Friday July 17, 7:03 pm Eastern Time
FOCUS-Wall Street firms eye negative Q2 U.S. GDP
By Steven Scheer
NEW YORK, July 17 (Reuters) - The U.S. economy may have shrunk for the first time in seven years during the
second quarter, as the financial turmoil in Asia appears to have bitten deeper than previously thought, economists said.
Following Friday's report of a sharp widening of the U.S. trade deficit to its highest level since the monthly trade data
began being reported in January 1992, economists at major firms slashed estimates for second-quarter Gross Domestic
Product growth.
Some forecasters now see negative U.S. growth in the second quarter, which would be the first time since a 2.1 percent
decline in the first quarter of 1991.
''Based on the data in hand, it would be surprising if (GDP) came in with positive numbers,'' said David Hensley,
senior economist at Salomon Smith Barney Inc.
Companies began seriously mulling the prospects of negative growth on Wednesday, after business inventories -- led by
a massive drop in automobiles -- posted a 0.1 percent fall in May, for its first drop in two years.
A larger-than-expected 10.3 percent swelling of the U.S. trade deficit to $15.75 billion in May confirmed economists'
expectations of very weak second-quarter growth.
Friday's report showed deficits widening with much of Asia, as well as Canada and Mexico.
''Exports are down and imports are up. It's a sign that there's no demand abroad for U.S. goods and U.S. demand for
foreign goods is strong,'' said Harvinder Kalirai, economist at I.D.E.A.
Economists reckon the worsening trade picture and falling inventories will each knock off three percentage points from
second-quarter GDP, slowing sharply from the robust 5.4 percent rate in the first quarter and 3.7 percent rate seen in
1997. A massive inventory buildup helped inflate first-quarter growth, analysts said.
But they stressed the economy remains quite healthy over the long run.
''We are not having a recession,'' said Bruce Steinberg, chief economist at Merrill Lynch & Co. Inc. ''But the economy
has (now) stopped. Growth has stopped.''
Solid growth may not reappear until late in the year, which will likely keep the Federal Reserve from raising short-term
interest rates through the end of the and could lead the central bank to lower interest rates in early 1999, economists said.
After a weak second quarter, economists see a rebound to about 1.5 percent GDP growth in the third quarter, despite the
dampening effect of the ongoing General Motors Corp. strike.
Assuming the strike ends soon, GDP growth could top 4 percent in the fourth quarter, as production recovers.
The drag from trade seen in the past few quarters should not be so evident and inventories should rise again later in the
year, economists said.
As for the second quarter, Donaldson Lufkin & Jenrette Securities Corp. predicts a 1.5 percent decline in GDP growth,
with Merrill Lynch seeing a 1.0 percent fall and Salomon Smith Barney expecting a 0.5 percent dip. Nomura Securities
International Inc. cut its forecast to a 0.5 percent fall.
Economists at powerhouses Goldman Sachs & Co. and Lehman Brothers, while saying that negative growth cannot be
ruled out in the quarter, predicted small rises. Goldman predicts a 1.0 percent growth rate. Lehman sees a 0.5 percent
GDP pace.
Stephen Slifer, chief economist at Lehman, said he was reluctant to call for negative growth.
Slifer echoed the thoughts of others -- including those who predict negative growth -- in noting the report will
encompass trade and inventories data from only April and May and the Commerce Department might not want to report a
negative set of numbers until definitive data are known.
''They can plug in (June) numbers that are optimistic,'' he said. ''The first (estimate) you can get a positive number.''
Still, one very weak quarter should not cause much damage to consumers' psyches, economists said.
Said Salomon's Hensley: ''Unemployment is low, job growth is still healthy and balance sheets couldn't be better.''
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