- The Washington Times - Friday, August 2, 2002

Given the generally upbeat analysis of the economy offered last month by Federal Reserve Chairman Alan Greenspan and the optimistic expectations of economists in general, the 1.1 percent annual growth rate of Gross Domestic Product (GDP) for the second quarter, which the Commerce Department reported Wednesday, was a keen disappointment. Among economists, the expectation of second-quarter growth ranged between 2.1 percent and 2.5 percent. For the year, the Fed has projected a growth rate between 3.5 percent and 3.75 percent.
With the first-quarter's growth rate revised downward from 6.1 percent to 5 percent, the economy's annual growth rate will have to be 4.2 percent during the next two quarters to meet the Fed's modest growth target for the year. That may be a tall order. After all, the growth rate for consumer spending, which had been the economy's backbone during the 2001 recession and thereafter, has sharply decelerated from 6 percent for 2001's fourth quarter to 3.1 percent during the first quarter to a very disappointing 1.9 percent in the second quarter.
Even more worrisome to the Fed has to be the disappointing trend in final demand, which deducts inventory changes from GDP. As Mr. Greenspan has repeatedly emphasized in congressional testimony since the economy began its slowdown, it is growth in final demand that determines whether economic recovery will be sustainable.
"[T]he strength of final demand will play its usual central role in determining the vigor of the expansion," Mr. Greenspan told Congress in July. "While final demand has been increasing, the pace of forward momentum remains uncertain." Indeed, while journalists concentrated on Mr. Greenspan's use of the phrase "infectious greed" during his testimony to characterize the current spate of Wall Street scandals, they essentially ignored the mundane "Monetary Policy and Economic Outlook" report accompanying his testimony. Indicative of the importance the Fed gives to final demand, that five-page report mentioned the concept no fewer than nine times. However, according to the latest data, the "pace of forward momentum" has not only slowed considerably, it has now shifted into reverse. Specifically, final demand grew by 4.2 percent during last year's fourth quarter, decelerated to 2.4 percent during the first quarter and declined by 0.1 percent during the second quarter.
With final demand falling into negative territory and inflation remaining subdued the consumer price index has increased by only 1.1 percent over the past 12 months, compared to 3.2 percent for the previous 12 months it may be time for the Fed to consider reducing short-term interest rates at its next meeting on Aug. 13.

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