Bleak economic indicators

Louis Proyect lnp3 at
Thu Aug 1 06:22:15 MDT 2002

WSJ, Aug. 1, 2002

Economic Growth Slows
Far More Than Expected


WASHINGTON -- The nation's economic recovery is weaker than previously
believed and last year's recession was deeper, raising the chances that the
still-fragile recovery could stall.

New government statistics revealed fresh signs of weakness in key sectors,
including commercial real estate and government spending. Many experts
still say a so-called double-dip recession is only a remote possibility,
but concerns about a near-term slowdown are likely to shadow the nation's
markets and businesses.

The Commerce Department said economic output grew at a 1.1% annual rate in
the second quarter, down sharply from a 5% rate in the first quarter, a
figure that itself was revised from an earlier-reported 6.1%. The growth
was so anemic that the economy would have contracted had businesses not
restocked inventories after months of depleting them in anticipation of
slower sales.

Extensive Revisions

The Commerce Department also made extensive revisions to data from previous
years, most notably indicating that last year's recession was longer and
deeper, with the economy shrinking in each of the first three quarters
instead of just the third, as originally thought.

The revisions have significant future implications. Previously, optimists
argued that technological advances would allow productivity and profits to
grow much more quickly without fueling inflation than in earlier decades.
The new numbers have taken some of the bloom off that rosy view, though few
argue the U.S. is heading back to the much pokier 1970s-era economy.

Blue-chip stocks initially plunged on the news, but recovered all their
losses, with the Dow Jones Industrial Average closing up a modest 57 points
at 8737. (See a roundup of Wednesday's market activity.)

Though mostly bleak, Wednesday's economic indicators weren't all bad. Much
of the drop-off in growth was due not to weak spending but to a shift
toward spending on imported goods instead of domestically produced ones.
More recent data suggest economic activity is still advancing in July,
though in fits and starts.

"The economy expanded modestly in recent weeks, with an uneven performance
across sectors," the Federal Reserve's periodic survey of economic
conditions, known as the beige book, reported Wednesday.

Yet the economy continues to face strong headwinds. Commercial construction
slumped 14% in the second quarter, and state and local spending shrank
1.1%, two sectors that in stronger times pump significant cash into the
economy and support consumer spending.

Greater Risk

Those factors increase the risk that the recent stock-market swoon will set
back consumers, whose spending growth slowed to 1.9% in the second quarter
from 3.1% in the first, and suffocate a fledgling recovery in business
spending on equipment and software. Such spending advanced 2.9% in the
second quarter after six straight quarters of decline.

"It just means that the woes of the stock market this summer hit on a more
vulnerable economy, and that's troublesome," said Jade Zelnik, chief
economist at Greenwich Capital Markets. "Clearly, you have to give a
somewhat higher probability to a double dip even if it's not what you might
consider the most likely scenario." A double-dip recession is a protracted
downturn punctuated by at least one quarter of growth.

Clearly worried about the political implications of the sluggish economy,
President Bush put a glass-half-full spin on the numbers. "We're heading in
the right direction," he told reporters. "But the growth isn't strong
enough, as far as I'm concerned."

The administration's top economic policymakers were sanguine. Glenn
Hubbard, chairman of the Council of Economic Advisers, said the second
quarter was weak partly because lots of spending that normally would occur
in the second quarter happened in the first.

On average, growth in the first half of the year was about 3% at an annual
rate. That "seems about right given the shallowness of recession," Mr.
Hubbard said. "The bet has always been for a turnaround in business
investment in the second half. "The bet has always been for a turnaround in
business investment in the second half. I see no reason to suggest that
won't be the case."

Fed officials also have been relatively confident the stock-market plunge
won't derail the recovery, though they acknowledge it has increased the

"Most people, whatever their forecast was, would take a little bit off"
because of the market's fall, said Jack Guynn, president of the Federal
Reserve Bank of Atlanta, in an interview this week. "But the greatest
probability is we will continue to get moderate growth" of 2% to 3% in the
second half, accelerating next year, he said.

That means that the Fed is unlikely to cut interest rates further as long
as the financial markets keep functioning relatively well. But the Fed also
probably has more time before it has to raise the rates from their current,
40-year lows. Inflationary pressures have probably receded slightly, Mr.
Guynn said. He warned that the Fed's current low interest rates aren't
"consistent with low inflation" in the long run, adding, "but that's a
problem for another time, another day."

The beige book, prepared for Fed policymakers' meeting on Aug. 13, found
retailers had a "general sense of optimism about the near-term outlook,
though a number of districts expressed concern [that falling stock prices]
could affect the real economy." Manufacturing activity had "improved
modestly," though it was "continuing to struggle" in some districts.
Residential real estate was strong in all districts, according to the Fed
report, but anecdotal signs of a cooling are beginning to show up in some
hot markets. (Please see related article.) "Commercial real estate
continued to struggle," the report said. Offsetting these drags, the
industrial sector is continuing to recover from the battering it took
during the recession. Renewed sales incentives, including no-interest
loans, appear to have boosted auto sales in July, the Fed's beige book found.

The revisions by the Commerce Department's Bureau of Economic Analysis show
that while GDP did decline through the first three quarters of 2001, the
total loss of output, at 0.6%, tied for the second-mildest recession since

But the data will likely put an end to the debate over whether there really
was a recession. A committee of academic economists from the nonprofit
National Bureau of Economic Research, considered the authority on business
cycles, declared last November the economy was in recession for the first
time in a decade. But many policymakers questioned that, because recessions
are popularly defined as two or more negative quarters of growth. Now, it
appears that the U.S. would have experienced a recession by the
two-negative-quarters definition even without the Sept. 11 terrorist attacks.

The revisions also set back the most optimistic projections that the U.S.
is able to grow much more quickly thanks to higher productivity, the key to
real incomes over time. Economists had marveled at how productivity kept
growing briskly throughout the recession. With growth revised down to 2.1%
during 2000 and 2001 from 2.7%, due primarily to lower business spending on
software and equipment and less big-ticket consumer spending, productivity
probably wasn't as impressive.

Robert Gordon, an economics professor at Northwestern University, estimates
productivity grew just 0.5% a year between the spring of 2000 and the
summer of 2001, instead of the previously estimated 1.4%. Still, even with
the revisions, the economy grew much faster from 1995 to 2000 than
previously thought possible, at 3.8% a year, compared with 2.8% from 1973
to 1995.

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