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U.S. economic growth slows
First reading of 2Q gross domestic product shows growth slowed to 1.1% from revised 5.0% in 1Q.
July 31, 2002: 1:52 PM EDT

NEW YORK (CNN/Money) - A slowing in consumer spending put the brakes on U.S. economic growth in the second quarter, raising the threat of a new recession or at least a slower recovery in the second half of the year than had been hoped.

A Commerce Department report on U.S. gross domestic product, the broadest measure of goods and services produced and purchased in the nation, came in much weaker than expected Wednesday. Revisions of earlier data showed a weaker than previously reported rebound in first-quarter growth and confirmed the popularly held view that had been challenged by official government data until Wednesday -- that the economy suffered through a recession last year.

The Commerce Department said the second quarter GDP showed a 1.1 percent annual growth rate. That's less than half of the consensus forecast of a 2.3 percent growth rate in the quarter, according to a survey of economists by

The government report also revised the first-quarter growth rate to 5.0 percent, down from its previous reading of 6.1 percent.

Economists debated how much significance to attach to the report, which is simply the first of several readings of the closely watched measure of economic activity during the period. But the report, coming on the heels of a survey Tuesday that showed weaker than expected consumer confidence, coupled with a report later Wednesday that showed less growth in Midwest manufacturing than forecast, raised concerns about the outlook for a recovery the second half of the year and helped send U.S. stock markets lower.

Daiwa Securities America Chief Economist Mike Moran pointed out that final sales, a measure of demand by consumers and businesses, fell 0.1 percent in the period, with the gain in GDP coming from a increase in inventories during the period after six quarters of lower inventories.

"The results were not especially promising for the outlook," said Moran. "Final demand was sluggish, and the slippage in the stock market could lead to caution on the part of consumers and businesses in coming quarters. We still look for the economy to expand, but today's report does not suggest that vigorous activity is on the horizon."

President Bush weighed in on the data, saying that while the economy is moving in the right direction, more needs to be done.

"The growth isn't strong enough," he said in comments to reporters, saying it shows the need for some items on his legislative agenda, including a trade bill, terrorism insurance bill, and making tax cuts passed last year permanent.

But he said he is optimistic about the outlook for the economy.

"The facts are inflation is low, interest rates are low, productivity is high," he said. "I feel strongly having been through three quarters of negative growth when I first came into office, we've now had three quarters of positive growth. I think it's the right trend."

Threat of a "double dip"

Some economists aren't as sure of continued growth, suggesting there is now the threat of a so-called "double dip" recession, as the economy goes into reverse again soon after halting last year's contraction. But most economists weighing in Wednesday, even some concerned about the risk of a double-dip recession, said they expect slow growth to continue for the foreseeable future.

"This report tells us that the economy continues to struggle from a case of slow growthitis," said Anthony Chan, chief economist with Banc One Investment Advisors. "It tells us that the weakness in net new job creations was telling us the truth, namely, that the economy will continue to ride on a local train rather than on the express train for quite some time."

The data showed personal consumption grew by 1.9 percent in the second quarter, compared with a 3.1 percent gain in the first quarter. Consumer spending on durable goods, such as cars and appliances, rebounded to a 2.4 percent gain in the quarter, following a 6.3 percent decline in the first quarter. But spending on the broad range of nondurable goods declined 0.6 percent.

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CNNfn's Valerie Morris explains the U.S. gross domestic product and how it's measured.

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Mark Vitner, senior economist for Wachovia Securities, said while that level isn't strong, it is still growth in overall consumer spending, and he believes it is too soon to write off consumers as a continued engine for the nation's economic growth.

"It's hard to say that consumer behavior is changing with one quarter's data," he said. "Even the consumer confidence survey, which was taken at a time when the stock market was at its weakest point, showed more people intending to buy cars and houses. Chain store numbers are holding up reasonably well."

He said that the Federal Reserve is unlikely to change interest rates due to Wednesday's economic report.

"I don't think a rate cut is even on their radar screen, and I don't think raising rates is even on their radar screen," he said.

Housing prices have continued to gain even through last year's economic downturn, helped by low interest rates and consumers shifting investments from a declining stock market into real estate. The GDP report showed a 5 percent annual growth rate in residential real estate investment in the quarter, although that was down from the 14.2 percent growth rate in the first quarter.

Businesses showing signs of growth

Some signs surfaced of a turnaround in spending by businesses in the quarter, however. Investment in equipment in software grew 2.9 percent, marking the first gain in that measure since the third quarter of 2000.

Vitner said it was encouraging that private businesses increased inventories by $1.0 billion in the second quarter, ending a period during which business burned through existing inventories due to a weak sales outlook. Inventories decreased $28.9 billion in the first quarter and $98.4 billion in the fourth.

"The rebuilding of inventories has just started," he said. "The level of inventories relative to sales is lowest on record. That's the number one reason I don't think the economy is in much danger of falling back into recession."

Data finally show '01 recession

The government's revised GDP readings for 2001 confirmed what had been widely acknowledged by economists -- that the U.S. economy underwent a recession last year, which is defined as two or more quarters of declines in economic activity.

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1Q GDP revised up

The first quarter of 2001 was revised down to show an economic contraction of 0.6 percent at an annual rate from the previous reading of a 1.3 percent growth rate, the second quarter was revised to a negative 1.6 percent rate from a 0.3 percent gain, and the third quarter was revised to a negative 0.3 percent rate rather than the negative 1.3 percent rate. The fourth quarter had a 2.7 percent growth rate.

"It confirms that this recession in 2001 was not particularly mild or as short as some folks had thought," said Vitner. "We were expecting at least two negative quarters, and the fact we had three is a little bit of a surprise. That helps explain why we're having so much difficulty generating some positive momentum right now. The economy was weaker than we had thought."  Top of page

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