- The Washington Times - Thursday, January 31, 2002

The economy eked out a sliver of growth in the final quarter of 2001 as consumers went on an auto-buying binge and the government ratcheted up spending on defense and homeland security.
The unexpected 0.2 percent rise in economic output reported by the Commerce Department yesterday suggests the economy is recovering from what now appears to be the mildest recession in U.S. history.
Should the budding recovery hold up in coming months, the economy would have declined in only one quarter, and the nation's 280 million consumers who spent voraciously at a 5.4 percent rate at the end of the year will have escaped a punishing business downturn that is taking a heavy toll in bankruptcies.
The Federal Reserve cited the promising outlook for recovery yesterday in deciding not to cut interest rates for a 12th consecutive time, signaling that the central bank is satisfied that its aggressive, year-long campaign to revive the economy is finally bearing fruit.
President Bush hailed the growth report as positive news, noting that the unprecedented 81 percent surge in consumer spending on cars during the quarter was due in part to last year's tax rebates and increases in take-home pay. Consumers drained their checking accounts of their tax windfalls, reducing the savings rate to a paltry 0.5 percent.
But Mr. Bush cautioned against complacency, arguing that more legislation is needed to help the unemployed and to spur job creation. Unemployment is expected to continue rising even as a recovery sets in.
"I remain concerned about the economy," he said. "We cannot take growth and job creation for granted."
The Fed also voiced qualms about the durability of the recovery in a statement after a two-day meeting of its rate-setting committee. While "the forces restraining the economy are starting to diminish," it said, "the degree of any strength in business capital and household spending is still uncertain."
While consumers emptied their wallets on new cars and all levels of government went into overdrive with a 9 percent increase in spending, businesses slashed their spending on new plants and equipment by 12.8 percent, continuing a year-long retrenchment.
Since such business investment spending was a key source of strength during the 1990s expansion, Fed Chairman Alan Greenspan has warned that no recovery is complete without a revival of corporate spending as well as the profits that support it.
Businesses have just finished reporting a fifth straight quarter of falling profits, and such key corporate players as Intel, Eastman-Kodak and Corning have announced plans to cut investment spending from the last year's already-low levels.
"Businesses simply can't invest what they don't have," said Richard Yamarone, economist with Argus Research Corp.
Mr. Yamarone called the question of a turnaround in the business outlook "a major unknown" that could prompt further rate cuts by the Fed if it fails to materialize later this year.
The Fed also could be prompted into action "if the ever-resilient consumer decides to curtail spending amid rampant unemployment," he said.
Some economists worry that consumers went deeply into debt purchasing cars and houses last year, and that will cause them to pull back on spending this year posing further risks to the economy.
The most promising development resulting from last fall's spending binge was that businesses were able to clear unsold inventories from their showrooms and stores at a record $121 billion annual rate. That means their stocks are now so low that they must ramp up production to replenish them.
Even if businesses choose just to keep stocks at today's low levels, the resulting increase in production will add 5 percentage points to growth in the current quarter and become an important catalyst for recovery, economists say.
David Orr, chief economist with Wachovia Securities, said he is concerned that the economy remains so weak outside of auto sales and government spending, which cannot increase at a 9 percent rate every quarter.
Housing, which had supported the economy throughout much of last year's downturn, declined at a 6.5 percent rate in the last quarter, he noted.
"While the headline rise seems encouraging, in our view, the breadth was poor," he said.
And when the Commerce Department's adjustment for inflation is excluded, economic output actually declined 0.1 percent to $10.221 trillion, he noted the first such decline since the 1982 recession.
"It is not clear that there is a basis for healthy growth, even if the economy may technically emerge from its recession," said Dean Baker of the Center for Economic Policy Response.
"With a savings rate of just 0.5 percent, it is likely that consumers will curtail spending in the future," Mr. Baker said.
"Weaker consumption, coupled with declining state and local spending, is likely to sharply limit growth in the next year," he said.

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