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07/27 13:45

U.S. Economy: 2nd-Quarter Growth Slowest in 8 Years (Update2)

By Siobhan Hughes and Carlos Torres

Washington, July 27 (Bloomberg) -- The U.S. economy grew in the second quarter at the slowest rate in eight years as business investment slumped and consumer spending cooled, a government report showed. Other signs pointed to a rebound later this year.

Gross domestic product, the total of all goods and services produced in the U.S., increased at a 0.7 percent annual pace in the April-June period, down from 1.3 percent in the first quarter, the Commerce Department said. Second-quarter growth was the weakest since a 0.1 percent decline at the start of 1993.

The quarter was the fourth in a row with growth at less than 2 percent, which last happened during the 1990-1991 recession. The report, which also showed inflation was tame, may make it easier for Federal Reserve Chairman Alan Greenspan to support another interest-rate cut beyond the six already made this year.

``It's an outright collapse in business investment spending that's killing the economy,'' said Avery Shenfeld, senior economist at CIBC World Markets Inc. in Toronto. ``The Fed needs to keep consumers in gear while this mess is worked out.''

Analysts expect lower borrowing costs, along with falling energy prices and tax rebates that are already in the mail, to spur growth later this year. The report also showed businesses made progress clearing unwanted stockpiles, opening the way for manufacturers to rev up production in coming months.

Home buying, aided by cheaper mortgages, will also buoy growth, as owners spend money on furnishings or draw on refinancing and home equity loans for cash. New home sales rose 1.7 percent in June to 922,000 at an annual rate, the record seventh straight month of a sales pace in excess of 900,000, the Commerce Department also reported today. Existing homes sold last month at the fifth fastest pace on record.

Consumer Spending Slows

Analysts had expected a 1 percent growth rate for the second quarter after a previously reported 1.2 percent pace in the first. The U.S. Treasury's 10-year note rose 3/16 point, pushing down its yield 3 basis points to 5.1 percent, after the GDP was released. Two-year notes, the most sensitive to rate moves by the Fed, rose 1/32, pushing the yield down 3 basis points to 3.88 percent.

Today's report also reflects government benchmark revisions. Those show that the economy grew 4.1 percent last year, slower than the previously reported 5 percent. GDP grew 4.1 percent in 1999 and 4.3 percent in 1998.

Consumer spending, which accounts for two-thirds of the economy, grew at a 2.1 percent annual rate in the second quarter, the slowest since the second quarter of 1997, after a 3 percent rate of growth in the first. Spending on non-durable goods, such as clothing, food and fuel, cooled.

Investment in equipment and software fell at a 14.5 percent annual rate in the second quarter, the largest drop since the second quarter of 1982, after declining at a 4.1 percent annual rate in the first quarter. It was the first time such spending has declined for three straight quarters since 1982-1983, when the economy was in recession.

Capital Spending `Will Soften'

Cisco Systems Inc., the No. 1 maker of computer networking gear, Hewlett-Packard Co., the No. 2 computer maker, and Lucent Technologies Inc., the biggest U.S. maker of phone equipment, have suffered from the spending declines. These companies are among many that have fired workers after customers canceled or delayed orders and profits slumped.

``Capital spending will continue to soften because of excess supplies of telecommunications equipment,'' said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis, before the report. ``On the other hand, the tax rebate that we are beginning to get could help consumers buy small-ticket items, eventually boosting orders later this year.''

New orders for telecommunications equipment such as wireless phones declined 21 percent in June, the last month of the quarter, and were down 61 percent from June 2000, the department reported yesterday.

Businesses Trim Inventories

Businesses pared inventories by $26.9 billion in the second quarter after a $27.1 billion reduction in the first quarter. The declines may set the stage for a pick-up in production in months ahead.

``It probably heralds better employment'' and is one reason ``we can look forward to a stronger economy,'' Sohn said.

Analysts surveyed by Bloomberg News expect growth to increase to a 2.9 percent annual rate by the fourth quarter.

Greenspan, in testimony to lawmakers this week and last, said the Fed's policy-setting Open Market Committee was prepared to cut interest rates further this year if signs of weakness persist. The committee so far this year has reduced the overnight bank rate by 2 3/4 percentage points to 3.75 percent, the lowest in seven years.

Consumers have maintained their optimism amid signs of slower growth. The University of Michigan's index of consumer sentiment for July was 92.4, little changed from 92.6 in June. The measure of expectations increased to 88.4 this month from 86.9 in June.

Inflation Remains Tame

Tame inflation already makes it easier for central bankers to further cut lending rates if they choose. The GDP price deflator rose at a 2.3 percent annual pace, compared with 3.3 percent in the first. The personal consumption expenditures price index, watched by Greenspan, rose at a 1.7 percent annual pace, down from3.2 percent in the first.

Real final sales, which exclude inventories, rose at a 0.7 percent annual rate, after rising at a 4 percent rate in the first quarter.

Non-residential fixed investment, which includes commercial construction as well as business equipment and software, fell at a 13.6 percent annual rate in the second quarter. That followed a 0.2 percent rate of decline in the first quarter. Spending on non- residential structures, such as office buildings, industrial parks and hotels, fell at an 11.2 percent annual pace.

By contrast, residential fixed investment, reflecting demand for houses and apartments, increased at a 7.4 percent pace after a gain at 8.5 percent in the previous quarter.

Exports fell by $30.2 billion and imports shrank by $44.9 billion. That left a net trade deficit of $349.1 billion, down from $363.8 billion in the first quarter.

Government spending increased at a 5.5 percent pace, compared with a 5.3 percent rate in the first quarter. State and local governments led the gain, with outlays up 7.5 percent at an annual rate, the fastest pace since the first quarter of 1986.

Adjusted for inflation, GDP totaled $9.352 trillion in the second quarter when measured at an annual rate. In the first quarter, GDP totaled $9.335 trillion.

-- (M@rket.trends), July 27, 2001