- The Washington Times - Thursday, August 2, 2001

The recently released report of the Commerce Department for economic activity during the second quarter was not a pretty picture. Indeed, contrary to Fed Chairman Alan Greenspan's relatively upbeat testimony earlier in the week, during which he declared that "the rate of deterioration is slowing, quite clearly," Friday's figures indicated quite clearly that important segments of the economy continued to move in the wrong direction.

The economy as a whole registered an annual growth rate of 0.7 percent for the second quarter, the slowest in eight years. Over the past four quarters, moreover, the economy has grown a minuscule 1.3 percent, which is barely one-fourth of the 5.2 percent in annual growth registered during the previous four quarters.

Business investment incurred the most precipitous declines. Inflation-adjusted nonresidential investment i.e., business outlays for structures (factories, warehouses, etc.), equipment and software had been increasing at a torrid pace from 1997 through most of 2000, averaging nearly 11 percent per year during that period. The annual rate of increase in this category slowed to 1 percent during last year's fourth quarter and became slightly negative (0.2 percent) during the first quarter. During the second quarter, however, such investment plunged at an annual rate of 13.6 percent, the steepest decline since the deepest postwar recession in 1982. Spending on structures alone declined at an 11.2 percent annual rate during the second quarter after increasing by 12.3 percent during the first quarter. Business spending on equipment and software, which averaged more than 13 percent from the third quarter of 1999 through the second quarter of 2000, plummeted by an annual rate of 14.5 percent in the second quarter.

Meanwhile, after falling a modest 1.2 percent during the first quarter, total U.S. exports plunged 9.9 percent during the second quarter. Even consumer spending, which had been averaging a 3.5 percent annual rate of increase since the total economy entered its significant slowdown during last year's third quarter, sharply decelerated to a 2.1 percent growth rate in the second quarter.

The news on the inflation front, though,was particularly encouraging. Commerce reported that the price index for gross domestic purchases, which measures prices paid by U.S. residents, sharply decelerated from an annual rate of 2.7 percent during the first quarter to 1.5 percent in the second. Meanwhile, the price index for personal consumption expenditures, which Mr. Greenspan is known to scrutinize closely, increased at an annual rate of 1.7 percent during the second quarter, roughly one-half the rate of increase during the first quarter.

The policy response to Commerce's report seems clear: Reduce short-term interest rates. The Fed should act before its next monetary policy meeting, scheduled for Aug. 21.

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