Economy: Slower but still steady ahead

By Chris Isidore, CNN/Money senior writer

Economists look for slower growth in 4Q, 2005; but see continued growth all the same.

NEW YORK (CNN/Money) - The solid economic growth seen in the third quarter could be difficult for the U.S. economy to match through the end of next year, according to economists, but most still see growth nonetheless.

The final report Wednesday on the gross domestic product, the broad measure of the nation's economic activity, showed 4.0 percent growth in the quarter, a bit better than the previous reading and economists' forecasts of 3.9 percent growth in the period.

But October's hike in energy prices and the continual rise in interest rates have most economists looking for a slowdown going forward.

"I think the economy is already in the process of slowing to a more moderate pace," said Ethan Harris, chief economist for Lehman Brothers. "Oil has both an immediate impact on spendingand lagging impacts. Even though oil has stabilized in recent weeks, we still have to play out effects. We're still waiting for the shock value of the winter heating bills hitting people."

But Harris and other economists say that it's wrong to see the slowdown as purely the impact of energy. Rising interest rates could curb both consumer and business spending, especially since it's unlikely that consumers will be able to free up as much cash through refinancing in the coming year. And business spending is likely to drop off early in 2005 due to the end of preferred tax treatment of capital spending on Dec. 31.

"Some companies have pulled ahead [of] spending, at least on the short term," said economist Gina Martin of Wachovia Securities. "That could help the fourth quarter number. I think the fourth quarter might surprise us on the upside, coming in somewhere between 3.6 percent and 4.0 percent growth. But we've got a general slowdown coming -- we're forecasting 3.2 percent growth for all of 2005."

Still the economy is generally seen as relatively strong and able to resist hits such as energy price spikes and rising interest rates without falling into recession.

That's partly because economists see businesses are relatively well positioned to be spending in 2005, due to strong balance sheets and unusually slow spending and hiring during the growth of the last year.

"The expansion we have now is a resilient one. At this point in the business cycle, even if you have significant shocks from oil, terrorism or [a] big drop in dollar, they are not going to derail the expansion," said Anirvan Banerji, director of research at the Economic Cycle Research Institute.

But even economists such as Banerji who see a strong economy overall don't see much signs of faster economic growth going forward.

"Corporate earnings growth is slowing," said Anthony Chan, senior economist for JPMorgan Fleming Asset Management. "Earnings might be growing at 9 to 10 percent, and that's still impressive. But they're going in the wrong direction."

While some economists, including Banerji and Chan, see little or no risk of the economy slowing into recession next year, Harris said there is such a threat -- if continued declines in the dollar cut off foreign investment in U.S. debt, causing a relatively rapid further fall in the dollar and a rise in interest rates.

"That's something [economists] should have sitting in [the] back of their mind," said Harris. "We are not forecasting that, because it's hard to figure out a timing of such an event. You want to see evidence of things falling apart before you predict it. But I think the risks to the economy are greater in 2005 than in 2004."

Source: CNN MONEY