U.S. Economic Growth Slows Sharply

Thursday, December 21st 2000, 12:00 am

By: News On 6

WASHINGTON (AP) â€” The U.S. economy slowed sharply to an annual growth rate of just 2.2 percent in the summer, the weakest performance in four years, the government said Thursday. The report provides further evidence that America's boom times are definitely over.

The Commerce Department said the third quarter increase in the gross domestic product â€” the economy's total output of goods and services â€” was even weaker than previously believed as the trade deficit deteriorated further. A month ago, third quarter GDP was estimated to have risen by 2.4 percent.

The July-September performance marked a dramatic slowdown from a sizzling 5.6 percent GDP growth rate in the April-June quarter.

The sharp falloff in economic growth in the summer and mounting evidence of more recent weakness, including disappointing Christmas sales, have increased worries about whether America's record 10-year economic expansion was in danger of toppling into a recession.

In another report indicating weakness, the Labor Department said that the number of Americans filing new claims for unemployment benefits jumped a sharp 34,000 last week to 354,000. That pushed the four-week moving average for claims to the highest level since July 1998.

Both President-elect Bush and his running mate, Dick Cheney, have talked openly about the possibility of an economic downturn, using the economic danger to promote their $1.3 trillion tax cut proposal.

Wall Street has grown increasingly nervous about what slower growth will do to corporate profits. On Wednesday, the technology-heavy Nasdaq index plunged by 7.2 percent. The Nasdaq has lost more than half its value since hitting highs in March.

President Clinton, however, insisted in a meeting with Bush at the White House this week that the economy was simply experiencing a needed slowdown. He said most economists are still looking for moderate, sustainable growth in the coming year, although at much lower pace than the past four years.

Since 1997 the economy has been racing ahead at annual growth rates above 4 percent, the best stretch of prosperity since the mid-1960s. The strong growth drove unemployment to its lowest levels in three decades.

Analysts believe that growth for all of 2001 will average just 3 percent. While this would be far from a recession â€” defined as two consecutive quarters of falling GDP â€” it would be far below the 5 percent growth expected for all of this year. Economists are looking for the unemployment rate, which is currently at 4 percent, to rise to close to 5 percent by the end of next year.

The Commerce Department's new report showed the slowdown was having the desired effect on inflationary pressures with an index tied to the GDP rising at a rate of just 1.6 percent in the third quarter, down from an estimate a month ago that prices were rising at a 1.9 percent rate in the summer. The GDP price gauge had risen at rates of 2.4 percent in the spring and 3.3 percent in the first quarter.

The Federal Reserve raised interest rates six times from June 1999 to May of this year to dampen an economy that was threatening to overheat and trigger inflation problems. But a rash of recent economic statistics indicate that the central bank may have overdone its credit tightening.

Those concerns prompted the Fed to switch its policy directive this week away from inflation worries to a concern about economic weakness, a 180-degree turnabout that signaled to economists that the Fed will begin cutting interest rates at its next meeting on Jan. 30-31.

The GDP report Thursday showed that corporations' after-tax profits managed only a 0.6 percent increase in the third quarter, down from a 2.5 percent increase in the second quarter and the weakest performance since profits fell by 1.6 percent in the fourth quarter of 1998. The downward GDP revision for the third quarter reflected a bigger trade deficit than previously estimated, reflecting weaker export sales.

The government said that consumer spending â€” which accounts for two-thirds of total economic activity â€” was rising at an annual rate of 4.5 percent in the third quarter. Based on weaker-than-expected Christmas sales, analysts believe that figure will be just half that rate in the current quarter.

Business investment in the summer was up at a 7.7 percent rate, just half the 14.6 percent rate of increase in the spring. Analysts are worried that business investment spending, one of the major engines propelling the expansion, will weaken further this quarter and next year as corporations react to the sliding stock prices.

All of the changes left total output as measured by the GDP at $9.37 trillion in the third quarter, after removing the effects of inflation.

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On the Net:

GDP report: http://www.bea.doc.gov