- The Washington Times - Thursday, August 30, 2001

The longest economic expansion in history nearly ended this spring as growth slowed to a 0.2 percent rate, with the economy escaping recession only because of steady spending by consumers and local governments.

Despite relief that yesterday's Commerce Department report showed the economy is still above water, financial markets dropped on the news as few signs of recovery have emerged since the economy stalled in the April-to-June quarter. The Dow Jones Industrial Average fell by 130 points.

President Bush called yesterday's report "bad news" and expressed frustration that "the recovery is very slow in coming" in a speech to the American Legion in Texas.

"I am deeply worried about the working families all across the country," he said.

The report showed that economic growth in the year from June 2000 to June 2001, at 1.2 percent, was the slowest since the last recession in 1991. The bare thread of growth this spring quarter was down from the department's previous estimate of 0.7 percent.

While consumer spending grew at a solid 2.5 percent annual rate, that was largely because of increased spending on cars and sport utility vehicles. The report showed that the economy would have contracted during the quarter without autos.

Also keeping growth above zero was a 7.4 percent spurt in state and local government spending and a 5.8 percent jump in housing investment — a somewhat weaker housing performance than previously estimated by the department.

"The economy's growth has stopped, but we're not talking recession-type weakness at this point in time," said Robert Dederick, economic consultant at Northern Trust Co. The downturn has been concentrated in manufacturing and hasn't engulfed most of the nation's millions of service businesses.

"A number of people have lost heart because we haven't seen any strengthening yet," and the stock market is stoking that pessimism, he said.

Economists are pinning their forecasts for a recovery toward the end of the year on an upturn in leading indicators of economic health in recent months, such as a four-week decline in new unemployment claims and markedly easier credit conditions.

But the economy still could fall into recession if consumers pull back on spending in the face of rising layoffs and corporations continue to cut staff because of flagging profits, said Mr. Dederick.

A report on Tuesday showed that consumer confidence is cracking under the weight of rising unemployment and raises questions about the durability of consumer spending, he said.

The profit squeeze that is prompting businesses to cut employees has not abated and was vividly in evidence in yesterday's report. It found that corporate profits dropped by 3.6 percent, in their third quarterly decline.

The economic stall in the spring was mostly the result of the biggest liquidation of business inventories and the largest drop in business capital spending since the recession of the early 1980s.

"The big drop in inventories is important," said Diane Swonk, chief economist at Bank One Corp., noting that businesses cleared a massive $38 billion of goods off their shelves and may be nearing the point when they will start ordering new wares again.

"There's nothing better for growth than having a cupboard that's bare," she said. Miss Swonk estimates that even a somewhat less-robust liquidation of stocks this summer will lift growth as measured by the department by as much as one percentage point in the third quarter.

Mark Vitner, vice president at First Union bank, said yesterday's report adds to "a growing sense that the economy may be out of the woods."

He too expects the economy to rebound this quarter because businesses won't disgorge stocks as much as they did in the first half of the year.

"The second quarter may mark the low point for the economy, as the combination of tax rebates, lower interest rates and lower energy prices gives consumers a much needed boost in the second half of the year," he said.

Lara Rhame, an economist at Brown Brothers Harriman & Co., said the boost from yesterday's report was primarily psychological, however.

"Certainly, it's good news we didn't go into negative numbers, and psychologically that's very important," she said. But the growth numbers "are not necessarily enough to give us solid growth momentum going forward."

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