Economy grows at 1.3 percent rate in the second quarter, slight improvement over previous estimate

<br>WASHINGTON (AP) _ The economy grew at an annual rate 1.3 percent in the spring, a performance that was slightly stronger than previously thought but which still marked a dramatic slowdown from the

Friday, September 27th 2002, 12:00 am

By: News On 6

WASHINGTON (AP) _ The economy grew at an annual rate 1.3 percent in the spring, a performance that was slightly stronger than previously thought but which still marked a dramatic slowdown from the beginning of the year.

The revised figure for gross domestic product, considered the best barometer of the nation's economic health, showed that the economy grew a little faster in the April-June quarter than the 1.1 percent rate estimated a month ago, the Commerce Department said Friday.

Gross domestic product measures the total value of goods and services produced in the United States.

The latest reading on GDP was a bit better than analysts were expecting. They were predicting the government's final estimate on second quarter GDP would remain unchanged at 1.1 percent.

But that didn't provide any comfort to Wall Street investors. The Dow Jones industrial average dropped 105 points and the Nasdaq index was off three points in the first hour of trading.

The biggest factor in the small upward revision in second quarter GDP was a slight improvement in the United States' trade picture, which resulted in the bloated deficit being slightly less of a drag on the economy than previously estimated.

The trade deficit shaved 1.40 percentage points off second quarter GDP, compared with a bigger, 1.65 percentage-point reduction previously reported. Stronger demand for U.S. exports accounted for the improvement.

Even with the small improvement to second quarter GDP, the economic recovery was struggling with below-par growth, reflecting less vigorous spending by consumers and deep cuts in capital spending on new plants and other buildings by businesses.

Consumer spending in the second quarter grew at an annual rate of 1.8 percent, a tad weaker than the government previously estimated and considerably less brisk than the 3.1 percent rate seen in the first three months of this year.

Consumers, whose spending accounts for two-thirds of all economic activity in the United States, grew more cautious in the second quarter as a wave of corporate accounting scandals, a stock market slide and a stagnant job market made people feel more anxious about the economy's direction.

Businesses, facing stock market distress and economic uncertainties, slashed spending on new factories, office buildings and other structures at a rate of 17.6 percent in the second quarter, even worse than the 14.2 percent rate of decline posted in the first quarter.

All of these factors contributed to the economy losing momentum in the second quarter. The recovery bolted out of the starting gate in the first quarter, growing at a brisk rate of 5 percent.

The economy's 1.3 percent growth rate turned in during the second quarter was the worst showing since the third quarter of 2001 when the GDP actually dipped at a rate of 0.3 percent.

Despite concern about the struggling economic recovery, the Federal Reserve on Tuesday decided to leave short-term interest rates at a 41-year low, but continued to hold the door open to future rate reductions if economic conditions worsen. Two Fed members dissented from the decision to hold rates steady, saying they wanted an immediate rate cut, which would have been the first one this year.

With worries rising about the possibility of a war with Iraq and the rare display of dissent within the Fed, economists say the odds are growing that the Fed might move rates lower before the end of this year, possibly at its next meeting on November.

Analysts believe that the economy actually picked up some steam in the third quarter, with growth estimates ranging from a rate of 3 percent or higher.

But growing numbers of economists believe the economy will slow again in the fourth quarter of this year, in part reflecting heightened economic uncertainties due to a possible conflict with Iraq. Some economists believe fourth-quarter GDP could come in at a rate of around 2.5 percent.

Friday's report showed that after-tax profits of U.S. corporations rose at a rate of 1.7 percent in the second quarter, the same as previously estimated, but down from the first quarter's 2 percent growth rate.

Businesses, whose profits took a hit during the slump and have yet to fully recover, have been wary of making big commitments to hiring and capital spending, forces that are restraining the recovery. Economists say that a sustained turnaround in capital spending is a necessary ingredient for the economy to fully get back to good health.