- The Washington Times - Thursday, November 1, 2001

The country's economic output declined at a 0.4 percent annual rate in the summer quarter as sharply lower spending by consumers, businesses, and state and local governments overwhelmed federal efforts to pump up the economy with tax- and interest-rate cuts.
The biggest decline in output since the 1991 recession reported by the Commerce Department yesterday probably marks the end of history's longest expansion and the beginning of a recession, according to most economists, including White House economic advisers. An official determination of recession has not yet been made, however.
President Bush said the report "confirms that the events of September the 11th have really shocked the nation, have affected our work force and our business base" in an address to the National Association of Manufacturers.
"People are having tough times in America. People are losing their jobs. And I'm deeply concerned about that." Mr. Bush called on Congress to pass by the end of the month a second round of tax cuts and other stimulative measures to try to revive the economy. "It's time for our government to act in a positive and constructive way."
The report showed a marked deceleration of consumer spending the biggest contributor to growth to a 1.2 percent annual rate in the July-to-September quarter from the already tepid 2.5 percent rate set in the spring quarter. Also reflecting the cooling ardor of consumers, the pace of residential construction fell by two-thirds to 1.8 percent.
An infusion of tax cuts at a rate of more than $150 billion did little to boost spending as consumers used the windfall to beef up their savings accounts. The personal savings rate nearly quadrupled to 3.8 percent.
A 4.6 percent surge in federal spending on defense, rescue aid and other areas during the quarter failed to offset the near shutdown of state and local spending, which had been growing at rates over 6 percent. Meanwhile, business spending on plants and equipment continued to plummet at double-digit rates, as did both imports and exports.
Robert Dederick, economic consultant with Northern Trust Co., said he was surprised that output didn't fall more dramatically a development that limited losses in the financial markets yesterday.
"Clearly the economy didn't roll out of bed in the third quarter," he said. "The springs gave way and we sagged some, but we seem to have done no more than that."
Mr. Dederick remains optimistic that, while the economy is in recession, the downturn will be short and shallow like the one in 1990-91.
The downturn should be limited, he said, because both manufacturing and technology already have been in recession for a year and those sectors have eliminated many of the excess inventories they had to work through before they could start ramping up production again.
Meanwhile, consumers may still decide to spend those tax rebates and in fact, may already be doing so to pay for their recent spending spree on cars that automakers are offering with seemingly irresistible zero-rate financing.
"The consumer doesn't seem to be really taking to the hills," he said, although consumers are shifting their buying patterns by spending more at car dealerships and discount stores and less on luxuries and discretionary items.
Other economists said the decline appeared deceptively mild, however.
David Orr, chief economist with First Union bank, said a larger decline was masked by a "statistical quirk" caused by massive insurance payments from overseas insurers in compensation for the World Trade Center disaster last month. Excluding that quirk, he said, the economy fell at a steeper 1 percent rate.
"Don't assume that the economy is holding up better than expected," he said. "In our view, when this recession is officially dated, it will be from the second quarter, not the third quarter."
While many people will blame the terrorist attacks for throwing the economy into recession, David Baker with the Center for Economic Policy Response, said yesterday's report shows that a downturn already was well under way led by the collapse of business investment spending and the depressing effect on consumer spending from a year and a half of stock market losses.
The effect of the attacks, which are only partially shown in yesterday's report, "make the economic picture much worse" and will accelerate the downward trends seen in the report, he said.
The economy in the current quarter will not benefit from further tax rebates, he said, and consumer spending could be depressed further by the recent decline in their housing wealth as well as their stock wealth.

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