Economists believe growth slowing, but no more recession
By KEN MORITSUGU
Knight Ridder Newspapers
Jul. 30, 2002
WASHINGTON - New government data coming out Wednesday is expected to confirm that the U.S. economy slowed in the spring, and some forecasters worry that growth could remain tepid for the rest of the year.
Analysts don't believe the economy will return to recession after a brief recession last year, but some say the recent slide in stocks could trim 1 percentage point off growth in the second half of the year.
The Commerce Department will release its first estimate of second-quarter gross domestic product on Wednesday. Most forecasts were for 2 percent to 2.5 percent growth at an annual rate, down from 6.1 percent in the first three months of the year. GDP, the total value of all the goods and services produced in the United States, is the broadest measure of the overall economy's performance.
A drop in growth from 6.1 percent to the 2 percent to 2.5 percent range would not be as dramatic as it sounds.
In evaluating the prospects for sustained economic growth, analysts look more closely at a component of GDP called final sales - the combined spending of consumers, businesses and the government - which grew at a 2.6 percent annual rate in the first quarter. Many forecasters believe final sales dipped in the second quarter, with a drop in consumer spending overwhelming a long-awaited pickup in business spending.
"Everyone is looking for a second-quarter slowdown. It's just a question of how big," said Cary Leahey, an economist with Deutsche Bank in New York. "The worry is it will be maintained in the third quarter, because the confidence numbers have been knocked down."
Consumer confidence fell sharply this month, largely because of the stock market decline and public concern about corporate scandals, the Conference Board, a New York-based business research group, reported Tuesday.
The group's index of consumer confidence dropped to 97.1 in July from 106.3 in June, a larger decline than analysts had anticipated.
The index is still above levels generally associated with a recession, but the decline suggests that consumers will "tend to curb their spending in the absence of offsetting incentives," said Lynn Franco, director of the Conference Board's Consumer Research Center.
The plummet in consumer confidence dampened investor enthusiasm after Monday's strong rally. The Dow Jones Industrial Average slipped 31.85 points to 8680.03. The tech-heavy Nasdaq composite index edged up 8.94 points to 1344.19.
Analysts are divided over the impact of the stock market decline on the economy. Some say it could be minimal, while others believe it will lead to spending cutbacks by both consumers and businesses.
The stock market's fall has driven down mortgage and other interest rates, offsetting some of the negative economic impact. Homeowners who refinance their homes at lower rates wind up with more cash in their pockets.
"The great irony of the stock market woes is that consumers went out and refinanced again," said Diane Swonk, chief economist at Bank One in Chicago.
However, Merrill Lynch chief economist Bruce Steinberg believes that stock market losses now outweigh housing market gains for consumers. "At this point, the loss of wealth is so large that it will reduce growth," he said.
Both Merrill Lynch and Deutsche Bank expect to cut their second-half growth forecasts by about 1 percentage point after examining Wednesday's gross domestic product data.
The chances remain slim, though, that the stock market decline will drive down spending so much that the economy will fall into recession, analysts said.
"You can't rule it out when you have this kind of shock to the equity market, but I think it's not that likely," said James Glassman, an economist at J.P. Morgan Chase in New York.
The second-quarter GDP report will be posted on the Commerce Department's Bureau of Economic Analysis Web site: bea.doc.gov |
