Economic Expansion Has Ended
The U.S. economy shrank from July through September for the first such contraction since 1993, the Commerce Department said Wednesday. The decline ended the longest economic expansion in American history and almost surely signals an economy in recession.
The gross domestic product, the value of all goods and services produced in the United States, contracted at a 0.4% annual rate. Though it was a milder decline than many analysts had predicted, there was little celebration.
That was at least in part because the number was buoyed by a fluke in the way Washington keeps its trade statistics. Absent the fluke, the third-quarter GDP decline would have occurred at a 1% rate. Most economists predict an even steeper decline in the October-through-December quarter.
President Bush placed blame for the economy’s tumble below the zero mark on the terrorist attacks. “The events of Sept. 11 have really shocked the nation, have affected our work force and have affected our business base,” Bush said in a speech Wednesday to a Washington industry group.
“People are having a tough time in America,” he said. “People are losing their jobs.”
The economy was already stumbling before the attacks, and many analysts believe that a recession began as early as April or May. During the April-through-June quarter, the economy grew at only a 0.3% annual rate.
The country has been unable to muster better than a 1.5% growth rate during the last year, a far cry from the glory days of 1997 through the middle of 2000, when it regularly posted 4%-plus rates. The economy has expanded every year since 1991, the longest stretch of growth since the country began keeping records in the mid-19th century.
A recession is traditionally defined as two consecutive quarters of falling GDP. But the National Bureau of Economic Research, the private agency assigned to declare when the economy is contracting, takes into account a variety of economic measures, such as employment and industrial production, many of which have been on the downswing since spring.
Some elements of the economy held up better than expected during the last quarter. Consumer spending rose at a 1.2% rate rather than falling, as many analysts had predicted. But the increase, less than half the 2.5% rate of the previous quarter, appeared to have been largely the product of steep price cuts by business.
Indeed, according to several key measures, the country experienced a mild case of deflation, or a fall in the general price level. For example, the personal consumption expenditure deflator, which Federal Reserve Chairman Alan Greenspan follows carefully, showed consumer prices dropped at a 0.4% rate. A similar measure for business investment spending showed a 0.2% decline.
“It’s an unusual circumstance when you have deflation going on in both the consumer and business sectors,” said Robert J. Barbera, chief economist with Hoening & Co. in Rye, N.Y. “We’ve seen rampant price-cutting.”
Consumer willingness to spend did not translate into business readiness to invest and maintain inventories. Business investment dropped at an 11.9% annual rate from July through September, following a 14.6% decline in the previous quarter.
Corporate America’s decision to shrink inventories accounted for virtually all of the decline in GDP from July through September, according to government statistics. Companies reduced their stock of goods on hand by $50.4 billion during the third quarter, following declines of $38.3 billion in the second quarter and $27.1 billion in the first quarter.
Both imports and exports fell sharply in the latest quarter, a sign of economic weakness both here and abroad, according to analysts. Government figures showed imports fell 15.2% after slipping 8.4% in the previous quarter. Exports plunged 16.6%, after an 11.9% fall the previous quarter.
Administration officials used news of the GDP decline to jawbone for congressional passage of an economic stimulus bill. Treasury Secretary Paul H. O’Neill told reporters the bill was needed quickly “to help ensure that business is creating jobs for people and that we’re moving back to a positive rate of real growth.”
The measure, which initially was expected to sail through Congress after the September terrorist attacks, has become mired in a political clash between House Republicans and Senate Democrats.
In addition to extra government spending to revive growth, the sagging economy may get new help from the Federal Reserve. Many economists expect the Fed to cut interest rates still more when its policymaking body meets Tuesday.
The Fed, in what has turned out to be a vain attempt to prevent the economy from contracting, has reduced rates an unprecedented nine times this year, with two reductions coming after the September attacks. It has driven its signal-sending federal funds rate from 6.5% to 2.5%.
