US growth slows further

US corporate profits were hit as the economy grew at its slowest rate in five and a half years during the last quarter of 2000, according to the latest official figures.

Analysts predict that the first quarter of 2001 will turn out even worse.

The US economy is growing slowly

Gross domestic product, or GDP, which measures total national economic output within US borders, was revised down to a 1% annual rate of expansion from a previously reported 1.1%.

The fall came as companies scaled back production and investment in the face of weaker growth in consumer spending, and this trend is expected to have continued during the first months of 2001.

Analyst predictions for GDP for the first quarter of this year are pessimistic, with the weakest estimates predicting a fall of 0.3%, and the highest figures expecting GDP to have risen by 0.8%.

Back before the boom

Sales of so-called big ticket durable goods, such as cars and refrigerators, actually fell 3.1% during the fourth quarter, having grown by 7.7% during the third quarter.

Similarly, business investment in new plants and equipment fell by 0.1% during the fourth quarter, a reversal of the situation during the third quarter when it rose by 7.7%.

US GDP:

Q1 2001
0.8%
(best estimate)
-0.3%
(worst estimate)

Q4 2000
1.0%

Q3 2000
2.2%

Sources:

Analysts' estimates

US Commerce Department statistics

GDP was down from a 2.2% rate of expansion in the third quarter, the softest for any three months since GDP grew at 0.8% rate in the second quarter of 1995.

In contrast, in the first half of 2000, the US economy grew by more than 5% annually.

And Wall Street economists, who in January expected fourth-quarter growth to come in at 2.3%, have since been forced to downgrade their forecasts dramatically.

Their new prediction of 1.1% growth was much more downbeat, but as it turned out; reality was even bleaker than they had thought.

Recession fears

The US economic slowdown is remarkable, not least because it has caught everyone by surprise.

Less than a year ago, the Federal Reserve chairman Alan Greenspan raised interest rates and was worried that the economy was overheating.

So far this year, the Federal Reserve has cut interest rates aggressively, dropping them three times by a half percentage point each time, in a bid to boost sluggish expansion and stave off a potential recession.

Fed chairman Alan Greenspan's economic outlook has changed dramatically in a year

But despite the rate cuts, some analysts fear GDP may have stalled early in 2001, or barely edged ahead, as businesses struggle to work down overstocked inventories - that is, they are trying to sell wares that are clogging up their shelves.

The economic slowdown hit company balance sheets as after-tax profits shrank for the first time in two years, down 4.3% to an annual rate of $626.4 billion after growing 0.6% in the third quarter.

It was the first time since the fourth quarter of 1998, when profits fell 1.6%, that businesses reported smaller earnings than in the prior quarter.

And with the recent slew of profit warnings from Corporate America, there are widespread fears that businesses will have seen their earnings fall during the first quarter of this year as well.