Economic forecasts cut

The Baltimore Sun

WASHINGTON -- The financial turmoil that began with the seemingly narrow meltdown in subprime mortgages is now forcing both policymakers and Wall Street analysts to scale back their expectations for growth in the overall economy.

Most economists still predict continued economic growth for the rest of the year and into 2008, but many are trimming their forecasts and warning that even their somewhat darker views could be too rosy.

Global Insight Inc., a forecasting firm in Lexington, Mass., predicted yesterday that growth would be markedly slower for the third quarter of this year, and it reduced its forecast for all of 2007 to 1.9 percent from 2.1 percent.

"The economic outlook has dimmed," wrote Nigel Gault, group managing director of North American economic research at Global Insight.

Noting tightening credit and a "continuing drumbeat of bad news on housing" as well as high oil prices and slower growth in productivity, he also scaled back his forecast for growth in 2008.

In Washington, the nonpartisan Congressional Budget Office issued a comparatively optimistic forecast yesterday, cautiously predicting that the turmoil in markets would not derail economic growth.

Even so, the congressional agency trimmed its previous forecast for growth this year to 2.1 percent, from 2.3 percent, and it warned the uncertainties were higher than normal.

"I wouldn't say we're sanguine," Peter R. Orszag, director of the agency, said in an interview. "The situation is very cloudy and uncertain. But the most likely economic scenario is continued solid growth."

As for the federal budget, the agency predicted the deficit would decline this year to $158 billion, its lowest level since 2002.

But it reiterated past warnings that the long-term budget path is "unsustainable."

If President Bush's tax cuts are extended indefinitely beyond their planned expiration in 2010, and Congress continues to protect most taxpayers against increases in the alternative minimum tax, the budget office estimated, over the next 10 years government revenue would fall $3.4 trillion short of the baseline forecast and deficits would return to more than $200 billion a year.

The White House put out a statement after the budget office released its new estimates celebrating the decline in the budget deficit. "It shows that our government is on a path to meeting the goal I set forth of putting the budget into surplus by 2012," Bush said.

The Congressional Budget Office forecast was notably sunnier than those elsewhere.

"This is one of the greatest panics I've seen in 55 years in financial services," Angelo R. Mozilo, chief executive of Countrywide Financial Corp., the nation's biggest mortgage lender, said in an interview on CNBC.

He predicted that the housing crisis would lead to a recession.

"I just don't see a light here at the moment," Mozilo told CNBC. "I can't believe when you're having this level of delinquencies - equity is gone, the tide has gone out - that this doesn't have material effect on the psyche of the American people and eventually on their wallets."

Most Wall Street forecasters are not anywhere near being that gloomy, cautioning against panic. But they are less optimistic than the congressional forecasters.

On Wednesday, Citigroup Inc. issued a new forecast suggesting growth would fall short of its earlier estimates. And economists at Goldman Sachs, who had already reduced their forecast to 1.9 percent two weeks ago, warned yesterday that the housing market was probably overpriced by more than 15 percent.

Where the budget office predicted yesterday that the economy would pick up speed early next year and expand by 2.9 percent during 2008, many private sector analysts said they see growth of less than 2.5 percent in gross domestic product next year, with some going lower.

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