Economy grows a scant 0.2 percent
By Jeannine Aversa
WASHINGTON The nation's economy inched ahead in the spring at the slowest pace in eight years. Still, the fact that there was any growth at all fueled hope that the economy may be ready to begin climbing again without tipping into recession.
Even so, the second-quarter performance was better than most analysts were forecasting. Some predicted the economy would stall, while others thought it would slip into reverse, possibly signaling the start of the first recession in the United States in 11 years. A recession is usually defined as two consecutive quarters of shrinking GDP.
"We stayed on the right side of the ledger," said Bill Cheney, chief economist at John Hancock Financial Services. "I think ... that we're more likely to find our way back to safer ground than we are to tumble over the edge."
Hofstra economics professor Irwin Kellner says yesterday's report suggests an upcoming turnaround.
But on Wall Street, the slim gain didn't cheer investors. The Dow Jones industrial average lost 131.13 points to close at 10,090.90.
Many analysts believe the second quarter will prove to have been the point that the economy showed the greatest danger of dipping into a recession. They predict the economy will rebound to around a 2 percent growth rate in the current quarter and to around 3 percent to 3.5 percent in the fourth quarter.
Private economists and the Bush administration are counting on nearly $40 billion in tax rebate checks and the aggressive credit easing by the Federal Reserve to lift the economy to higher growth rates in the second half of this year.
"I'm optimistic there are some good signs out there," said Commerce Secretary Don Evans, adding that consumer spending and the housing market have held up during the yearlong slowdown.
To fight off a possible downturn, the Fed has slashed interest rates seven times this year, with the most recent cut coming last week. Economists believe the Fed might reduce rates again in October.
One of the main reasons for the lower estimate of second-quarter GDP is that companies did a better job liquidating their inventories than previously estimated. Inventory reduction was valued at $38.4 billion in the second quarter, the biggest decline since the first quarter of 1983. That subtracted 0.4 percentage point from GDP.
While inventory reduction subtracts from GDP, economists say excess inventories must be whittled before companies can ramp up production, something that would bode well for economic growth down the road.
"Most of the required inventory liquidation is now behind us, and as a result, the economy now is in a better position to recover over the next several months," said Lynn Reaser, chief economist at Banc of America Capital Management.
Another reason for the downward revision was that the trade deficit was slightly worse because exports fell more than previously thought, reducing second quarter GDP by 0.3 percent percentage point.
Still, much of the overall weakness in the second quarter continued to come from companies cutting back sharply in their investment in plants and equipment in the face of weak sales and plunging profits.
U.S. companies reduced such investment in the second quarter at a rate of 14.6 percent, the worst showing since the second quarter of 1980. The new estimate was weaker than the 13.6 percent rate of decline previously estimated.
The reduction in spending on computers and software in the second quarter was an even sharper rate of 15.1 percent, versus the 14.5 percent rate of decline initially thought.
Spending on new factories and office buildings fell at rate of 13.4 percent.
Yesterday's report also showed that after-tax profits of U.S. corporations fell by 2 percent in the second quarter, an improvement over the 7.8 percent decline in the first quarter.
Consumers were the primary force keeping the country out of recession. Consumer spending, which accounts for two-thirds of total economic activity, rose at an annual rate of 2.5 percent in the second quarter, stronger than the 2.1 percent rate originally estimated.
Also helping was a 5.8 percent rate of increase in residential construction, a sector that has remained strong, helped by falling interest rates.
While second-quarter growth remained positive, the rate of expansion was the weakest since a 0.1 percent rate of decline in the first quarter of 1993, and it trailed the 1.3 percent growth rate posted in the first three months of the year.
"The economy stayed out of negative territory, and, if anything, that should have some positive psychological impact for consumers and businesses," said Ken Mayland of ClearView Economics.