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Growing trouble in the subprime mortgage industry poses the greatest risk to financial markets right now.

The forecast by NABE, which polled 47 top economists, called the subprime sector a more serious concern than hedge funds, which came in second.


Subprime mortgage lenders provide higher-priced loans to consumers with impaired credit. Defaults and delinquencies among subprime borrowers have jumped since late 2006, and a number of lenders have shut down or scaled back their operations.

On Wednesday, for example, shares of subprime lender NovaStar Financial plummeted more than 42% to $10.10 after it announced a fourth-quarter loss of $14.4 million. Company officials said they weren't sure they'd post a profit in the next five years.

While the NABE finding illustrates concern about escalating problems in the subprime sector, it doesn't mean economists expect the difficulties to spark broader financial stress. Overall, they expect steady economic growth in 2007.

"The outlook for consumer spending, which is the one that might be hit the highest by mortgage delinquencies and defaults, was actually revised upward," says Carl Tannenbaum, NABE president and an economist at LaSalle Bank.

The economists predict that the U.S. economy will expand at a 2.5% to 2.6% annual rate in the first half before accelerating to around 3% later this year. Growth is expected to average 2.8% for the year, in line with earlier NABE reports.

Housing will continue to be the biggest drag on growth. After five years of a boom market, housing starts have plunged in the past year.

The jobless rate, now 4.6%, is expected to inch up to 4.7%, the NABE says. Corporate profits, which rose by an estimated 19% last year after taxes, are projected to rise by a far more modest 5% in 2007.