- The Washington Times - Saturday, July 28, 2001

The economy this spring gave its worst performance in eight years, growing at an anemic 0.7 percent annual rate as steady spending by government and consumers barely offset a collapse of business investment.
Also, according to a Commerce Department report released yesterday, the current economic slump and bust in business spending started a quarter earlier than previously thought, in the summer of 2000.
Growth fell during that period to a 1.3 percent rate. As a result, the overall growth rate for 2000 was lowered dramatically to 4.1 percent from 5 percent.
Although few economists expect the deep downturn in manufacturing, technology and other businesses enduring a profits recession to reverse any time soon, nearly everyone is hopeful that growth will recover to more healthy levels by the end of the year. They pin those hopes on a bounce in consumer spending coming out of tax cuts, interest-rate cuts and falling energy prices.
"The economy is puttering along. It is not nearly as strong as it should be," President Bush said in remarks to the Future Farmers of America yesterday.
"Given the economic news of today, the tax cut looks more and more wise," he said. "It provides an incredibly important boost to economic vitality and economic growth."
The weakness in the April-June quarter came from a huge 13.6 percent cutback in spending on new plants and equipment by businesses. That was the steepest reduction since the spring of 1982, when the country was in the worst recession of the post-World War II period.
The cut in spending on computers and software was an even sharper 14.5 percent, also the biggest quarterly decline since 1982. Spending on new factories and office buildings fell at a rate of 11.2 percent.
Consumers, by contrast, maintained their optimism and spending despite the investment rout, which has kept the stock market underwater for a year. But the pace of consumer spending fell by more than half to 2.1 percent in the last quarter from rates of more than 5 percent a year ago.
In line with the still-sunny consumer outlook, investment in new housing rose a robust 7.4 percent in the spring, also helping to keep the economy afloat. The Census Bureau reported that new-home sales rose 1.7 percent last month to a 922,000 annual pace, near-record levels.
A 7.5 percent burst of spending by state and local governments also bolstered growth in the spring, but economists said spending in that sector is likely to be more subdued in the future.
"The economy managed to sidestep recession in the second quarter," said Richard Yamarone of Argus Research Corp. in New York. "While the business sector was collapsing, consumers were playing Atlas and shouldering the burden of prolonging the expansion.
"The $64,000 question is whether the consumer can continue to spend at a 2 percent pace amidst mounting job losses, poor corporate-earnings announcements, eroding stock market activity and the deep, and almost certainly prolonged, capital-spending slump," he said.
"We believe this is possible, as long as personal incomes continue to grow and the unemployment rate remains in the 4.5 percent to 5 percent range," he said.
Falling energy prices are boosting consumers' disposable incomes, much like this month's $40 billion of tax-rebate checks in the mail. They also contributed to lower inflation in yesterday's report, where a key price measure fell to 2.3 percent in the spring from 3.3 percent the previous quarter.
Allen Sinai, president of Primark Decision Economics, said consumers are likely to continue spending at a steady, though subpar rate because they are weighed down by mounting unemployment and debt, weak income growth and a $4 trillion loss of stock market wealth.
"The risks to consumer spending appear unusually high," he said but added that "no collapse in consumer spending is envisioned" unless the unemployment rate rises above 5 percent.
Dean Baker of the Center for Economic Policy Response said a recent acceleration in the pace of layoffs and weakening of wage growth do not bode well for consumers and the economy. Businesses have been ordering the layoffs because of a collapse in profits documented by yesterday's report.
"The picture of the economy in this report is rather grim," he said.
"While modest consumption growth and strong housing growth continue to sustain the economy, it is not clear how much longer this will be true. The tax cut will provide some stimulus in the third and fourth quarters, but it is not large enough to offset the sources of downward pressure on the economy."

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