U.S. economic recovery stalls

By Siobhan Hughes and Alex Tanzi
Bloomberg News Service

WASHINGTON — The economy has hit a slow patch as 2002 heads toward a close, reports this week are expected to show.

Spending at U.S. retailers fell in October, and factories cut production for a third straight month, according to economists surveyed by Bloomberg News Service. Both numbers will be reported later this week.

"It's almost a replay of the early 1990s recovery, where the economy just kept stalling," said Christopher Low, chief economist at FTN Financial in New York. "I don't think the pullback in consumer spending will last, but if it does, then that's it for the recovery."

The Federal Reserve last week lowered interest rates by a larger-than-expected half percentage point, underscoring the fragility of the recovery. After growing at a 5 percent pace in the first quarter, the economy slowed to a 1.3 percent pace in the second quarter. A rebound in the third-quarter is giving way to growth of less than 2 percent this quarter, economists say.

"The Federal Reserve's aggressive stance should help to bolster the economy, although uncertainty remains about the prospect of war with Iraq early next year," said Lynn Reaser, chief economist at Banc of America Capital Management Inc. in St. Louis.

Fed Chairman Alan Greenspan is scheduled to testify about the U.S. economy Wednesday before the Joint Economic Committee of Congress. He may offer clues to his thinking during the Fed's policy meeting last week, when he and fellow policy-makers decided to reduce interest rates to the lowest since July 1961.

For now, manufacturing is in a slump. Industrial production fell 0.3 percent in October after dropping 0.1 percent in September and 0.3 percent in August, a Federal Reserve report due Friday will probably show, based on the median of 42 forecasts in a Bloomberg survey of economists.

Economists also expect the Commerce Department to report on Thursday that October retail sales dropped by 0.2 percent, which would follow a 1.2 percent decline in September.

Dell Computer Corp., the largest maker of personal computers, is offering a six-month, interest-free loan to some customers for purchases of more than $500.

Zero-interest loans subtract from companies' profits because manufacturers absorb the costs. General Motors Corp. is offering cash-back incentives on most 2003 model passenger vehicles and scaling back zero-interest loans, which failed to lure shoppers in October.