Washington, May 10 (Bloomberg) -- After expanding in the first quarter at the fastest pace in two years, the U.S. economy will cool this quarter and show little pickup in growth in the second half of 2002, according to the latest Blue Chip Economic Indicators survey. The consensus forecast of 51 economists in the May survey projects that gross domestic product will expand at a 3.1 percent annual rate from April through June, down from the 5.8 percent growth pace in the first three months of the year. May's forecast for second-quarter growth is down from April's consensus of 3.4 percent and marks the first time since November that Blue Chip growth expectations have been revised lower. About a quarter of those surveyed also cut expectations for the second half of the year. This month's survey forecasts that the economy will expand at a 3.3 percent annual pace in the third quarter, down from a consensus of 3.6 percent last month. Growth will pick up to a 3.6 percent pace from October through December, down from expectations of 3.7 percent in April. ``This month's retrenchment in forecasts of growth during the remainder of this year appears to stem from a reduction in optimism about the pace of recovery in capital spending, signs of a faster-than-expected widening in the trade deficit and growing signs of a pull-back in the pace of residential investment,'' the report said. Even so, the outlook for the entire year improved based on the stronger-than-expected rebound in the first quarter. The economy will probably grow by 2.8 percent for the year, up from April's forecast of 2.6 percent growth, according to the consensus. The world's biggest economy expanded 1.2 percent in 2001, damped by the recession that started in March.

Growth Next Year
Growth will probably accelerate to 3.5 percent in 2003, according to the consensus, slower than the 3.6 percent rate expected last month. Concerns that business investment in new factories, equipment and software will be slow to pick up was the primary reason for the drop in expectations, the report showed. Orders for non-defense capital goods excluding aircraft, a barometer of businesses' plans to invest in new equipment, fell 3.6 percent in March, the Commerce Department reported last week. That was the biggest drop since September when businesses halted spending after the terrorist attacks and may explain why concern is rising. Federal Reserve policy makers kept the target on the overnight bank-lending rate at 1.75 percent this week to prevent consumer demand from faltering and to stimulate business spending. The slowdown in growth may mean the Fed will keep the rate steady a while longer, according to the survey. Eighty percent of the economists surveyed said the first increase in the overnight rate won't occur until after the June meeting. Just over half said the first increase would most likely come in August.

Fewer Rate Increases
The consensus this month also expects fewer rate increases during 2002. The average estimate of the overnight rate at the end of the year fell in May to 2.63 percent from 2.87 percent in April. The Fed can afford to be cautious in raising rates because there is little threat of inflation, the report said. Prices, as measured by the consumer price index, will probably rise at a 1.6 percent rate this year, matching the increase in 2001, which was the smallest since 1998. The unemployment rate, which rose to a 7 1/2-year high of 6 percent last month, will probably fall for the remainder of the year, the report showed. Unemployment will probably average 5.7 percent in the third quarter and fall to a 5.6 percent average in the last three months of the year.

Consumer Spending
That's one reason why consumer spending will likely hold up for the rest of the year. Spending is expected to rise at a 2.5 percent annual pace this quarter, down from a 3.5 percent pace in the first three months of the year, and then accelerate to a 2.7 percent pace in the third quarter and a 3.1 percent rate in the fourth. Still, ``the consensus has consistently underestimated consumer spending in recent years and 2002 may not be an exception,'' the report said. In April, the consensus forecast had been for a 2.9 percent rise in consumer spending for the first quarter. Economists at Fannie Mae and Genetski.com were the most optimistic about this year's economic growth rate in the May survey, expecting 4 percent. The least optimistic, the University of California at Los Angeles Business Forecasting Project, predicted growth of just 1.5 percent.