- The Washington Times - Thursday, August 1, 2002

Economic growth fell sharply to 1.1 percent in the spring quarter, and the recession last year was deeper and longer than previously estimated, the Commerce Department reported yesterday.
The weak growth detailed in the report, compounded by a stock-market plunge in recent weeks that has cut deeply into consumer confidence, raised worries that the economy could fall back into recession after posting three quarters of growth.
But the Bush administration and economists saw a silver lining in the report: a revival of export growth after deep declines during the recession and a tentative return of business spending on inventory and technology equipment, which had been absent for nearly two years.
President Bush played down the major drop in growth seen in the report, noting that growth averaged 3 percent in the first half of the year when the spring's 1.1 percent rate is combined with the first quarter's 5 percent.
He also noted that the economy has improved steadily since the slump in the first three quarters of last year, which coincided with his first nine months in office.
"We're heading in the right direction," he said after a 45-minute meeting with his Cabinet. He described his "own consumer confidence index" as "positive," though he added that "growth isn't strong enough, as far as I'm concerned" and could be better if Congress passed trade and terrorism-insurance legislation.
Many private economists expect the economy to continue to sputter along, despite the historic lows set in the stock market last month and sharp decline in confidence.
"The snapshot for the second quarter was discouraging, but the entire movie should have a happy ending," said Sung Won Sohn, chief economist at Wells Fargo & Co.
The weakness during the spring was primarily the result of a 24 percent surge in imports, which overwhelmed a 12 percent gain in exports, and a reluctance by businesses to add much to their inventories until they saw a rise in consumer spending.
Consumer spending slowed to a still-respectable 1.9 percent growth rate, down from 3.1 percent in the first quarter. And the long-awaited recovery of business-equipment spending, which was up by 2.9 percent, should gather momentum as many businesses replace outdated computers and other high-tech machinery that they held on to during the recession, he said.
"Unfortunately, the stock market has had a dampening effect on consumer and business spending, but the overall trajectory of economic growth should not change materially," Mr. Sohn said.
But some analysts said the report's strong points were drowned out by accumulating evidence of a stagnating and decelerating economy.
"The odds of a double-dip recession have increased," said Mark Vitner, economist with Wachovia Securities, noting that the report shows the economy losing momentum rather than picking up speed, as it normally does at this point in a recovery.
"This report must be seen as bad news on several accounts," said Dean Baker of the Center for Economic Policy Response. "The economy is currently quite weak, with final demand essentially flat. More importantly, the prospects are for slower growth in the immediate future."
Consumer spending is not likely to return to robust levels, as American households are saddled with record debt and have seen little wage and employment growth for more than a year, he said.
Equipment investment may edge higher, but at best this will balance declines in business spending on new buildings and plants, which is in a downturn that won't reverse any time soon, Mr. Baker said.
Meanwhile, federal spending is likely to slow after providing a 7.3 percent boost in the last year. And state and local governments will be a drag on growth as they impose big budget cuts and tax increases after having contributed to spending growth during the recession, he said.
Housing, another bright spot in the economy, appears to be cooling, growing by 5 percent after a 14 percent jump in the first quarter, economists said.
The department's revisions for 1999 through 2001, which replace previous estimates with more complete information gleaned from businesses and consumers, also show that the economy did not perform as well in recent years as was believed.
Largely as a result of lower-than-estimated consumer and technology spending, the department now says that economic output shrank in the first three quarters of last year by 0.6 percent, 1.6 percent and 0.3 percent, respectively.
As a result, economic output dropped by 0.6 percent during the recession twice as large as previous estimates, though that would still match the magnitude of the 1969-1970 recession, previously the mildest on record.
The growth of productivity and profits in earlier years also was much lower than previously reported, suggesting that the much-heralded "new economy" of supercharged growth for both businesses and consumers may have been mostly a statistical illusion, Mr. Baker said.
The National Association of Business Economists registered a protest over the revisions showing that the 2001 recession started and ended earlier than previously reported, blaming Congress for not giving the Bureau of Economic Analysis the funding it needs to get the figures right the first time.

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