Economy slips, ends U.S. boom

Third-quarter GDP falls at 0.4% rate, less than expected

Stock markets mixed

Many analysts see a steeper decline to close out the year

War On Terrorism

The Nation

November 01, 2001|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

For the first time in more than eight years, the U.S. economy suffered a quarterly contraction, leaving little doubt among economists that the longest economic boom in the country's history is over.

"We are in a recession. The bad news is that it's going to get worse," said Sung Won Sohn, chief economist with Wells Fargo & Co. in Minneapolis.

The gross domestic product - the total value of goods and services produced in the country - fell at a 0.4 percent annual rate in the third quarter, the Commerce Department reported yesterday. It was the first drop since the 0.1 percent decline in the first quarter of 1993 and the steepest since a 2 percent drop in the first quarter of 1991, the tail end of the last recession.

The figure for the July-through-September quarter reflected consumer spending that has slowed to its weakest pace in more than eight years and businesses' continued reluctance to invest in new plants and equipment.

The GDP eked out a 0.3 percent gain in the second quarter, and some economists said that what had been a slowing economy began to turn around.

But any turnaround was abruptly halted.

"Sept. 11 put us in a recession," said Greg Mount, senior economist with Bank One in Chicago.

Despite the third-quarter contraction, the stock market took the news with relative calm.

"It was better news than anticipated. Economists were talking about negative 1 percent GDP growth," said Keith Leggett, senior economist with the American Bankers Association in Washington. "That's a good-news story. The economy didn't sink as bad as people had anticipated."

The Dow Jones industrial average, which vacillated between positive and negative territory during the day, closed down 46.84 points at 9,075.14. The broader Standard & Poor's 500 index fell .01 points to 1,059.78.

The technology-heavy Nasdaq composite index finished up 22.79 points at 1,690.20.

Technology stocks were helped by a statement yesterday by semi-conductor leader Intel Corp. that business is improving, said Angel Mata, senior vice president with Legg Mason Inc. in Baltimore.

"There is a feeling that the worst is behind the technology stocks," he said.

Stocks, too, might have been buoyed by the prospect of a huge economic stimulus package that is expected to include some short-term tax cuts to boost consumer and business spending, some said. In a speech yesterday, President Bush urged Congress "to get to work and get something done" on the stimulus package by the end of this month.

Still, analysts said, investors shouldn't expect a quick recovery.

"The market, investors, the economy and the consumer are all in a recovery mode, but it's going to be kind of like when you have surgery. You can't jump out of the hospital bed the first day and do the jitterbug," said Al Goldman, chief market strategist for A.G. Edwards in St. Louis. "It's a long time before you can sit up and run."

This latest GDP figure is preliminary and will undergo two revisions. After revision, the contraction is likely to be greater, perhaps as much as the negative 1 percent rate that many expected, some economists said.

And the drop in GDP for the final three months of the year is expected to be bigger, when the economic impact of the Sept. 11 terrorist attacks is more strongly felt. Economists predict the GDP rate then will be a negative 1.5 percent to a negative 3 percent.

"Consumers are losing confidence, and they have pulled back," said Mark Zandi, chief economist with in West Chester, Pa. "After zero percent financing and other discounts come off in the next couple of weeks, we'll see a sharp decline in retail activity. Right in time for Christmas."

A second-straight quarter of contraction would meet the standard definition of a recession.

That would end an economic boom that began in 1991 and replaced the 1961-1969 expansion as the longest in U.S. history, Leggett said. "It's almost two years longer than any other economic expansion that has occurred," he said.

Some economists predict that if the economy officially slips into a recession, it will be a short one, possibly no more than two quarters. And they said it will likely be less painful than the last one, which started in the middle of 1990 and ended in early 1991.

"That recession was a rather painful one, even after the economy began to recover. It was the jobless recovery," said Bank One's Mount. "Unemployment reached relatively high levels. We don't expect that to happen this time around."

Unemployment this time will likely not rise above the mid-6 percent level, which is still a low rate historically, Mount said. "Then employment will pick up again in 2002," he said.

Still, predictions of a short recession could be thrown off track. The recession's length also hinges on Americans' sense of personal safety, the success of the U.S. military action in Afghanistan and whether another massive terrorism attack occurs here, experts said.

Investors and economists also will be monitoring economic indicators.

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