WSJ, Aug. 1, 2002 Economic Growth Slows Far More Than Expected
By GREG IP Staff Reporter of THE WALL STREET JOURNAL WASHINGTON -- The nation's economic recovery is weaker than previously believed and last year's recession was deeper, raising the chances that the still-fragile recovery could stall. New government statistics revealed fresh signs of weakness in key sectors, including commercial real estate and government spending. Many experts still say a so-called double-dip recession is only a remote possibility, but concerns about a near-term slowdown are likely to shadow the nation's markets and businesses. The Commerce Department said economic output grew at a 1.1% annual rate in the second quarter, down sharply from a 5% rate in the first quarter, a figure that itself was revised from an earlier-reported 6.1%. The growth was so anemic that the economy would have contracted had businesses not restocked inventories after months of depleting them in anticipation of slower sales. Extensive Revisions The Commerce Department also made extensive revisions to data from previous years, most notably indicating that last year's recession was longer and deeper, with the economy shrinking in each of the first three quarters instead of just the third, as originally thought. The revisions have significant future implications. Previously, optimists argued that technological advances would allow productivity and profits to grow much more quickly without fueling inflation than in earlier decades. The new numbers have taken some of the bloom off that rosy view, though few argue the U.S. is heading back to the much pokier 1970s-era economy. Blue-chip stocks initially plunged on the news, but recovered all their losses, with the Dow Jones Industrial Average closing up a modest 57 points at 8737. (See a roundup of Wednesday's market activity.) Though mostly bleak, Wednesday's economic indicators weren't all bad. Much of the drop-off in growth was due not to weak spending but to a shift toward spending on imported goods instead of domestically produced ones. More recent data suggest economic activity is still advancing in July, though in fits and starts. "The economy expanded modestly in recent weeks, with an uneven performance across sectors," the Federal Reserve's periodic survey of economic conditions, known as the beige book, reported Wednesday. Yet the economy continues to face strong headwinds. Commercial construction slumped 14% in the second quarter, and state and local spending shrank 1.1%, two sectors that in stronger times pump significant cash into the economy and support consumer spending. Greater Risk Those factors increase the risk that the recent stock-market swoon will set back consumers, whose spending growth slowed to 1.9% in the second quarter from 3.1% in the first, and suffocate a fledgling recovery in business spending on equipment and software. Such spending advanced 2.9% in the second quarter after six straight quarters of decline. "It just means that the woes of the stock market this summer hit on a more vulnerable economy, and that's troublesome," said Jade Zelnik, chief economist at Greenwich Capital Markets. "Clearly, you have to give a somewhat higher probability to a double dip even if it's not what you might consider the most likely scenario." A double-dip recession is a protracted downturn punctuated by at least one quarter of growth. Clearly worried about the political implications of the sluggish economy, President Bush put a glass-half-full spin on the numbers. "We're heading in the right direction," he told reporters. "But the growth isn't strong enough, as far as I'm concerned." The administration's top economic policymakers were sanguine. Glenn Hubbard, chairman of the Council of Economic Advisers, said the second quarter was weak partly because lots of spending that normally would occur in the second quarter happened in the first. On average, growth in the first half of the year was about 3% at an annual rate. That "seems about right given the shallowness of recession," Mr. Hubbard said. "The bet has always been for a turnaround in business investment in the second half. "The bet has always been for a turnaround in business investment in the second half. I see no reason to suggest that won't be the case." Fed officials also have been relatively confident the stock-market plunge won't derail the recovery, though they acknowledge it has increased the uncertainty. "Most people, whatever their forecast was, would take a little bit off" because of the market's fall, said Jack Guynn, president of the Federal Reserve Bank of Atlanta, in an interview this week. "But the greatest probability is we will continue to get moderate growth" of 2% to 3% in the second half, accelerating next year, he said. That means that the Fed is unlikely to cut interest rates further as long as the financial markets keep functioning relatively well. But the Fed also probably has more time before it has to raise the rates from their current, 40-year lows. Inflationary pressures have probably receded slightly, Mr. Guynn said. He warned that the Fed's current low interest rates aren't "consistent with low inflation" in the long run, adding, "but that's a problem for another time, another day." The beige book, prepared for Fed policymakers' meeting on Aug. 13, found retailers had a "general sense of optimism about the near-term outlook, though a number of districts expressed concern [that falling stock prices] could affect the real economy." Manufacturing activity had "improved modestly," though it was "continuing to struggle" in some districts. Residential real estate was strong in all districts, according to the Fed report, but anecdotal signs of a cooling are beginning to show up in some hot markets. (Please see related article.) "Commercial real estate continued to struggle," the report said. Offsetting these drags, the industrial sector is continuing to recover from the battering it took during the recession. Renewed sales incentives, including no-interest loans, appear to have boosted auto sales in July, the Fed's beige book found. The revisions by the Commerce Department's Bureau of Economic Analysis show that while GDP did decline through the first three quarters of 2001, the total loss of output, at 0.6%, tied for the second-mildest recession since 1955. But the data will likely put an end to the debate over whether there really was a recession. A committee of academic economists from the nonprofit National Bureau of Economic Research, considered the authority on business cycles, declared last November the economy was in recession for the first time in a decade. But many policymakers questioned that, because recessions are popularly defined as two or more negative quarters of growth. Now, it appears that the U.S. would have experienced a recession by the two-negative-quarters definition even without the Sept. 11 terrorist attacks. The revisions also set back the most optimistic projections that the U.S. is able to grow much more quickly thanks to higher productivity, the key to real incomes over time. Economists had marveled at how productivity kept growing briskly throughout the recession. With growth revised down to 2.1% during 2000 and 2001 from 2.7%, due primarily to lower business spending on software and equipment and less big-ticket consumer spending, productivity probably wasn't as impressive. Robert Gordon, an economics professor at Northwestern University, estimates productivity grew just 0.5% a year between the spring of 2000 and the summer of 2001, instead of the previously estimated 1.4%. Still, even with the revisions, the economy grew much faster from 1995 to 2000 than previously thought possible, at 3.8% a year, compared with 2.8% from 1973 to 1995.
