Compiler Press'

Elemental Economics

Not Accounting, Not Business, Not Commerce, Not Mathematics  - Economics  

                                                       

SITE INDEX

Microeconomics

Introductory

Intermediary

Shared Resources

Macroeconomics

Introductory

Intermediary

 

SISTERetrics

Cultural Econom

 SITES

Compiler Press

Compleat World Copyright Website

Competitiveness of Nations

Cultural Econom

ics

Elemental Economics

World Cultural Intelligence Network

 

Dr. Harry Hillman Chartrand, PhD

Cultural Economist & Publisher

Compiler Press

©

h.h.chartrand@compilerpress.ca

215 Lake Crescent

Saskatoon, Saskatchewan

Canada, S7H 3A1
 

Curriculum Vitae

 

Launched  1998

 

MACRO-ECONOMICS LITERACY TEST

Economic Growth Slowed Sharply in Third Quarter

By LOUIS UCHITELLE

New York Times On-Line, October 28, 2000

The pace of economic activity slowed sharply in the summer quarter, the Commerce Department reported yesterday, as higher interest rates took their toll on growth.

But in these boom times, even a relatively modest increase in the nation's gross domestic product - it rose in the third quarter at an annual rate of 2.7 percent - is still healthy growth, and the latest numbers suggest that the dip might be temporary.

Government outlays dropped, particularly as census takers left the payroll, and retailers sold stockpiled merchandise rather than newly ordered goods. That may turn around this fall, stimulating a modest rebound in economic growth - but probably not enough to push the growth rate back to the exceptionally robust levels of recent years.

"We are relying too much on consumer spending," said Edward McKelvey, a senior economist at Goldman, Sachs, "and we are seeing enough stock market weakness to undermine the wealth effect that has sustained consumption."

The rate of growth in gross domestic product, the total value of all newly produced goods and services, was less than half the 5.6 percent pace of the second quarter. While growth in the fourth quarter is likely to rise above 3 percent, forecasters say, the new upper limit in the year ahead is not expected to exceed 4 percent.

"We would agree that growth is likely to be more in the 3 percent- plus range for the rest of this year and into next year," said Martin N. Baily, chairman of President Clinton's Council of Economic Advisers.

Wall Street welcomed the slowdown, with some forecasters seeing the latest report as evidence that the economy is on the verge of achieving a "soft landing," in which production and spending slow to a pace that is not likely to raise the inflation rate but is sufficient to keep the economy from falling into a recession. On the New York Stock Exchange, the Dow Jones industrial average rose more than 210 points, to close at 10,590.62, up about 2 percent. The Nasdaq composite index was up a modest 6.18 points for the day, to 3,278.36.

For more than three years, the nation's annual growth rate, despite occasional quarterly dips, has averaged 4 percent or more. There was a dip to 2.5 percent in last year's second quarter, the lowest level since the mid-1990's, when the economy suddenly blossomed and annual growth rates reached levels not seen for so long a stretch since the 1960's.

This latest dip could also give way to another stretch of stronger growth. But while many economists greeted the previous dips with optimistic assurances that they were merely brief pauses in a technology- driven, highly productive new economy, this time the outlook is less buoyant.

"Our story is that temporary factors pulled us down in the third quarter, and then we get a rebound but to a rate substantially below what we have seen in the last two or three years," said Chris Varvares, a partner at Macroeconomic Advisers, a consulting and forecasting firm in St. Louis.

Economic growth below 4 percent a year is viewed on Wall Street and within the corridors of the Federal Reserve as within the capacity of the nation's businesses to keep up with the demand for goods and services without shortages that push up prices and raise the inflation rate. Indeed, the G.D.P.'s price index, included in yesterday's report, rose at a 2 percent annual rate, down from 2.4 percent in the second quarter.

Some economists even called on the Fed to lower interest rates after having raised them by 1.75 percentage points since June 1999 - a reversal the Fed is unlikely to undertake.

"Today's numbers suggest that the inflationary pressures are subsiding, and the Fed can possibly cut interest rates soon," said Gary Thayer, chief economist at A. G. Edwards, a brokerage firm.

The higher rates have clearly helped to slow the economy. So have stock prices, which have leveled off or fallen this year, depriving millions of consumers of the rising wealth that has helped to lift spending since 1995. Higher prices for gasoline and heating oil have also played a role, cutting into other family spending. Finally, consumer confidence, while still strong, fell in October for the third straight month, partly out of concern that "the ongoing slowdown in economic growth would begin to raise the rate of unemployment," the University of Michigan's Consumer Survey group said yesterday. The unemployment rate is a very low 3.9 percent.

Consumer spending, in fact, has risen more slowly the last two quarters than in any six-month period since early 1997, the Commerce Department reported yesterday. New home construction has declined from the very high level of last winter, hurt partly by higher interest rates. And capital spending on equipment and software, a big source of economic growth, grew in the third quarter at its slowest pace in two years - after two quarters of very strong increases.

"That could not be sustained," said Brent Moulton, an associate director at the Commerce Department's Bureau of Economic Analysis, where the quarterly reports on economic growth are prepared.

The weaker corporate investment showed up particularly in communications equipment, perhaps in response to setbacks at Internet and high-technology companies where profits have weakened lately and raising money through new stock issues is now far more difficult. But aircraft deliveries, another form of capital investment, fell in the third quarter, and they may bounce back in the fourth.

In a separate report yesterday, the Commerce Department said that durable goods orders - the aircraft, trucks, machinery and other big ticket items involved in capital spending - rose a healthy 1.8 percent in September, a good omen for the fourth quarter.

Indeed, despite signs that weaker economic growth may stretch into next year, temporary factors played the biggest role in the slowdown. In the second quarter, American companies, from manufacturers to retailers, had accumulated inventories, in effect selling less than they bought or made. In the third quarter, however, this imbalance disappeared and with it the extra production and economic growth that had helped to lift the economy during the spring.

In addition, federal spending declined during the summer because tens of thousands of census takers left the payroll. And the Defense Department, which often makes big payments to contractors in one quarter and none in the next, paid out very little in the third quarter.

The inventory factor and the drop in government spending were enough by themselves to account for the slowing of economic growth since the summer quarter, Mr. Moulton said.