Economy: Weakest Performance in 8 Years
Friday July 27, 9:57 am Eastern Time
By Caren Bohan
WASHINGTON (Reuters) - The U.S. economy turned in its weakest performance in eight years during the second quarter as businesses slashed spending on software and other investments and pared back bloated inventories, the government said on Friday.
The Commerce Department said gross domestic product, the broadest measure of the nation's economic health, increased at an inflation-adjusted annual rate of 0.7 percent in the April to June quarter. That followed a 1.3 percent gain in the first quarter, which was revised up slightly from a previously reported 1.2 percent increase.
The second-quarter GDP figure marked the economy's most lackluster showing since a 0.1 percent contraction in GDP in the first quarter of 1993.
Bond prices gained on the report, which was slightly weaker than the 0.9 percent GDP rise economists had expected and which helped cement expectations the Federal Reserve would cut interest rates by another quarter-percentage point in August.
``The numbers were on the soft side, but came in about as expected,'' said Astrid Adolfson, economist at MCM Moneywatch in New York. ``For the bond market, it's a plus. For the Fed, it means a green light to ease 25 basis points in August.''
HOLDING ABOVE ZERO
Even though growth in the recently ended quarter was anemic, the fact that GDP rose at all was in some ways good news. In recent months, some economists had feared the economy might have slipped into its first recession in 10 years. A recession is loosely defined as two straight quarters of falling GDP, so any decline in economic output would have been an ominous sign.
``Clearly, the good news is a plus number,'' said Wayne Ayers, chief economist at FleetBoston Financial. ``We've avoided a recession and we'll continue to avoid it.''
Ayers added, ``The biggest risk is the consumer. Everything is still good there. Layoffs have been concentrated in the manufacturing sector but they have been spreading.''
U.S. consumers, whose spending makes up two-thirds of GDP, have so far been the economic stalwarts. Their expenditures increased at a 2.1 percent rate in the second quarter following a 3 percent gain in the first quarter.
An improved trade deficit helped to push the economy along as well.
But the business sector has hit hard times. Since the beginning of the year, companies have been reducing inventories to bring supplies of unsold cars, computers and other goods back into line with demand.
That process continued in the second quarter, with inventories falling $26.9 billion after a $27.1 billion decline in the first quarter. However, inventories contributed positively, if only very slightly, to growth, since the latest inventory drop was smaller than the first-quarter decline.
But business fixed-investment plummeted 13.6 percent in the April to June period, the biggest drop in 19 years. It had fallen 0.2 percent in the first three months of the year. The latest decline was led by a 14.5 percent drop in spending on equipment and software.
Strength in home building, though, helped to offset some of the weakness. Investment in new residences climbed 7.4 percent.
MILD INFLATION
Another silver lining in the report was tame inflation.
The price index for personal consumption expenditures rose by a mild 1.7 percent, the smallest gain since the first quarter of 1999. The index, closely watched by the Federal Reserve, increased 3.2 percent in the first quarter of this year.
The latest GDP release included some methodology changes, including a key change to the way telecommunications equipment is treated, and updated data from recent business surveys.
The changes, which revised the GDP series back through 1998, showed the economy slowed more sharply in the second half of last year than previously thought.
GDP grew at a 1.3 percent annual rate in third quarter of last year, revised down from the previously reported 2.2 percent gain. Fourth-quarter growth was revised upward, however, to a 1.9 percent rise from 1.0 percent. |
