Economic growth slowed to a 0.7% annual rate this spring as businesses slashed investment spending and consumers bought more cautiously, the Commerce Department said Friday.
It was the economy's weakest performance in eight years and contrasted sharply with the 4%-plus growth rates that the nation became accustomed to in the late 1990s.
Analysts were particularly taken aback by the size of the steep decline in business equipment and software investment, which fell at a 14.5% annual pace. The tumble contrasted sharply with the 20% increases of only a few years ago when it appeared that corporate America was remaking itself--and the economy--in a new, high-tech image.
"The investment slide is really in full force," said Robert V. DiClemente, chief U.S. economist at Salomon-Smith Barney in New York. "We knew it was coming from some of the company announcements, but when you see the number it looks pretty big." Firms such as fiber-optic maker JDS Uniphase Corp. and computer giant Compaq Corp. have spent the week announcing a new round of losses and layoffs.
The latest growth numbers show that the economy continues to exhibit a curious, inverted pattern. Consumers, who usually help cause slowdowns by pulling back from purchases, are still spending, while businesses, which are usually the last to give up on an expansion, seem to have lost most hope.
"Consumers are the only ones who are saving this from turning into an actual recession," said Michael H. Strauss, managing director of the Common Fund, a Wilton, Conn., investment group for colleges and universities. "They're the only game in town right now."
But the numbers show that even consumers are slowing down. Consumer spending, which accounts for almost two-thirds of economic activity, grew at a 2.1% annual rate from April through June, down from 3% during the first three months of the year and the slowest growth rate in four years, according to the Commerce figures.
Separately, the University of Michigan reported that consumer confidence has remained largely unchanged in July as hopes that interest and tax rate cuts will spur new growth were offset by growing concern over job losses.
But Americans are apparently not ready to pass up a good deal when offered one. Spurred by lower mortgage rates, new home sales rose 1.7% in June to an annual pace of 922,000 units, the Commerce Department said. It was the seventh straight month of 900,000-plus sales rates.
The 0.7% growth rate from April through June was the slowest expansion of the nation's gross domestic product, the total output of goods and services produced in the United States, since the spring of 1993. It means the nation has now gone for a full year with growth of less than 2%, something it has not done since the 1990-91 recession.
The latest figure was down from the 1.3% growth rate during the first three months of the year and the 1.9% rate during the final three months of 2000, and was slower too than the less than 1% rate that was the consensus of private analysts for the spring.
"The economy has nearly ground to a halt," said Stuart G. Hoffman, chief economist of PNC Financial Services Group in Pittsburgh.
One bright spot was inflation, which appears even tamer when measured by methods used in calculating GDP than it does when gauged by other widely used indexes.
The GDP price deflator rose at a 2.3% yearly rate in the spring quarter, down from the 3.3% pace of the previous quarter. The so-called personal consumption expenditures price index, which is carefully watched by Federal Reserve officials, posted an even steeper drop of 1.7% from 3.2%.
Low inflation makes it easier for the Fed to cut interest rates because it can act without worrying about sending prices flying. Fed Chairman Alan Greenspan said in congressional testimony this week that the central bank is prepared to cut rates further if the economy continues to show weakness.
So far this year, it has sliced its key signal-sending interest rate by 2.75 percentage points to 3.75% in one of the fastest and steepest rate reductions in its recent history.
Commenting on the new growth numbers, President Bush told student leaders of the Future Farmers of America: "The economy is puttering along. It is not nearly as strong as it should be." He asserted the recently enacted tax cut will rekindle growth.
Friday's report on the economy included revisions of key statistics from 1998 through 2000 that some analysts found as revealing as the 0.7% GDP figure because they suggested that growth at decade's end may not have been quite as hot as previously thought.
The revisions "dim the luster of the New Economy quite a bit," said Frederick Breimyer, chief economist of State Street Corp. in Boston. "They show the past was not as good as it was originally presented to us."
The revisions, which are done annually, usually result in slight increases in the government's figures for GDP, income, corporate profits and the like. But this time, they included some significant decreases.
They show that the economy grew by 4.1% in 2000, rather than the previously reported 5%, and that corporate profits were just short of $70 billion, or 7% lower than originally estimated.
Mixed markets: Technology stocks pushed the Dow down 38.96 points while Nasdaq edged up. C3
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U.S New-Home Sales
Seasonally adjusted annual rate, in thousands of units:
Source: Commerce Department