U.S. Economy May Slow as Rates, Gasoline Costs Pinch (Bloomberg)

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U.S. Economy May Slow as Rates, Gasoline Costs Pinch (Update4)

July 11 (Bloomberg) -- Rising interest rates and persistently high gasoline prices will pinch consumer spending more than previously estimated, weakening the U.S. economy for the rest of the year, according to a monthly survey by Bloomberg News.

Gross domestic product, the sum of all goods and services produced in the country, will expand at an annual rate of 2.9 percent this quarter and 2.8 percent in the last three months of 2006, according to the median forecast of 51 economists surveyed from June 30 through July 10. Forecast rates for both quarters are down a 10th of a percentage point from last month's median.

Federal Reserve policy makers will now need to raise their target rate again this quarter and hold it there for the rest of 2006 to prevent this year's 35 percent jump in gasoline costs from stoking inflation, according to the survey. A cooler housing market will add to the list of consumer woes.

``With the Federal Reserve being pretty forthcoming in saying their priority is to fight inflation, there is a good chance that they will continue to raise rates despite the fact that the growth indicators will slow,'' said Sharon Lee Stark, chief fixed-income strategist in Baltimore for Stifel Nicolaus & Co., an institutional brokerage firm. Stark, who this month raised her interest rate forecast, said inflation ``will continue to be elevated.''