Recession fears are growing

WASHINGTON (Reuters) - Expectations for the weakest consumer spending performance in 17 years during 2008 kept the odds of a recession at nearly 40 percent, a survey of top forecasters showed on Thursday.

Panelists surveyed by the Blue Chip Economic Indicators newsletter have the odds of a recession in the next year at 38 percent, a little weaker than the 39 percent odds forecast a month ago.

But the most recent survey was taken ahead of December's grim unemployment report and the newsletter stated that growth forecasts would have been weaker if taken after release of that data.

"The January 4th news of the first decline in private sector nonfarm payrolls since July 2003 and whopping 0.3 of a percentage point jump in the unemployment rate during December no doubt caused some of our panelists to further trim their forecasts of economic growth this year and heightened speculation about the possibility of a recession," the newsletter stated.

"Whether or not the economy is already in a recession, about to enter one, or manages to muddle through without one, will only be known in the fullness of time," the newsletter wrote.

Based on the Jan 2-3 survey of economists -- taken a day ahead of the government's weak employment report that showed a huge uptick in the December unemployment rate and the weakest job growth in more than four years -- consumer spending this year is expected to grow at the weakest annual pace since 1991.

"Expected to weigh on consumer spending in 2008 are slower job and income growth, high energy costs, declining home values and if the first week of January is any indication, a weaker stock market," the newsletter wrote.

Prospects for the housing sector remain grim, with new housing construction activity expected to fall by 17 percent this year compared with 2007 levels. That's almost half the amount of housing start totals seen in 2004 and 2005.

"Combined inventories of new and existing unsold homes remain near a record high, lending standards have tightened considerably and foreclosures will likely accelerate this year as adjustable rate mortgage resets surge and the unemployment rate increases," the newsletter wrote.

Economists in the panel forecast that residential investment may continue to subtract more than a full percentage point from economic growth as measured by gross domestic product. But that drag on growth should ease considerably during the second half of the year.

Sales of autos and light trucks will see the poorest performance in a decade, the economists forecast

The outlook for business spending is a bit stronger.

Business investment is projected to grow 4.2 percent this year, just 0.1 of a point less than estimated a month ago but economists expect companies to be hampered by weaker profit growth, tighter lending and general uncertainly about the economic outlook.

Pretax corporate profits are expected to grow 1.8 percent this year, 0.6 of a point less than what was forecast a month ago and half the pace estimated in October.

"Slower consumer spending and capital investment is expected to limit manufacturing activity. Foreign goods producers will absorb some of the hit from the reduced demand, but the consensus still expects total industrial production to grow only 1.9 percent in 2008," the newsletter wrote.

The inflation picture was mixed. Panelists noted that below-trend economic growth and lower energy prices will eventually cause inflation to ease over the coming year. But at present inflation continues to creep higher with consensus forecasts for year-over-year inflation measured in the government's Consumer Price Index rising for the past three months in a row.