, Fed policymakers still believed the threat of inflation posed the biggest risk to the economy. Ten days later, however, it offered a more grim assessment of economic conditions as a credit crisis gripped Wall Street. In that assessment, the Fed made no mention of inflation.