WSJ_2QGDP WSJ.com

August 30, 2001
Economy
GDP Dodges Contraction, Growing 0.2%,
As Decline in Corporate Earnings Eases
By GREG IP 
Staff Reporter of THE WALL STREET JOURNAL


WASHINGTON -- The U.S. economy barely grew at all in the second quarter, but avoided contraction, quelling fears of an imminent recession, at least for now.

The annualized 0.2% increase in inflation-adjusted gross domestic product, the slowest in eight years, was revised downward by the Commerce Department from its initial estimate of 0.7%. It was still better than economists' consensus expectation of zero growth; many had expected GDP to shrink.

The Commerce Department also released new data suggesting the decline in corporate profits has slowed and that profits for the broad economy are in better shape than those of companies in the major stock-market indexes.

      1See the full text of the Commerce Department's preliminary report on second-quarter gross domestic product.

      2Read analysis from Briefing.com on the GDP report.
     
While 0.2% is statistically almost indistinguishable from zero, a negative number could have been politically and psychologically damaging to policy makers and consumers. The picture is grim enough: GDP has grown just 1.2% in the past 12 months, the slowest 12-month rate of change since the recession of 1990-91. The second-quarter growth rate could yet be revised away; a final estimate is due in late September. In addition, business investment, stock prices, consumer confidence and some foreign economies have weakened further in the current quarter. In San Antonio on Thursday, President Bush said a recovery seems "very slow in coming."

But the GDP report contained important bright spots. The main reason for the downward revision was that businesses liquidated inventories at a far faster rate than originally estimated. They may not be able to make sales out of inventories at the same rate. If so, that would require increases in production in the current quarter. Business investment in buildings, factories, equipment and software was revised to a 14.6% drop, the deepest since 1980, from the earlier estimate of a 13.6% decline. But growth in personal consumption, totaling two-thirds of GDP, was revised up to growth of 2.5% from 2.1%.

Lehman Brothers economist Joseph Abate said that statistic shows "the consumer was actually spending more than was given credit for." He said consumption could grow in the current quarter at about 3%. Combined with slowing inventory liquidation, that would make it difficult for the economy to record the two quarters of negative growth that is often used as the definition of a recession. The National Bureau of Economic Research business-cycle dating committee is considered more authoritative on the subject, and its recent comments have played down the possibility that a recession has started.

"I think there's a good chance we'll dodge the bullet this time," Princeton University economist and committee member Ben Bernanke said in an interview published on the university's Web site. In a separate interview Wednesday, he said, "The decline is most pronounced in the industrial and high-tech sectors and we're still seeing a really strong labor market and personal income growth and so on. I'm not a forecaster, but so far it doesn't show the weakness or pervasiveness of a classic recession."



Wednesday's report also showed after-tax corporate profit fell 2% at a quarterly rate in second quarter after falling 7.8% in the first quarter and 3.5% in the fourth. Furthermore, some of the second-quarter decline reflected insurance claims and uninsured losses from Tropical Storm Allison and other severe storms. After-tax profit fell 12.6% from a year earlier, or 13.4% after adjusting for inventory valuation and capital-consumption allowances.

That divergence is less than Thomson Financial/First Call's 17% estimated decline in operating earnings of companies in the Standard & Poor's 500-stock index. The discrepancy suggests profits at small and closely held companies haven't fallen as much as those of companies in the blue-chip indexes. That is partly because tech companies, whose profits have been especially hard hit, make up much less of the overall economy than they do of stock indexes. (Both the government and First Call attempt to exclude most unusual charges such as for write-down of assets. But tallying profits has been complicated by companies' widely differing treatment of unusual items, the classification of stock option income and accounting for losses at small firms.)

Goldman Sachs economist Jan Hatzius said, "In terms of the rates of decline, the worst probably is past," though it isn't clear investors' expectations have yet come down enough.

Write to Greg Ip at greg.ip@wsj.com3


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Hyperlinks in this Article:
(1) http://interactive.wsj.com/documents/bbgdp-20010829.htm 
(2) http://interactive.wsj.com/documents/bcom-suboecgdp.htm 
(3) mailto:greg.ip@wsj.com 

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