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Wednesday, 31 July, 2002, 22:07 GMT 23:07 UK
Surprise weakness in US economy
The US economic recovery is losing momentum fast, according to new figures.

They showed that the economy was growing at an annual rate of 1.1% during April, May and June - much slower than the 5% growth rate enjoyed during the previous three months.

There's definitely a risk of a double dip recession

Sal Guatieri
Senior economist, Bank of Montreal
The figures are much lower than had been expected, and cast new doubts about whether the recovery will last.

And a survey of the economy by the US Federal Reserve, also released on Wednesday, found growth growing "modestly" and a subdued jobs market.

Greater risk

The GDP figures make it harder to reach the target set last weekend by US Treasury Secretary Paul O'Neill, who said he expected the economy to grow at 3% to 3.5% during 2002.

And it creates difficulties for President Bush who has repeatedly stressed that the fundamentals of the economy are sound.

"There's definitely a risk of a double dip recession," said Sal Guatieri, senior economist at the Bank of Montreal.

"But we still think there's plenty of stimulus in the economy to stimulate a solid recovery in the second half of the year."

Wobbling confidence

Lacklustre spending by consumers and bigger cuts by business in investment were the major reasons behind the weakness.

1998 +4.3%
1999 +4.1%
2000 +3.8%
2001 +0.3%
Q1 2002 +5%
Q2 2002 +1.1%
Deep cuts in business investment were a key reason why the economy slid into recession in the first place.

The faltering in the US economic recovery has already been highlighted by worrying figures released yesterday on consumer confidence.

And a spate of Wall Street scandals has been undermining the health of shares and the dollar.

Now the key question is whether consumers will cut back their spending even further as share owners see how much their wealth has shrunk.

A deeper recession

The figures also revealed that the economy was in an even worse state than thought last year.

I am positive about our economy

President George W Bush
The world's largest economy grew by just 0.3% during 2001, based on the more complete data.

And GDP contracted in three quarters in a row rather than just the one - fulfilling the official definition of a recession that had previously been disputed by the Bush administration.

"That helps explain why we're having so much difficulty generating some positive momentum right now," said Mark Vitner, Senior economist at Wachovia securities.

'Modest' expansion

The sluggish nature of the US economy was echoed by the latest 'beige book' report from the US Federal Reserve, which gives an anecdotal snapshot of the health of the economy.

"District reports suggest that the economy expanded modestly in recent weeks, with an uneven performance across sectors," the Fed said.

"Labour markets were characterized as slack but relatively stable in most districts...the pace of wage increases generally remained subdued," it added.

Although it found that retailers were optimistic about prospects in the short-term, it found the retail sales situation was currently "mixed".

Bush 'optimistic'

Despite the gloomy news, President Bush said he remained upbeat about the prospects for the US economy.

"I am positive about our economy - I feel very optimistic about it," he said.

He took heart from the fact that the US economy has now grown for three quarters in a row.

"It's a positive trend," he said.

"It's headed in the right direction but the growth isn't strong enough as a far as I'm concerned."

A top Treasury official also said the US recovery remained on track.

"I do think that underneath the numbers, we do see a recovery continuing," said Peter Fisher, Treasury under secretary for domestic finance.

"Even with this morning's revisions of the GDP numbers, we're looking back at historically what is a very mild recession, and a rather nice recovery."

Brian Fabbri, BNP Paribas in New York
"The import side was a very big shock."

Economic indicators

Fears and hopes

US Fed decisons

See also:

31 Jul 02 | Business
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