Tue Aug 17, 2004

WASHINGTON (Reuters) - Terrorism has overtaken weak job growth and the budget deficit as the biggest risk to the U.S. economy, and inflation fears are slowly building, a survey of American businesses out on Tuesday showed.

The survey of 172 members of the National Association for Business Economics found 40 percent of respondents said terrorism was the largest short-term threat to the economy, more than double the 19 percent who said so six months ago.

The survey was taken between July 23 and Aug. 5. On Aug. 1 the government raised the terrorism threat level to "high," or code-orange, in New York, northern New Jersey and Washington, D.C., citing threats to financial institutions in those areas.

The ballooning U.S. deficit was identified as the biggest concern by 23 percent of respondents, down from 25 percent in March, while inflation was cited by 9 percent of those surveyed -- up from 6 percent in March and just 1 percent a year ago.

Most respondents said the Federal Reserve should raise interest rates over the next six months and the government should tighten tax and spending policy, moves that would help head off rising prices.

"Monetary policy should get tighter. Although 59 percent of respondents said current monetary policy is about right, 62 said it should tighten over the next six months," the survey said.

Fed policy-makers have raised interest rates twice, in June and August, taking official borrowing costs to 1.5 percent, and most analysts expect the central bank will tighten further before the end of the year to dampen rising inflation.

"Two-thirds of respondents thought current fiscal policy is too loose, and 80 percent thought it should become more restrictive. Only 37 percent thought it would become so, however," NABE said, noting that 20 percent thought the government would actually loosen fiscal policy over the next two years.

The U.S. budget deficit will hit a record $445 billion this year, according to White House forecasts. Private-sector analysts have projected cumulative 10-year budget deficits in a range of $5 trillion to $5.5 trillion.

President Bush, who has pledged to cut the deficit in half as a percentage of gross domestic product by the end of his second term, has called for making his tax cuts permanent and is also expected to issue a call for tax code reform as part of his reelection bid.

A bare majority of the NABE respondents said the deficit should be cut primarily by reducing spending, while 32 percent said higher taxes were the answer.

Concern about unemployment shrank to just 6 percent, down from 25 percent six months ago -- though the survey was conducted before the government released stunningly weak July employment figures early in August.

The July job report was the second straight to show unexpectedly weak employment growth after strong gains in April and May had reassured businesses the expansion was finally self-sustaining.

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