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The weak second quarter showing of 0.7 percent, the worst since 1993, caught analysts by surprise.
©New York Times
© St. Petersburg Times, published July 28, 2001
The economy grew at a barely perceptible rate in the second quarter, its weakest pace in eight years, as businesses slashed spending and inventories, the government reported Friday.
The gross domestic product, the broadest measure of the nation's output of goods and services, expanded by 0.7 percent, according to the first reading on the quarter by the Commerce Department. It would have receded if not for a small increase in consumer spending and the large first effects of spending by state and local governments on projects that were approved during the economy's rapid expansion through last year.
Economists had expected a slightly larger increase of about 1 percent. In the first three months of the year, the economy grew 1.3 percent, the Commerce Department said, revising its earlier report of a 1.2 percent increase.
Friday's report provided further evidence of the rapid deceleration of the economy over the last year. In contrast, the economy surged 5.7 percent in the second quarter of 2000.
"It fits with the picture that the economy is correcting," said Kathleen Stephansen, director of economic research for Credit Suisse First Boston. "The clear weak point is obviously investment demand."
The reaction in the financial markets was muted. The Dow Jones Industrial Average ended the day down 38.96 at 10,416.67. For the week, the Dow lost 159.98 points.
The report showed that spending on equipment and software fell by 14.5 percent in the second quarter, the third consecutive decline but the largest since one of 15.1 percent in the second quarter of 1982. In contrast, businesses increased spending on technological gear by rates of more than 10 percent annually in the late 1990's.
State and local governments increased their spending by 7.5 percent, the largest increase since one of 8.1 percent in the first three months of 1986.
"The policymakers couldn't have planned it any better if they'd tried," said Louis Crandall, chief economist at R.H. Wrightson Associates, a research firm. While the new government spending was anticipated because so many construction projects were approved last year, he said, "they're hitting at a very opportune time."
Consumers also increased spending, but only by 2.1 percent, the smallest quarterly increase since one of 1.9 percent in the second quarter of 1997.
The University of Michigan, meanwhile, provided another sign that consumers remained nervous as the economy weakened. It reported that its consumer sentiment index fell to 92.4 in July from 92.6 in June.
"I think the third quarter's going to be another lackluster quarter, said Michael Strauss, the senior economist at Commonfund, a money manager for universities that is based in Wilton, Conn.
A separate report from the Commerce Department on Friday showed that sales of new homes rose to a seasonally adjusted annual rate of 922,000 in June, exceeding economists' predictions of 921,000. It was a 1.7 percent increase from the revised May rate of 907,000.
Businesses liquidated about $25-billion in inventories during the quarter, surprising economists, some of whom had even expected a small rise in inventories. That has the effect of deflating GDP somewhat artificially, since goods are counted as output even if they remain unsold, meaning many sales were counted in previous quarters. Analysts said this sizable inventory reduction should set the stage for a rebound in production in coming months.
The pullback in growth came even though the Federal Reserve has cut short-term interest rates this year by a total of 2.75 percent. The Fed's policymakers are scheduled to meet again to discuss interest rates on Aug. 21.
The economy has not expanded by such a slow rate during any quarter in 10 years, with a singular exception. It receded by 0.1 percent in the first three months of 1993, when a snapshot of the economy would have produced an inverse image of today's -- companies expanding investment in technological equipment, consumers reducing their spending, and a sharp decline in military spending.
- Information from the Associated Press was used in this report.