Expansionary Institute

Michael Zey
futurist3000@aol.com

By Glenn Somerville

 
WASHINGTON (Reuters) - New government figures on Thursday showed U.S. economic growth slowed sharply in the summer to its weakest pace in four years, as a political debate about the risks of recession heated up.

The Commerce Department said gross domestic product or GDP, the broadest measure of economic activity within U.S. borders, grew at a revised 2.2 percent rate in the July-September third quarter.

That was marked down from the 2.4 percent that the government estimated a month ago, because overseas sales were weaker than it thought then. It was the most lackluster quarterly growth since 2 percent in the third quarter of 1996 and followed a sparkling 5.6 percent rate of second-quarter expansion.

Other reports showing rising claims for jobless pay and slumping manufacturing activity along the East Coast added to signs that economic boom times were over and fanned a war of words about how serious the slowdown may become.

Senior Clinton administration officials angrily charged that top members of President-elect George W. Bush's team were "talking down" the economy in a campaign for tax cuts that could backfire by spreading self-fulfilling fears of a sharp slump.

"What you're seeing is President-elect Bush and his team actually talking down our economy, actually probably injecting more fear and anxiety into the economy than is justified," said Gene Sperling, a White House economic adviser.

REALISM, OR SCARE-MONGERING?

But Vice President-elect Dick Cheney said later the incoming Bush administration, which will take power in January, had to be realistic. Bush campaigned on a program of offering a $1.3-trillion tax cut to fuel U.S. prosperity.

"There does seem to be a lot of evidence out there that in fact the economy has slowed down some," Cheney said in a meeting with reporters. "Whether or not this ultimately results in a recession, that is negative real growth, nobody knows at this time."

The economy has grown steadily since the last brief recession in 1990-91, creating tens of millions of jobs that the Clinton administration wants full credit for while ensuring that any future weakening is laid on the doorstep of the incoming Bush administration.

The rapidity of the slowdown in national output is raising concern among the highest councils of economic policymakers. The Federal Reserve -- the U.S. central bank -- this week said it was more concerned now about an excessive downturn than about inflation as it signaled it was preparing to cut interest rates in the new year.

Late on Thursday, Ford Motor Co. said it was lowering its profit estimates for the rest of this year and scaling back production for the beginning of 2001 because of weak demand. General Motors Corp. said it will close five plants during the first week of January and shut down a sixth one for a day as sales of new cars keep slumping.

The Labor Department said on Thursday that new claims for unemployment pay jumped by 34,000 last week to 354,000. In some states, layoffs were beginning to show up in the auto industry, a reflection of slumping sales as carmakers shutter plants temporarily.

BRAKES ARE STILL ON FOR ECONOMY

The slowing appears to be continuing.

The regional Federal Reserve Bank of Philadelphia said manufacturing activity in the U.S. mid-Atlantic region contracted in December -- a third bleak month after sluggish growth in November and another contraction in October.

Its index of business conditions, calculated by subtracting companies that report decreases in particular measures like prices and orders from those that have increases and making seasonal adjustments, fell 6.1 after rising 5.2 in November.

Economist Paul Kasriel of Northern Trust Co. in Chicago said rising jobless claims and the continuing weakening in manufacturing clearly reflect an economy under stress after years of breakneck borrowing and spending.

"It's almost like we're on a knife-edge," Kasriel said, made especially so because of high levels of consumer debt and corporate borrowing for expansion and for share buybacks.

"Right now, there is no sign of recession, but conditions could deteriorate very quickly, he said, adding that he still expected about 3 percent GDP growth in the current quarter, slowing to 2.5 percent in the first half of 2001.

Financial markets, while still jittery about the economy's direction, regained some equilibrium on Thursday. The Dow Jones industrial average closed up 168.36 points at 10,487.29, retracing Wednesday's loss. But the tech-laden Nasdaq composite index eked out only a 7.34-point gain to end at 2,340.12, well off its high for the day.

Bond prices also ended higher. The 30-year U.S. Treasury bond rose 8/32 to yield 5.41 percent, while the inflation-sensitive 10-year note added 12/32 to yield 5.04 percent.

The rate of price rises slowed during the third quarter, as the personal consumption expenditure gauge favored by Fed Chairman Alan Greenspan advanced at a revised annual rate of 1.8 percent. A month ago, Commerce had estimated prices went up at a 2.1 percent rate, the same as in the second quarter.

Corporate profits suffered as the economy slowed in the third quarter.

After-tax profits totaled $654.4 billion and grew at only a 0.6 percent annual rate, the weakest performance since the closing quarter of 1998 when they contracted amid a global slowdown stemming from an Asian financial crisis. Profits had grown at a 2.5 percent rate during the second quarter.

18:00 12-21-00

Copyright 2000 Reuters Limited.  All rights reserved.  Republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Reuters.  Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.