The Securities Industry and Financial Markets Association predicts that the U.S. economy will continue to grow at a more moderate pace in 2007.

It also expects a reduced inflationary environment during the coming year. According to an economic survey released today by SIFMA’s economic advisory committee, committee members expect GDP growth of 2.5% in 2007 as the economic cycle matures and the economy works through some further correction in the housing sector.

“While the worst of the housing downturn is behind us, a total correction in the sector is not yet complete,” said Michael Decker, interim co-head of research at SIFMA. “However, continued growth in both consumer spending and business capital investment supported by expansionary fiscal policy, supportive financial market conditions and reduced energy costs provide the backdrop for sustained economic growth.”

The committee expects business capital investment to grow by 7.8% for the full year 2006 followed by 7% growth in 2007 as businesses continue to benefit from strong internal cash flow and historically low interest rates and corporate bond credit spreads. Consumer spending is also expected to remain solid, buoyed by lower energy prices and growth in employment and personal income. The committee’s forecast expects consumer spending to increase 3.1% by the end of 2006 and grow at a 2.8% clip in 2007.

The threat of higher inflation remains a prominent concern in the markets, but the median projection of the committee expects the PCE deflator to decline to 1.9% in 2007 from its 2006 level of 2.8% and core PCE to decline from 2.3% in 2006 to 2.2% in 2007. Although the recent decline in the value of the U.S. dollar could add to inflationary pressures, committee members considered energy prices, labor costs relative to productivity and slack in the economy as the most important factors driving their inflation outlook.

“Relatively low inflation expectations, Fed credibility and global competition will likely all combine to keep inflationary pressures muted in the months ahead,” said Robert DiClemente, chairman of SIFMA’s Economic Advisory committee and head of U.S. economic and market analysis at Citigroup Global Markets.

The committee was divided when asked if the Fed should adopt an explicit inflation target or objective, 54% of respondents opposed a target while 38% recommended an inflation range. Only 8% advocated setting a specific inflation objective. If the Fed were to adopt a specific objective, the largest number of responses recommended a 1% to 2% range.

The committee expects the FOMC to leave the Fed funds rate unchanged at its December 12 meeting. Looking ahead to 2007, the forecast calls for the Fed to hold steady at 5.25% through the end of the first quarter before easing by 25 basis points later in the year.

The median forecast has the yield on the 10-year Treasury note rising modestly to 4.6% during the first quarter of 2007 and reaching 4.8% by the end of the year. The committee also projects that the yield curve, which was inverted for much of 2006, will transition to a flat or slightly positive slope throughout 2007.

In the equity market, the committee projects the S&P 500 to reach 1,500 by the end of 2007. That would represent a 7.4% increase from its level at the time of the survey. The consensus view is that equity markets will be driven more by profit and economic growth expectations than changes in valuation metrics such as any contraction or expansion of market price to earnings multiples.