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GNP Growth Put at 2.7%; Corporate Profit Off 7.2%

From Reuters

The economy grew at a revised 2.7% annual rate in the third quarter, the Commerce Department said Wednesday, but the slightly higher-than-expected estimate did little to dispel fears of an impending fourth-quarter slump.

“It looks right now like the economy has stalled,” said economist Donald Ratajczak at Georgia State University. “All of the third-quarter growth occurred in July, and since then the economy has been flat.”

The revision in third-quarter gross national product from a previously reported 2.5% rate resulted from a downward adjustment in the U.S. trade deficit, which helped boost overall growth in the economy.

But in a disturbing sign for business, the department also said third-quarter after-tax corporate profits fell by 7.2%, the same rate as the second quarter and the third consecutive quarterly decline.

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The drop in profits was the steepest since a 16.5% decline in the first quarter of 1986.

Shrinking profits cause businesses to lay off workers, reduce investment and slow production, ultimately cutting economic growth. Such a pattern has already emerged in the manufacturing sector, where employment has fallen for seven months.

“The Federal Reserve may find disturbing a corporate profit drop of 7.2%,” said Thom Brown, managing director at Rutherford Brown & Catherwood.

“I think the Fed has to do something about bringing down interest rates in the next week or two,” he added, because easier credit stimulates borrowing and fuels growth.

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The economy will now have to grow by 1.8% in the fourth quarter to achieve the Bush Administration’s projection of 2.7% growth over the fourth quarter a year ago. But analysts said such a goal appears difficult.

Economist Allen Sinai of Boston Co. this week predicted that the economy will be flat or contract by as much as 0.6% in the fourth quarter, potentially ending the seven-year peacetime record of uninterrupted growth.


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