Economy Slows in Second Quarter

The U.S. economy lost momentum in the second quarter of this year, growing at an annual rate of just 1.1 percent. New figures Wednesday also showed that last year's recession was worse than thought, with the economy shrinking in three quarters of 2001.

The gross domestic product in the April-June quarter was in sharp contrast to a revised 5 percent growth rate turned in during the first three months of the year, the Commerce Department reported.

GDP measures the total value of goods and services produced within the United States and is considered the broadest measure of the economy's health.

The second-quarter performance was weaker than the 2.2 percent growth rate that many analysts had forecast. It marked the most sluggish growth since the third quarter of 2001, when the economy was still mired in a slump.

Annual revisions to GDP, based on more complete data, showed that the economy last year was in a more fragile state than earlier estimates showed. For all of 2001, the GDP grew by only 0.3 percent, versus a still-below par 1.2 percent.

And, GDP contracted in three straight quarters last year, rather than just one. The government's new figures show the economy shrank at a 0.6 percent rate in the first quarter, at a 1.6 percent rate in the second and at a 0.3 percent rate in the third quarter, which under earlier estimates had been the only quarter of negative GDP during the slump.

Weaker spending by consumers, which accounts for two-thirds of all economic activity, and bigger cuts by business in investment were the major reasons behind the first and second quarters reversals. Deep cuts in business investment were a key reason why the economy slid into recession.

The fourth quarter of 2001, however, turned out to be stronger than previously thought, with GDP growing at a 2.7 percent rate, representing an upward revision of a full percentage point.

Based on the revised GDP data, the drop in economic output during the recession was 0.6 percent. That's twice as big as previously thought, but would still match the mildest recession on record, the 1969-1970 slump, when GDP also fell by 0.6 percent.

With three quarters now showing declining GDP, versus one, that puts last year's recession more in line with one rough rule of thumb for a downturn -- at least two consecutive negative quarters of negative GDP.

The National Bureau of Economic Research, the recognized arbiter of when recessions begin and end, said that the economy fell into a full-blown downturn in March 2001. It hasn't declared when it ended, though some economists believe that will turn out to be January or February of this year. NBER uses several monthly statistics to pinpoint the economy's exact turning points.

The annual revisions also showed the economy grew by 3.8 percent for all of 2000 -- down from a previous estimate of 4.1 percent-- reflecting weaker growth in the second half of that year.

With the recovery losing momentum from the beginning of this year, the Federal Reserve has opted to leave interest rates at 40-year lows at each of its four meetings this year. Many economists believe the Fed will hold rates steady at its next meeting on Aug. 13 and possibly for the rest of the year.

The economy's struggles pose a challenge for President Bush, who has stressed that the economy's fundamentals are sound. He has expressed confidence that economy will overcome current difficulties, including a stock market slide and eroding consumer and investor confidence from a wave of accounting scandals.

The slowdown in second-quarter GDP partly reflected more cautious consumers, whose spending accounts for two-thirds of all economic activity in the United States.

Consumer spending in the second quarter rose at a rate of 1.9 percent, the slowest pace since the third quarter of 2001, and down from a 3.1 percent growth rate in the first quarter of this year.

Consumers spent more on durable goods, such as cars and appliances, in the second quarter compared with the previous quarter, but trimmed spending on nondurables such as food and clothes.

A pullback in spending by state and local governments and less brisk spending by the federal government on national defense also contributed to slower second-quarter growth.

Investment by business, however, showed some improvements in the second quarter. Companies cut back spending on new plants and other buildings at a rate of 14 percent, slightly less than the 14.2 percent rate of decline in the previous quarter.

However, investment in new equipment and software rose for the first time in roughly two years, growing at a rate of 2.9 percent in the second quarter and raising hopes of a sustained capital spending turnaround.

Businesses rebuilding lean inventories added 1.15 percentage points to second-quarter GDP. That was less of a boost than the 2.60 percentage points added to first-quarter economic growth.

Another factor contributing to the second-quarter slowdown was the U.S. trade deficit, which subtracted 1.77 percentage points from GDP, compared with a 0.75-percentage-point reduction to first quarter GDP.