ECONOMY slows to 0.7 percent rate in spring; weakest performance in eight years

Friday, July 27th 2001, 12:00 am
By: News On 6

WASHINGTON (AP) _ The U.S. economy slowed to a barely discernible 0.7 percent growth rate in the spring, the weakest performance in eight years, as businesses cut back on their investment spending by the largest amount in nearly two decades.

The meager advance in the gross domestic product _ the country's total output of goods and services _ in the April-June followed an anemic 1.3 percent growth rate in the first quarter and was the poorest showing in the country's yearlong economic slowdown, the Commerce Department reported Friday.

The weakness in the second quarter came from a huge 13.6 percent cutback in spending on new plants and equipment by American businesses, the steepest reduction since the spring of 1982, when the country was bogged down in the worst recession of the post-World War II period.

Some economists had been afraid that the GDP would tip into negative territory in the second quarter, signaling the possible start of the first recession in the United States in 11 years.

While growth remained positive, the rate of expansion was the weakest since a 0.1 percent rate of decline in the first quarter of 1993 as the country was struggling to emerge from the last recession and underscored the dangers still facing the economy.

The Bush administration and many private economists believe the second quarter will prove to be the point of maximum danger for the economy. The administration is counting on $40 billion in tax relief now showing up in the form of rebate checks and the aggressive credit easing of the Federal Reserve to lift the economy to higher growth rates in the second half of this year.

The Fed would have room to cut rates further because inflationary pressures have begun to abate as the economy has endured the yearlong slowdown.

A key inflation gauge tied to the GDP rose at a rate of just 1.7 percent in the second quarter, down from a 3.2 percent rate in the first quarter, and the best showing since early 1999.

However, some economists are still worried that the bigger-than-expected slowdown in the United States, which has adversely affected many other countries around the world, could still threaten a recession in this country if demand for American exports weakens further.

To fight off a possible downturn, the Fed has slashed interest rates six times this year, totaling 2.75 percentage points. Many economists believe Fed policy-makers will cut rates again at their next meeting on Aug. 21 by at least a quarter-point.

But Fed Chairman Alan Greenspan has warned that the central bank is fighting against a powerful force in the huge cutbacks U.S. companies are making in their investment plans, which had been a main source of strength driving the record economic expansion.

Battered by weak sales and plunging profits, U.S. companies continued to cut back sharply on their investment in plants and equipment. The 13.6 percent rate of decline followed a 0.2 percent decrease in the first quarter, the first back-to-back declines since the country was pulling out of the last recession in 1991.

The reduction in spending on computers and software in the second quarter was an even sharper 14.5 percent, the biggest quarterly decline since the spring of 1982. Spending on new factories and office buildings fell at rate of 11.2 percent.

Consumers were the major force keeping the country out of recession. Consumer spending, which accounts for two-thirds of total economic activity, rose at an annual rate of 2.1 percent in the second quarter. While that was the slowest increase in four years, it was enough to offset the widespread weakness in other categories and keep the economy in positive territory.

Also helping was a 7.4 percent rate of increase in residential construction, a sector that has remained strong, helped by falling interest rates.

The country's trade deficit was a small drag on growth in the second quarter, reflecting a decline in export sales. American manufacturers, who have been hardest hit by the slowdown, have laid off almost 800,000 workers over the past year.

The Friday GDP release was accompanied by the government's annual revision to previous GDP estimates to reflect more complete economic data.

Those revisions showed a dramatic reduction in growth for last year from 5 percent, which had been the best showing since 1984, down to 4.1 percent, the same growth rate as 1999, which was revised down by a smaller 0.1 percentage point.

The government attributed the unusual size of the revision to use of a flawed calculation method that overestimated business investment in software. To fix that going forward, the government has changed the way it tracks such investment.