WASHINGTON — The economy endured its weakest growth rate in eight years in the spring as American companies cut back on investment spending by the biggest amount in two decades.
Resilient consumers kept the economy afloat, although just barely, as the gross domestic product – the country’s total output of goods and services – eked out a tiny 0.7 percent growth rate in the April-June quarter.
Looking for glimmers of hope in the midst of a slowdown that began last summer, many analysts said they believed the country has now passed the maximum danger point for a recession. They forecast steady improvement for the rest of this year.
“I think we have seen the bottom for this economic cycle,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. “Consumers have prevented the economy from sliding off a cliff and now they will be getting some help.”
Sohn and other analysts pointed to falling interest rates, lower energy prices and the $40 billion in tax rebate checks taxpayers have started to receive as positive developments.
“While we’re still skating on the edge of a recession, I think the outlook for the economy is now quite encouraging,” said Bill Cheney, chief economist at John Hancock Financial Services in Boston. The current economic expansion is now in a record 11th year.
President Bush, who was accused by Democrats of talking down the economy as a way to sell his tax cut program, said that Friday’s GDP report showed how important it was that Congress approved a package including rebate checks to get relief into consumers’ hands quickly.
“The economy is puttering along. It is not nearly as strong as it should be,” Bush told members of the Future Farmers of America at the White House.
Wall Street saw the weak GDP report as confirmation of the string of dismal second quarter earnings reports it has been seeing. Lawrence Lindsey, the president’s chief economist, said in a CNN interview that “we have seen the worst of times already.” He predicted the economy would return to robust growth in 2002.
Many analysts said they looked for growth to rebound to around 2 percent in the current quarter and 3.5 percent in the fourth quarter. They predicted the Federal Reserve would cut rates for a seventh time at its Aug. 21 meeting to help the recovery along. The Fed would have room to cut rates further because of an absence of inflation. An inflation gauge tied to the GDP showed prices rising by just 1.7 percent in the second quarter, the best performance since early 1999.
The 0.7 percent GDP increase, the fourth straight quarter of sub-par activity, was the poorest showing since GDP actually shrank by 0.1 percent in the first quarter of 1993. The GDP for the first quarter of this year was revised to a rate of 1.3 percent.
The slowdown that started in the summer of 2000 was the result of a campaign by the Fed to raise interest rates in an effort to keep tight labor markets from making inflation worse. When the severity of the downturn became evident, the Fed reversed course in January and began cutting interest rates.
While most economists were optimistic that the nation will be able to avoid a recession, some worried that the unrelenting problems in manufacturing, which has lost 785,000 jobs in the last year, could spill over to the rest of the economy if consumers suddenly stopped spending because of fears about their own jobs. There were also fears of spreading weakness overseas.
“A sharp deterioration in growth overseas and the continuing impact of an overvalued dollar are wreaking havoc on companies’ ability to export,” said Jerry Jasinowski, president of the National Association of Manufacturers.
Battered by weak sales and plunging profits, companies reduced investment spending for new plants and equipment by 13.6 percent in the second quarter, the sharpest dropoff since the severe recession of 1982, with big cutbacks in spending for computers and software as well as new factories and office buildings.
However, consumer spending helped offset this weakness, although the 2.1 percent second quarter gain was the slowest in four years.
Spending on residential construction, which has been bolstered by falling interest rates, climbed at a healthy annual rate of 7.4 percent in the second quarter. In a second report Friday, the government said that new home sales rose by 1.7 percent in June to a strong seasonally adjusted rate of 922,000 homes.
In addition to the sharp cutback in business investment, the other big negative factor in the second quarter was a 9.9 percent drop in U.S. exports. Businesses continued struggling to reduce a huge backlog of unsold goods, cutting inventories by $26.9 billion in the second quarter following a decline of $27.1 billion in the first quarter.
Analysts said this sizable inventory reduction should set the stage for a rebound in production in coming months.
In addition to releasing the new GDP report, the government revised past GDP figures. The biggest change trimmed GDP growth for all of 2000 to 4.1 percent, instead of the previously reported 5 percent.