ECON - US growth falls to fresh low

greenspun.com : LUSENET : Current News : One Thread

BBC Friday, 27 July, 2001, 12:34 GMT 13:34 UK US growth falls to fresh low

US consumers remain confident, despite talk of a downturn

Economic growth in the US has fallen to its lowest rate for eight years during the second quarter.

The economy continues to slow as businesses, and to a lesser extent consumers, cut back on expenses.

On Friday, the nation's gross domestic product (GDP) edged ahead by a mere 0.7% in the second quarter, a little below analyst expectations of 0.9%.

This follows a rate of 1.3% last quarter and is the lowest rate of growth since the first quarter of 1993.

"The overall economy is not growing much at all," said Bill Meehan, chief market strategist at Cantor Fitzgerald, a New York brokerage.

"It also indicates that demand is slowing because the number wouldn't be expected to be that high if it were it not for continued decline in imports," he said.

A 13.6% fall in business investment over the quarter - the largest drop since 1982 - has put the breaks on GDP growth.

A report last week showed a narrowing in the US trade gap in May, suggesting demand for foreign goods is also being affected by the slowdown.

Consumer demand overall remains somewhat positive, but is waning, Mr Meehan said.

Recovery months away

The slight growth in second quarter GDP means the economy is a long way off from recovery, said Barry Hyman, chief equity strategist at investment firm Ehrenkrantz King Nussbaum.

Mr Hyman does not expect to see recovery before the end of the year.

"Looking at the numbers, I wouldn't expect [good economic news] until the first quarter, at the earliest, of 2002," he said.

Recession fears

Friday's modest move upward in GDP suggests recession fears still abound in the US economy.

It also leaves investors wondering about whether now is a good time to enter the stock market.

The US markets are hoping that the slow growth could spark another interest-rate cut.

Shares traded on the New York Stock Exchange and the Nasdaq have endured a volatile week, as investors responded to continuing worries over corporate earnings and positive news about consumer spending.

After the news came out on Friday, the euro strengthened against the dollar by 0.4 cents.

Cost-cutting

The slowdown in the economy has largely been driven by cuts at the corporate level.

As businesses try to find ways to cut costs, demand for everything from new buildings to computers to catered lunches has slowed.

Jobs cuts, too, have been a feature of the cooling economy.

And analysts wonder how long it will be before thousands of job cuts begin to affect consumer spending, which has been relatively strong.

Demand for houses, for example, remains at near all-time highs as do housing prices.

Tax incentives

The Bush administration is counting on consumer spending to continue driving the US economy.

Tax cuts and tax-rebate cheques - which have started to arrive in mail boxes across the country - are expected to continue to fuel the spending binge.

Fiscal policy makers hope consumer demand will remain strong, at least until US business shows renewed interest in buying the goods and services it needs.

Analysts' reaction

The figures raised hopes of a further cut in interest rates, when America's central bank, the Federal Reserve, meets in August.

Astrid Adolfson, economist at MCM Moneywatch, New York, said: "The numbers were on the soft side, but came in about as expected for the second quarter.

For the bond market, it's a plus. For the Fed, it means a green light to ease 25 basis points in August."

Christopher Low, chief economist, Fist Low Tennessee Capital Markets, of New York , said: "Consumers continue to carry the economy.

"The chief concerns of the Fed, particularly weak corporate spending appear to be worse in the second quarter than in the first quarter of this year."

Greg Anderson, Financial Economist, Fleet Global markets, Boston, said: "It's a little below expectations, but people's fears were on the low side, so that I don't know that it has that much of a market reaction.

"(The fall in business investment) is not surprising. That's been the theme of the last year's worth of GDP data."

-- Anonymous, July 27, 2001


Moderation questions? read the FAQ