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Friday, 21 December, 2001, 22:09 GMT
US economy continues to stutter
The US economy slowed at a greater rate during the three months from July to September than original thought, new figures have shown.

1998 +4.3%
1999 +4.1%
2000 +4.1%
Q1 2001 +1.3%
Q2 2001 +0.3%
Q3 2001 -1.3%

During the third quarter, US gross domestic product (GDP) shrunk at an annual rate of 1.3%, a faster rate of contraction than the initial estimate of 1.1%, and the largest quarterly decline in growth since the first quarter of 1991.

But a survey also released on Friday which showed that consumer sentiment was rising boosted stocks on Wall Street.

The main Dow Jones index eventually closed up 50.16 points at 10,035.34.

Analysts said investors were looking to the future.

"The market is tending to focus on more forward looking rather than backward looking indicators," Cary Leahy of Deutsche Bank told the BBC's World Business Report programme.

"They're less interested in how the economy did in the third-quarter and they're seeing signals from consumer sentiment, expectations of the future, which picked up surprisingly well... and other things like a drop in the number of people applying for unemployment insurance."

Recession blues

The revised reading of GDP, released by the Commerce Department on Friday, painted a dim picture for the economy following recent hopes of a revival.

Most economists are forecasting negative growth for the fourth quarter, with some saying the economy could shrink by an annual rate of 1.5%.

The stock markets have rallied in recent weeks amid optimism that US companies might be turning the corner.

Last month the National Bureau of Economic Research, a panel of senior economists, declared that the US economy entered recession in March this year.

The US Federal Reserve has already cut interest rates 11 times this year, in an attempt to prevent a prolonged downturn.

Consumer picture mixed

Figures from the Commerce Department showed that consumers were tightening their purse strings, with consumer spending growing by only 1%, down from 2.5% the previous quarter and the slowest rate since early 1993.

The spending figures have been closely watched as consumer expenditure accounts for about two-thirds of economic activity in the US.

Other figures released on Friday gave a mixed picture of how US consumers were behaving since September.

More data from the Commerce Department showed that consumer spending fell 0.7% in November.

Although the number was weak it was better than some analysts had been expecting.

Meanwhile the latest results from a closely watched consumer confidence measure showed sentiment improving.

The University of Michigan's consumer sentiment index rose to 88.8 in December from 83.9 last month.

It is the third month in a row that the index has risen, which will raise hopes among retailers that shoppers will return to the malls over the crucial holiday season.

Stocks cut

The GDP figures also showed that investment by businesses in new equipment fell by 8.5% during the third quarter.

Another factor that pushed the US economy into reverse was a huge drop in the level of unsold stocks held by firms, as business inventories slumped by a record $61.9bn.

Although this holds back GDP growth in the short-run, analysts say in the longer term it should be good for the economy as firms will eventually have to increase production to meet demand.

Deutsche Bank's Carl Leahy
"The market is tending to focus on more forward looking rather than backward looking indicators"

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See also:

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New York's economy shrinks
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30 Nov 01 | Business
US economy shrinks fast
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US officially enters recession
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US recession raises global fears
26 Sep 01 | Business
US economy in freefall
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