Originally created 08/01/98

Asia, GM strike sharply slow U.S. economy

WASHINGTON -- The U.S. economy's production of goods and services slowed sharply in the April-June quarter, hurt by lost trade to Asia and a prolonged strike at the nation's largest corporation.

The gross domestic product -- the sum of goods and services produced within U.S. borders -- increased at a modest 1.4 percent annual rate, the Commerce Department said today.

That's down sharply from the torrid 5.5 percent rate during the first three months of the year and President Clinton moved swiftly to assure Americans that one soft quarter does not necessarily mean the economy is foundering.

"Our economy continues to enjoy strong growth. This is growth the right way, led by business investment and built on a firm foundation of fiscal discipline," he said at the White House. "Prosperity and opportunity abound for the American people."

The second quarter wasn't nearly as bad as many analysts expected because business and consumer spending remained healthy. Some had thought the economy's output actually had decreased for the first time since the 1990-91 recession rather than just moderated.

"This isn't the slowdown everyone was waiting for," said economist Bill Cheney of John Hancock. "Even with the General Motors strike, people have jobs and rising wages, and they just feel too good to stop spending."

Still, it was the most sluggish quarter in three years and at least temporarily interrupted a remarkable run of robust growth unseen in this country since the economy was climbing out of the deep slump of the early 1980s.

Strikes at GM and auto-parts manufacturing plants, which idled 200,000 workers and were settled just this week, subtracted a full percentage point from second-quarter growth.

And the sharpest deterioration in the nation's trade balance on record subtracted 2.4 percentage points. Exports fell at an 8 percent annual rate, largely because economically troubled Asian countries no longer can purchase as many U.S. goods. And imports grew at an 11.9 percent rate as U.S. manufacturers struggled to compete against Asian goods made cheap by sharp currency devaluations.

Reflecting both the strike and the slump in trade, production of goods for inventory decreased sharply after soaring in the first quarter.

With Asia still shaky and with GM out of commission for nearly all of July, economists believe economic growth in the July-September quarter also will be subdued. But, they forecast a rebound during the final three months of the year.

"It will be a sort of Twinkie year," said economist David Wyss of Standard & Poor's DRI in Lexington, Mass. "Soft in the middle."

On the positive side for the second quarter, inflation all but disappeared. A price measure tied to the GDP rose at a 0.8 percent annual rate, the smallest increase since 1963.

The economy remained healthy in many other ways as well. Consumer spending increased at a brisk 5.8 percent annual rate, down only slightly from the 6.1 percent rate of the first quarter. Consumer purchases of big-ticket items from cars to computers increased at a 10 percent rate, down from 15.8 percent.

And businesses continued to spend heavily on new equipment -- especially computers. Equipment spending rose at a 17.8 percent annual rate. That's not nearly as rapid as the 34.3 percent rate of advance in the first quarter, a near 15-year record, but still very strong.

Computer purchases advanced at a 45 percent rate in the April-June period, down from 68.3 percent in January-March. Without them, the second-quarter growth rate would have been just 1 percent instead of 1.4 percent.

Housing construction was another bright spot, advancing at a 13.2 percent rate on top of a gain at a 15.6 percent rate in the first quarter.

And, thanks to a turnaround in military spending, government spending rebounded, rising at a 3.7 percent rate in the second quarter after decreasing at a 1.9 percent rate.

The various changes left the gross domestic product accumulating at a seasonally adjusted annual rate of $8.43 trillion, in current dollars, during the second quarter.


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