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U.S. growth slows
July 27, 2001: 12:57 p.m. ET

GDP 2Q rates falls to 0.7%, lower than expected, as slowdown continues
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NEW YORK (CNNfn) - The U.S. economy grew at the slowest rate in more than eight years in the second quarter as businesses slashed spending, the government said Friday, the latest signs of malaise in the world's largest economy.

The news, while worrisome, may mean the economy is near a bottom and can avoid a recession especially since the Federal Reserve is still likely to cut interest rates again when the central bank's policy-makers meet next month, analysts said.

"While we're still skating on the edge of recession, I think the outlook for the economy is now quite encouraging," said Bill Cheney, chief economist at John Hancock Financial Services. "We may not feel great right now, but if a recession is a nasty case of the flu, the good news is that all we're suffering now is just a really bad cold."

Gross domestic product (GDP) the broadest measure of the nation's economy grew at a 0.7 percent annual rate in the quarter, the Commerce Department reported, compared with revised 1.3 percent growth in the first quarter and a revised 5.7 percent rate a year earlier. Economists surveyed by had forecast a 0.9 percent reading for the quarter.

It was weakest since the economy shrank 0.1 percent in the first quarter of 1993. A recession is typically defined as at least two straight quarters of contraction in the economy.

Separately, the Commerce Department said new home sales rose 1.7 percent in June to a seasonally adjusted 922,000 annual pace, compared with a revised 0.2 percent gain to 907,000 in May. Analysts surveyed by expected home sales at a rate of 925,000.

And the University of Michigan's final July consumer sentiment index, a key measure of consumers' confidence in the economy, edged down to 92.4 from 92.6 in June, according to a Reuters report. Analysts polled by expected a reading of 93.7.

On Wall Street, stocks traded mixed at mid-session as corporate profits continued to worry investors. U.S. Treasury bonds rallied, driving interest yields lower, as investors bet the Fed would cut rates again. The Fed has cut its target for short-term rates six times this year, from 6.5 percent to 3.75 percent, in a bid to boost the economy and ward off a recession.

The second-quarter GDP reading was preliminary and will be revised in later reports. Based on new calculations, the government also cut its figure for full-year 2000 growth to 4.1 percent from 5.0 percent, 1999 GDP to 4.1 percent from 4.2 percent, and 1998 GDP to 4.3 percent from 4.4 percent.

Economists thought Friday's GDP data solidified expectations of another Fed move at its next meeting, scheduled for Aug. 21.

"There is nothing to stand in the way of a Fed rate cut of [a quarter-percentage point] in August," said John Herrmann, chief U.S. economist at

Consumer spending, which makes up two-thirds of the U.S. economy and has kept it afloat during a drastic slowdown in business spending, eased to a 2.1 percent growth rate, compared with 3 percent in the first quarter.

But capital spending fell a whopping 13.6 percent, compared with a drop of 0.2 percent in the first quarter. It was the steepest reduction in business spending since the spring of 1982, when the country was bogged down in the worst recession of the post-World War II period.

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The spending slowdown, together with a steep drop in production and miserable corporate results, have led to hundreds of thousands of job cuts this year. If that trend continues, consumer spending could be threatened, and a recession would become more likely.

Still, economists said consumers are holding strong for now, despite the reported drop in the University of Michigan's consumer sentiment index.

"The level of economic optimism is still quite high, especially given the continued sluggishness in the economy, rising joblessness, corporate profits warnings and equity market volatility," said Steven Wood, economist with FinancialOxygen.

Another rock of strength in the turbulent economy, the housing market, continued to chug forward. The sale of new homes in June was 16.3 percent higher than a year ago, the biggest year-on-year increase in new home sales since December 1998.

And the new home sales level was above 900,000 for the seventh month in a row, the first time this has happened since the Commerce Department began keeping the statistics in 1963.

"It's a continuing surprise, given weakness in other sectors of economy," said Scott Brown, senior economist at Raymond James. "Normally, the housing sector is very sensitive to the overall business cycle."

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Strong consumer confidence, income stability and lower mortgage rates have contributed to shore up the housing market during the current slowdown.

Also encouraging was that a key inflation gauge, the price index for personal consumption expenditures, rose by a mild 1.7 percent, the smallest gain since the first quarter of 1999. The index, closely watched by the Fed, increased 3.2 percent in the first quarter.

Without the threat of inflation, the Fed is free to cut rates as much as necessary to keep the economy moving. "There's a lot of good news on the inflation front," Brown said. "It certainly paves the way for the Fed to cut rates again." graphic

-- from staff and wire reports


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