2Q GDP brightens

September 28, 2001 Posted: 1459 GMT

NEW YORK (CNNfn) -- The U.S. economy grew a bit faster than initially thought in the second quarter, the government said Friday, indicating the world's largest economy was weak but not contracting in the months before the Sept. 11 terrorist attacks.

The gross domestic product (GDP) of the United States grew at a 0.3 percent rate in the quarter, the Commerce Department reported in its final revision of the number. Its previous estimate was growth of 0.2 percent, compared with first-quarter growth of 1.3 percent. Economists surveyed by Briefing.com expected GDP to grow at a 0.1 percent rate.

"It's encouraging, but let's not forget that the focus is on the third quarter and beyond, and that looks a little gloomier," said Hugh Johnson, chief investment officer at First Albany Corp.

Most analysts expect a recession in the United States, commonly defined as two consecutive quarters of economic contraction, after the attacks on New York and Washington, which killed thousands, damaged consumer confidence and sent shockwaves through financial markets around the world.

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An early indication of the impact of the attacks on confidence, the University of Michigan's September index of consumer sentiment came in at 81.8, compared with a final August reading of 91.5, according to a Reuters report. Economists surveyed by Briefing.com had expected the index to fall to 80.0 for September from the survey's preliminary reading of 83.6 for the month.

Separately, a key index of manufacturing in the Chicago area rose to 46.6 in September from 43.5 in August, the area's purchasing managers said Friday. Economists surveyed by Briefing.com expected the index to fall to 41.5 percent, and the better-than-expected reading is a hopeful sign for the beleaguered U.S. manufacturing industry.

On Wall Street, stock prices extended early gains after the data, while Treasury bond prices were mixed.

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In its report, the Commerce Department said the upward revision in GDP was due mainly to sluggish demand for imports, which are a drag on growth. It was the weakest growth rate since the first quarter of 1993, when the economy shrank 0.1 percent.

The biggest boosts to growth in the quarter were consumer and government spending, the report said, while business spending dragged growth nearly to a standstill.

The economic slowdown this year was mostly fueled by a steep decline in business spending on new equipment, especially technology, leading to production cutbacks, a manufacturing recession and hundreds of thousands of job cuts.

The better-than-expected Chicagoland Business Barometer, from the National Association of Purchasing Managers in Chicago, indicated that manufacturing, which has borne the brunt of the slowdown, was beginning to improve, while consumer spending, which has held the economy up, was at risk of faltering.

"We think this is an encouraging report, offering at least some offset to the... final Michigan consumer sentiment survey," said Ian Shepherdson, chief economist at High Frequency Economics Ltd.

More than half of the Chicago survey responses were received after Sept. 11, although some of them could have been mailed before the attacks, the purchasing managers group said. An index reading below 50 indicates manufacturing activity was contracting.

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While consumer spending, which fuels two-thirds of all economic activity, kept a recession at bay for months, consumer sentiment was starting to flag even in the weeks before Sept. 11. Many economists worry confidence will be further damaged, at least in the short term, by the attacks.

To encourage consumers and avoid a recession, the Federal Reserve has cut interest rates eight times this year, from 6.5 percent to 3 percent. The Fed is widely expected to cut its target for short-term rates again after the central bank's policy makers meet next Tuesday, dropping the federal funds rate below 3 percent for the first time in nearly 40 years.

"[Fed] Chairman [Alan] Greenspan will have to act to boost confidence," said Sung Won Sohn, chief economist at Wells Fargo Co. "Another cut at the Nov. 6 [Fed policy] meeting should not be ruled out, lowering the federal funds rate to 2.0 percent. Considering the weak economic outlook, the central bank will remain accommodative in the foreseeable future."

The reported results of the University of Michigan's consumer sentiment survey, which is available only to paying subscribers, were hardly surprising in the wake of the terrorist attacks. Half of the University of Michigan's 500 consumer survey responses were taken after those attacks, according to Reuters.

The survey's current conditions index, a gauge of how Americans feel about present economic conditions, fell to 94.6 in September from 101.2 in August, Reuters said. The September expectations gauge of the index, which tracks attitudes about the future, tumbled to 73.5 in September from 85.2 in August, Reuters said.

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-- from staff and wire reports

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