Thursday, August 01, 2002

Slower recovery forecast

Healthy economy could return at 'half speed'

By Jeannine Aversa
The Associated Press

        WASHINGTON - The U.S. economy downshifted into a lower gear in the second quarter, thanks to cautious consumers. Last year's recession also turned out to be deeper than previously thought, new government figures released Wednesday showed.

    The Federal Reserve's latest report on economic conditions in the country found the economy was expanding modestly but unevenly in the June-July period. Here's an excerpt from its so-called beige book report on the Cleveland district, which includes Cincinnati:
   “Economic conditions in the Fourth District during June and the first half of July showed some improvement from the last report. Shipping activity continued to increase, reports of expansion in manufacturing have spread and improving sales figures were reported across the retail sectors. ... Most contacts believe that business activity during the second half of 2002 will be stronger than the first, although many qualified their outlook with the caveat that the stock market decline and news of accounting scandals could scare consumers into holding onto their money.”
        The new information confirmed that the economy was sinking well before the Sept. 11 terror attacks - something that some economists had suspected.

        While the second-quarter figures show an economy struggling to get back to full health, many economists don't think that the recovery will fizzle out, leading to the dreaded “double-dip” recession.

        The Commerce Department reported that gross domestic product grew at a rate of just 1.1 percent in the April-June quarter, down considerably from the brisk 5 percent pace posted in the first three months of the year.

        GDP measures the total value of goods and services produced within the United States and is considered the broadest measure of the economy's health.

        The second-quarter performance, weaker than the 2.2 percent growth rate that many analysts had forecast, is the most sluggish growth since the third quarter of 2001.

        “It was disappointing, but I don't think the economy is headed into reverse,” said Stuart Hoffman, chief economist for PNC Financial Services Group. “But I think we'll have a half-speed recovery. Typically in the first year of a recovery, GDP can grow as much as 6 percent. With this one, I think it will be closer to 3 percent.”

        The economy dominated Wednesday's Cabinet meeting. “There was no discussion of a double-dip,” White House spokesman Ari Fleischer said. “It was just the opposite. The sentiment of the group was that all the ingredients are there for more robust growth going into the fall and into the winter of 2002.”

        The Federal Reserve, meanwhile, reported that economic activity remained sluggish in the current quarter, with the economy expanding only “modestly” in early July. Retail sales were mixed, the Fed reported.

        Given this, analysts predict the Fed will leave short-term interest rates alone at its Aug. 13 meeting. Interest rates have been at a 40-year low all year, and most economists believe they will stay unchanged through the rest of 2002.

        Annual revisions to GDP showed that the economy contracted in three straight quarters last year, rather than just one. That puts last year's recession more in line with one rough rule of thumb for a downturn - at least two consecutive quarters of declining GDP.

        GDP shrank at a 0.6 percent rate in the first quarter, at a 1.6 percent rate in the second and at a 0.3 percent rate in the third, which under earlier estimates had been the only quarter of shrinking GDP during the slump.


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