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The housing slowdown is expected to keep U.S. GDP growth at its slowest pace in five years, but stronger consumer spending should counterbalance that drag, according to a survey at the National Association for Business Economics. The group expects the economy to grow 2.7% in 2007. Housing construction is forecast to plummet 14.9%, well ahead of the 5.5% drop the group predicted in November and the 4.2% decline in 2006. The economists expect a 3.2% rise in consumer spending, however, that should protect the overall economy. They forecast consumer prices to increase only 1.9% against a 3.2% rise last year, helped by lower energy prices. The core inflation index, though, which excludes food and energy, is forecast to rise 2.3% this year and next. The group believes the Fed will maintain the benchmark federal funds rate at 5.25% for the rest of 2007 and cut it to 5.0% in 2008; in November, it predicted two hikes this year. Once housing stabilizes, GDP should rebound to 3% in 2008. The economists identified subprime mortgage lending as the greatest risk to the financial markets.

Sources: Reuters, Boston.com, Bloomberg
Commentary: Economic Report Summary: Core Inflation Rose, Broad Equity Markets WeakenedGDP By Category, Services Spending, and Foreign Investments in U.S.Should The Fed Raise Rates?
ETFs to watch: S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), iShares Lehman Aggregate Bond (AGG)

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Source: Economists Expect Fed to Sit Tight on Rates Throughout 2007