The Post--John Berry's "Economy Scantly Grows at 0.2%"
washingtonpost.com
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Rearranged some.
>>> Economy Scantly Grows at 0.2 Percent
By John M. Berry
Washington Post Staff Writer
Wednesday, August 29, 2001; 1:03 PM
The U.S. economy grew at a meager 0.2 percent annual rate in the second quarter, not the 0.7 percent pace originally estimated, the Commerce Department reported this morning, but many forecasters said that a modest pickup has already begun from that spring low point.
Many analysts were expecting the scheduled revision, the first of two, to show that economic activity declined slightly in the April-June period.
Statistically, there is virtually no difference between estimates of a plus 0.2 percent or a minus 0.2 percent growth rate,
... but a negative number would have increased talk that the United States had entered a recession and perhaps dampened optimism among consumers that the economy will improve soon.
Commerce statisticians found that consumers had boosted their spending more in the second quarter than originally estimated, and that offset part of the significant drag from businesses' reduced spending for inventories and new plants and equipment. The large drop in business investment clipped more than 2.4 percentage point off the quarter's growth rate.
But the continued decline in businesses' stocks of unsold goods has been so great that the stage is set for a turn around, analysts said.
Once inventories are down to a desired level, new orders will be placed and production will begin to increase once again.
"A recession . . . has been avoided, but the ensuing recovery will be modest," said economist Sung Won Sohn of Wells Fargo Bank. "Economic growth is expected to be around 2 percent during the third quarter and 3.5 percent during the final quarter of this year.
"A number of tail winds is helping economic growth, including the [personal income] tax cut, lower interest rates and cheaper energy. Inventories will be another source of economic growth in the future, [adding] as much as 1.5 percentage points to growth during the third quarter," Sohn predicted.
Bill Cheney, chief economist at John Hancock Financial Services in Boston, said the downward revision in the second-quarter gross domestic product was "the weakest growth in eight years but still better than expectations. In any event, this is ancient history. The focus now should be on the future and today's report contains harbingers of improvement."
The rise in consumer spending was revised up to a 2.5 percent annual rate from the 2.1 percent rate reported last month and "the inventory correction is proceeding faster than we thought," Cheney said, adding, "Corporate profits declined, but the pace of decline was half as much as in the first quarter."
"Barring surprises, this is the trough. I'm expecting the third quarter willshow improving growth," Cheney said.
Even the huge rate of decline in spending for business equipment may be moderating, according to Bruce Steinberg, chief economist at Merrill Lynch & Co. in New York.
"July shipments data suggest that capital spending is still declining in the third quarter, but not as rapidly as in the second quarter," Steinberg said. "Capital spending won't begin to revive until companies regain some earnings visibility," which is likely in the first half of next year.
"We expect economic data to gradually improve through the end of the year," he added. "We believe that by early 2002, a full-fledged recovery will be underway. But the economy remains weak enough at present to probably lead to another Federal Reserve" cut in short-term interest rates at the policymaking session set for Oct. 2.
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