U.S. Avoids Falling Into a Recession
The nation’s economy slowed to a crawl in the second quarter, but there were bright spots amid the gloom as the country managed to keep growth strong enough to avoid signaling a recession, the government reported Wednesday.
The Commerce Department said the economy grew at an annual rate of 0.2% in the spring, down from last month’s initial estimate of 0.7% and the weakest performance in eight years. The revision was largely caused by businesses selling their stockpiles of products. Selling off inventory could indicate that the economic slump has found its lowest point because businesses will need to step up production.
Many economists were expecting an even bigger downward revision that would have pushed the growth rate into negative territory, the first step to a formal definition of recession. For some, the positive growth figure is a sign that the yearlong slowdown will not deepen into a severe contraction.
“I think we’re seeing the bottom,” said Gerald Cohen, senior economist with Merrill Lynch & Co. in New York.
But the revised estimate of gross domestic product, the broadest measure of goods and services produced by the U.S. economy, failed to reassure Wall Street. Stock prices swooned, with the Dow Jones industrial average dropping 131.13 points, to close at 10,090.90, and the Nasdaq index falling 21.81 points, to finish at 1,843.17
“The financial markets are suggesting that the worst is yet to come,” said James W. Paulsen, chief investment officer with Wells Capital Management. A positive growth rate might seem comforting to some, Paulsen said, “but the reality of the situation is there’s very little difference between 0.2 and zero.”
President Bush said he too remains concerned about the economy’s sluggish performance.
“Our economy began slowing down last year, and that’s bad news, and I am deeply worried about the working families all around the country,” the president said Wednesday in a speech to the American Legion in San Antonio. “According to today’s GDP figures, recovery is very slow in coming.”
Commerce Secretary Don Evans said the GDP figures “paint a troubling picture,” but he expressed confidence that the economy will gradually recover to a sustainable growth rate of 3% to 3.5%.
Neal Soss, chief economist with Credit Suisse First Boston, also expects economic growth to begin accelerating soon and said the financial markets are overreacting to the downward GDP revision.
“That’s what happens in bear markets: All news is bad news,” Soss said. “That’s a psychological state of mind that can’t last forever. The fundamentals eventually win out.”
The growth of the economy has decelerated sharply over the last 18 months, plummeting from a high of 8.3% in the final quarter of 1999, the height of a technology-driven investment boom.
The slowdown has been driven largely by the business sector, as companies began reducing overstocked inventories and curtailing investments in new plants and equipment. Consumers have been a positive force, helping to keep the economy afloat with their spending and home buying.
Those trends continued in the second quarter. Consumer spending increased at an annual rate of 2.5%, the Commerce Department said. Though down from the first quarter’s 3%, it beat last month’s initial estimate of 2.1%
Consumer spending over the next year is receiving a powerful boost from three sources, according to a Merrill Lynch analysis: $40 billion in federal tax rebates, $50 billion in reduced interest payments and $20 billion from lower energy prices.
Low interest rates have contributed to a boom in home buying. Residential construction increased 5.8% in the second quarter, slowing slightly from the first quarter’s 8.5% rate.
Inventory reduction was one of the biggest contributors to the downward revision in the second-quarter growth rate, as businesses sold off overstocked goods at an annual rate of $38 billion, compared with an initial estimate of $27 billion.
Many economists view the rapid liquidation as a positive sign. At some point, businesses will decide they need to begin restocking their shelves, which will stimulate new production and reverse the long slide in manufacturing employment.
“Businesses should be closer to getting rid of any glut of inventory,” said Peter E. Kretzmer, senior economist for Bank of America Securities. “That bodes well for economic growth going forward. It means we may get a recovery somewhat faster, and it might be a firmer bounce-back as well.”
Other indicators of business activity were less encouraging. Companies cut back their investments in new plants and equipment by 14.6%, down from an initial estimate of 13.6% and the biggest decline in two decades.
The after-tax profits of U.S. corporations declined 2%, compared with a 7.8% fall in the first quarter. Exports dropped 12.2% as America’s economic malaise spread to other countries, reducing demand for U.S. goods and services.
“This isn’t a garden-variety downturn,” said Allen Sinai, president of Primark Decision Economics. “Its original source was the business sector. It looks like it’s spreading into [consumer spending]. It’s spreading around the world, which has come back to hurt exports. And there’s no sign of it hitting bottom yet.”
Sinai said he believes that the government’s final estimate of second-quarter GDP, to be issued next month, could produce a negative growth rate, followed by more shrinkage in the third quarter.
“I do believe the U.S. economy entered a mild recession in the second quarter,” Sinai said. “When will the economy be back up and running? Perhaps sometime in 2002. But I don’t think it’s in the cards for this year.”
