Housing and consumer weakness will cut US growth

The US economy will grow less than previously forecast as a rout in sub-prime borrowing hampers consumer spending, according to a survey of economists.

Growth will slow to an average 2.6 percent annual pace in the second half of the year, 0.2 percentage point less than economists forecast in July, according to estimates in a survey.

Rising delinquencies in the sub-prime mortgage market are prompting lenders to limit the availability of credit, which may mean Americans buy fewer cars and spend less on vacations.

The slackening expansion won't force the Federal Reserve to lower interest rates for the rest of the year as officials stay focused on taming inflation, economists said.

"The longer the housing downturn goes on, the more spillover there will be," said Nigel Gault, Chief US Economist at Global Insight in Lexington, Massachusetts. "The fed doesn't have a lot of room to manoeuvre because inflation is still at the high end of what they want to see."

Global Insight reduced its growth forecast for the last six months of 2007 by a quarter percentage point.

Much of the projected slowdown in spending stems from the tumult in the sub-prime mortgage market, which is weighing on home values and delaying a recovery from the 18-month-long housing slowdown.

Lenders such as Wells Fargo and Wachovia Corp are raising rates and restricting access to loans even for some of their most credit-worthy borrowers.

Consumer spending, which accounts for more than two-thirds of the economy, will probably grow at an average 2.5 percent pace in the second half of the year, a 10th of a percentage point less than forecast in July, according to the survey. Spending expanded at an average 3.7 percent pace per quarter over the last decade.