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Fed: Slow growth ahead

Its opens up with a barrel of bad news, including an unemployment bump in '08.

By Times wires
Published November 21, 2007


WASHINGTON - The Federal Reserve reported Tuesday that it expects slower economic growth and a slight bump up in unemployment next year due to the housing slump and a credit crunch. The board also said, however, that it believes inflation will remain moderate.

The fresh assessment of the country's economic outlook was issued by the Fed in the first of its quarterly reports to the nation, a fulfillment of Federal Reserve Chairman Ben Bernanke's pledge to bring more openness to an institution that has been shrouded in secrecy.

On the growth side, the Fed said it believes that business growth will slow next year, with the gross domestic product, or GDP, coming in between 1.8 percent and 2.5 percent. That would be weaker than how the Fed expects the economy to perform this year and would mark a downgrade to a previous projection released in the summer.

The downgrade was due to a number of factors, including "the tightened terms and reduced availability of subprime and jumbo mortgages, weaker-than-expected housing data and rising oil prices," the Fed explained.

The credit crunch has made it more costly and more difficult for people and companies to borrow money. The worst carnage has taken place in the market for subprime home loans - those made to people with spotty credit histories.

Credit problems started there and have spread to more creditworthy borrowers, including those who are looking for home loans of more than $417,000, so-called jumbo loans.

The overriding worry is that these housing and credit problems will make people less inclined to spend, putting a damper on economic growth.

That concern is on the Fed's radar, too.

"Partly in response to declining housing wealth, the personal savings rate was expected to rise over the next few years, contributing to restraint" on the growth of consumer spending, the Fed said as it provided more details about its projection for slower GDP growth in 2008.

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

The unemployment rate would rise to between 4.8 percent and 4.9 percent next year - still low by historical standards. A previous forecast estimated the unemployment rate next year would be 4.75 percent. The unemployment rate stands at 4.7 percent. For all of last year, it dipped to 4.6 percent, a six-year low.

With economic growth slowing, "the unemployment rate would increase modestly" in 2008, stabilize in 2009 and then decline slightly in 2010, the Fed said.

Overall inflation should ebb next year to between a 1.8 percent and 2.1 percent increase. Inflation should moderate further in 2009 and 2010, the Fed said.

"Overall inflation was expected to edge down over the next few years, fostered by an assumed flattening of energy prices," the Fed said.

The Fed's forecasts are based on estimates of activity in the final quarter of one year compared with the same period of a previous year.

S&L, housing signs worry

Housing: Construction of single-family homes in October skidded to the lowest level in 16 years, although the slide was cushioned somewhat by a rebound in apartment building. The Commerce Department reported Tuesday that total housing construction rose by 3 percent in October to a seasonally adjusted annual rate of 1.229-million units. But all the strength occurred in a hefty rebound in apartment construction, which is extremely volatile. In another worrisome sign, applications for building permits fell for a fifth straight month.
Savings & Loans: Federally regulated savings and loans set aside millions of dollars for anticipated loan losses in the third quarter as they felt the brunt of the housing market's downturn. The nation's 831 thrifts reported a third-quarter profit of $704-million, a drop of 84 percent from $4.29-billion in the same quarter a year ago, the Office of Thrift Supervision said Tuesday. The quarter "wasn't good," said John Reich, the agency's director. "I wasn't expecting it to be good, and my expectations were realized."

[Last modified November 20, 2007, 22:52:29]

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