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Wednesday, 8 August, 2001, 22:59 GMT 23:59 UK
US economy slows further, says Fed
Alan Greenspan and President George W Bush
Fed chairman Greenspan worries about the economy
The slowdown in the US economy is continuing, as weakness in manufacturing is spreading into other areas, according to the Federal Reserve.

Economic growth eased to just 0.7% annually in the April-June quarter, the poorest performance in eight years, the Fed said.

The news hammered US stock markets, which fell sharply, wiping out tentative earlier gains.

But bonds bounced, as investors scrambled to put their money into more stable markets.

The closely-watched Fed survey, known as the "beige book", gathers together reports from its 12 regional branches, and is a key indicator used in setting interest rates.

The gloomy news makes it even more likely that the Fed will opt to cut rates when it meets again on 21 August.

If it does, it would be the seventh rate reduction the Fed has made this year in an effort to keep the country from sliding into a recession.

Bad news spreads

The report was damning in its portrayal of the manufacturing sector.

"Manufacturing activity in nearly all sectors and regions declined further in recent months as producers adjusted to weak domestic and foreign demand and worked through accumulated inventories," it said. "Reports of reduced work hours, lost overtime, forced furloughs, planned shutdowns, and layoffs were pervasive."

But it also pointed out that the problem is not confined to manufacturing.

"Sustained weakness in the manufacturing sector spilled over to other businesses, with many districts indicating declines in demand for office space and trucking and shipping services," the beige book said.

Retail sales were "sluggish and frequently below expectations."

Unhappy shoppers

This is especially grim news for the US economy, since a relatively buoyant consumer market was seen as the main factor keeping the country out of recession.

In a regular poll taken by ABC News and Money Magazine, 51% of Americans rated the nation's economy as "excellent or good," indicating that consumers are still not buying wholly into the gloom felt by the markets.

There were a few other glimmers of hope.

The Fed noted that housing sales remained at generally high levels, stimulated by sharp cuts in mortgage rates.

Also cheering was the lack of inflationary threats, and the fact that rising unemployment is helping keep wage growth under control.

Grim mood

But overall, the financial markets - already depressed by a string of weak corporate results - took the news badly.

At the close, the Dow Jones Industrial Average share index was down 165 points, at 10,293.

The technology-heavy Nasdaq Composite index also fell sharply, closing down by 61 points at 1,966.

The beige book more than wiped out the effects of better-than-expected productivity figures released on Tuesday.

As is often the case, bond markets surged at the same time.

US 30-year Treasuries soared more than a full percentage point, pushing their interest yields to four-month lows.

Yields on two-year notes, the most sensitive to interest-rate expectations, tumbled to their lowest level since October 1993, the last time the Fed was battling against recession fears.


Terror's impact

Signs of a slowdown

Rate cuts

Analysis

Key players

FULL SPECIAL REPORT
See also:

07 Aug 01 | Business
Surprise surge in US productivity
25 Jul 01 | Business
Global jobs and shares gloom
27 Jun 01 | Business
Fed opts for 'smaller' rate cut
25 Jun 01 | Business
US may already be in recession
14 Mar 01 | Business
Can Bush avert recession?
17 Jan 01 | Business
US recession could be short-lived
06 Apr 01 | Business
Recession fears hit Wall Street
22 Dec 00 | Americas
US 'recession' row deepens
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