Rapid slowdown for US economy

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Wednesday, 29 November, 2000, 21:00 GMT Rapid slowdown for US economy

Economic growth in the United States has been cut sharply to just 2.4% during the three month from July to September. The revised figures from the US Commerce Department are lower than the original estimate of 2.7% - and well below the 5.6% and 4.8% growth rate scored in the second and first quarter respectively.

It seems to be soft landing but I think it's going to be rougher than expected Robert Mackintosh, Eaton Vance The slowdown of America's booming - some say overheating - economy is welcome news for investors. It suggests that interest rates will not rise any further, which should boost share prices and could weaken the US dollar, helping the export industry.

The US government and the Federal Reserve say their target is a "soft landing" of the economy, growing at lower levels while avoiding a recession.

A blip or a trend?

But economists are at odds as to whether the slowdown is just a blip or the start of a trend.

Robert Mackintosh of investment firm Eaton Vance points to a slump in consumer confidence and says cutbacks in consumer spending could produce "a minor recession".

Henry Willmore of Barclays Capital predicts "a significant slowdown in the economy in the months ahead".

Manufacturing could be hit hardest, warns Jerry Jasinowski, the president of the National Association of Manufacturers: "The revised data confirm that the slowdown has arrived and the remaining question is how hard the landing will be."

Other experts are less pessimistic. Bruce Steinberg, the chief economist of investment bank Merrill Lynch, predicts that economic growth will settle at between 3% to 4%.

"We believe the US economy has achieved a soft landing", Mr Steinberg says.

But all the talk of a slowdown or a soft landing is "just a mirage", warns Gale Fosler of the Conference Board, a research group.

He says that US consumers continue to spend and will keep fuelling the economic boom.

http://news.bbc.co.uk/hi/english/business/newsid_1047000/1047322.stm

-- Martin Thompson (mthom1927@aol.com), November 30, 2000

Answers

U.S. Economy Slowed Abruptly in Third Quarter By Glenn Somerville Nov 29 6:13pm ET

WASHINGTON (Reuters) - The soaring U.S. economy headed back to earth during the summer, growing at its weakest pace in four years as a Federal Reserve campaign to slow it through stiffer interest rates took hold, a government report on Wednesday showed.

The Commerce Department said gross domestic product -- the broadest measure of total output within U.S. borders -- advanced at an annual rate of 2.4 percent in the July-September quarter, down from 2.7 percent estimated a month ago.

That was less than half the second quarter's GDP growth rate of 5.6 percent and was the weakest for any quarter since the third quarter of 1996, when GDP increased 2 percent.

Analysts said the data still showed a healthy economy, though the manufacturing sector was coming under growing pressure as exports slow and spending on computers and software also begins to wane.

COOLING-OFF UNDER WAY

``It's a cooling-off period for the economy but it's certainly not pointing to recession,'' said economist Lynn Reaser of Banc of America Capital Management Inc. in St. Louis, Mo. ``We are clearly in a lower stage of flight, but we don't want to fully land this economy.''

The Fed has been trying to brake the economy, boosting interest rates six times from mid-1999 through May this year, in a bid to contain prices and so sustain a record economic expansion that is now in its 10th year.

Its goal is to achieve a soft landing, in which the economy keeps expanding at a rate slow enough to keep inflation bottled up but without throwing large numbers of people out of work.

The revised GDP report showed a gauge of price rises, based on consumer spending and favored by Fed Chairman Alan Greenspan, increased at a 2.1 percent rate in the third quarter instead of the 2.2 percent previously estimated.

That was the same increase as in the second quarter, implying no pickup in prices despite rising oil prices during the quarter.

Trade was a drag on the economy, with Commerce reporting imports were higher than it originally thought and exports were lower. In addition, businesses built inventories at a slower rate of $73.5- billion a year instead of $79.9 billion in the third quarter, further shaving from the rate of GDP advance.

Jerry Jasinowski, president of the National Association of Manufacturers, said he was concerned that a high-valued U.S. dollar was making it hard to sell American-made goods overseas and putting the manufacturing sector in a vulnerable spot.

``The revised data confirm the slowdown has arrived, and the remaining question is how hard the landing will be, with the prospect that growth may slow even more in the manufacturing sector than in the economy as a whole,'' Jasinowski said.

PROFITS START TO SHRINK

The economy's weakening performance has begun to show up on the bottom line for U.S. corporations. The GDP report showed after-tax profits advanced a scant 0.6 percent to a seasonally adjusted annual rate of $654.1 billion during the third quarter after a 2.5 percent increase in the second quarter.

It was the most lackluster performance for corporate profits since they shrank by 1.6 percent during the fourth quarter of 1998, when banks were being squeezed by the impact of an Asian economic crisis that has since stabilized.

The GDP data was slightly stronger than anticipated by financial markets but caused little stir since the factors that led to the revision were anticipated.

Bond prices initially softened but by the end of the day were up on the latest evidence of softening growth. The 30-year U.S. Treasury bond added 15/32 of a point as its yield eased to 5.65 percent while the 10-year note was up 13/32 to yield 5.53 percent.

Fading corporate profits make stock markets less attractive to investors and encourage a greater flow of safe-haven money into bonds. Bond prices have been rallying steadily for the past three weeks.

Stock prices once again were mixed, with the blue-chip Dow Jones Industrial Average closing up 121.53 points at 10,629.11, but the high-tech-laden Nasdaq composite index down 28.05 points to end at 2,706.93.

While the slowdown in GDP performance during the third quarter was marked, there still were pockets of strength that implied continued expansion. Consumer spending, which fuels two-thirds of national economic activity, grew at an unrevised 4.5 percent annual rate, up from 3.1 percent in the second quarter.

Economist Joel Naroff of Naroff Economic Advisors Inc. in Holland, Pa., said that level of spending was robust by any measure and was likely to keep the Fed on guard against potential inflation pressures into 2001. He said the weaker third-quarter GDP might be more apparent than real.

``The headline says one thing but the details point to something different, continued solid growth with only initial signs of chinks forming in the expansion's armor,'' he said.

Some types of business investment were stronger than previously thought. Nonresidential fixed investment, which includes new plants and equipment, increased at a 7.8 percent annual rate rather than 6.9 percent estimated a month ago.

http://www.siliconinvestor.com/headlines/general/20001129/256168.html



-- Martin Thompson (mthom1927@aol.com), November 30, 2000.


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