Economy Slows in Third Quarter

Friday, October 27th 2000, 12:00 am

By: News On 6

WASHINGTON (AP) â€” The U.S. economy slowed dramatically in the summer to a 2.7 percent growth rate, less than half the pace of the previous quarter, as American businesses and the federal government cut back on spending and home construction dropped sharply.

The increase in gross domestic product for the July-September period followed a sizzling 5.6 percent annual rate of growth in the second quarter, the Commerce Department reported Friday. GDP is the nation's total output of goods and services and the broadest measure of economic health.

Stocks were higher Friday. By midday, the Dow Jones industrial average had gained 154 points and the Nasdaq index was up by 40.

The 2.7 GDP gain, the weakest reading since a 2.5 percent rate in April-June 1999, was a much steeper slowdown than many analysts had been expecting. The government report comes less than two weeks before voters elect a new president.

Vice President Al Gore has staked much of his presidential bid on a claim that the Clinton-Gore administration has brought the nation an unprecedented period of prosperity.

Republican challenger George W. Bush cautions that the good times may not last. This is one of the reasons Bush puts forward for his $1.3 trillion tax cut, as insurance if the economy turns down.

White House spokesman Jake Siewert defended the economy's third-quarter performance, while taking a subtle jab at Bush's father, the former president who was unseated by Bill Clinton in 1992.

``Over the last four quarters, the American economy has been at or above 5 percent, that's strong growth. Even 2.7 percent growth would have been considered strong in the last Bush administration,'' Siewert said. ``So we think that's a considerable amount of growth in the American economy.''

Despite the slowdown over the summer, private economists saw little in the GDP report that could be taken as a warning of an impending recession.

``We have downshifted. But there's precious little evidence to suggest anything more than a downshift is taking place here and that's exactly what the Fed wants,'' said Paul Kasriel, chief economist for the Northern Trust Co.

Supporting that view, the government released a second report Friday showing new orders for big-ticket durable goods rose 1.8 percent in September, a much better performance than expected. Many economists had been predicting orders for durable goods would decline by 0.2 percent, reflecting the overall economic slowdown.

Economists closely watch the orders numbers for signs of how the manufacturing economy will perform in coming months. The September strength was led by an 11.8 percent increase in orders for electronic products, such as computer chips and circuit boards.

The GDP report also contained good news on inflation. An inflation gauge tied to the GDP, and closely watched by Fed Chairman Alan Greenspan, rose at an annual rate of 2.2 percent in the third quarter, virtually unchanged from a 2.1 percent rate in the second quarter even though energy pressures accelerated in the summer.

Excluding volatile energy and food prices, the inflation measure rose at a 1.5 percent rate in the third quarter, close to the 1.4 percent gain in the second quarter.

The Federal Reserve has raised interest rates six times since June 1999 to slow the economy and keep inflation under control. The Fed's rate increases are designed to make borrowing more expensive and cool demand for big-ticket items such as cars and homes.

The Fed's goal is to slow the economy enough to keep inflation in check but not so much as to cause a recession. Economists said Friday's GDP report suggests the economy is on track for a soft landing.

Given signs of slower growth, economists believe the Fed will leave interest rates unchanged at its next meeting, Nov. 15.

The GDP report showed that business investment spending slowed from a red hot 14.6 percent rate of increase in the second quarter to a more moderate 6.9 percent rate in the third quarter.

The slowdown was even more pronounced in the government sector. Federal outlays, which had soared at a 17.2 percent rate in the second quarter, decreased at an annual rate of 10.1 percent in the summer.

Spending on residential construction fell at an annual rate of 9.2 percent in the third quarter, the first decline in a year.

But consumer spending, which accounts for two-thirds of all economic activity, picked up in the third quarter. Spending increased at a 4.5 percent rate, up from a 3.1 percent rate in the second quarter, but well below the first quarter's red-hot rate of 7.6 percent, a 17-year high.

More robust spending pushed Americans' personal savings rate â€” savings as a percentage of disposal income â€” to a record quarterly low rate of negative 0.2 percent, down from a positive 0.3 percent rate in the second quarter.

The U.S. trade deficit was also a drag on economic growth in third quarter, although less than in the spring. The deficit subtracted 0.3 percentage points from third-quarter growth following a 1.0 percentage-point reduction in the second quarter.

All the changes left the economy growing at an annual rate of $63.3 billion in the third quarter, pushing the country's total output of goods and services to $9.4 trillion, after adjusting for inflation.