Originally created 07/30/99

Economy slows in second quarter



WASHINGTON -- U.S. economic growth slowed abruptly to 2.3 percent during the second quarter as consumers curtailed exuberant spending that had been the major force behind the recent economic boom.

But a second report showing a sharp increase in labor costs raised concerns about inflation and the possibility of another interest rate increase. At 11 a.m. today on Wall Street, the Dow Jones industrial average was down 191.55 at 10,780.52.

The Commerce Department reported that the gross domestic product, the nation's total output of goods and services, grew by $44 billion from April through June to an inflation-adjusted $7.8 trillion.

The second-quarter slowdown came after the economy surprised many analysts by growing at a bigger-than-expected 4.3 percent annual rate during the first three months of 1999. Economists have been predicting that slower growth would calm fears that the economy could overheat.

"People are still out there buying but at a more subdued pace, and if this is not just an aberration what it means is we're getting what was hoped for," said Robert G. Dederick, economic consultant with Northern Trust Co. in Chicago.

New restraint by consumers, whose purchases account for two-thirds of the nation's economic activity and whose spending proclivity has helped the United States weather two years of global economic crisis, was largely responsible for putting on the brakes.

Consumer spending grew by 4 percent from April through June, compared with a torrid 6.7 percent during the first three months of 1999. It was the slowest spending increase since the fourth quarter of 1997.

An inflation gauge tied to the GDP showed consumer prices rose more quickly during the spring, at an annual rate of 2.1 percent, compared to 1.2 percent in the first quarter.

In a separate report, the Labor Department said its Employment Cost Index, considered the best measure of changes in wages and benefit costs, rose 1.1 percent in the second quarter. That's the biggest quarterly increase since 1991, but followed a record low 0.4 percent rise during the first three months of 1999.

The lowest unemployment rate in 29 years has raised fears that employers scrambling for workers will have to raise wages, and therefore prices.

The number of Americans filing initial claims for unemployment benefits fell last week to the lowest level in two years, the Labor Department also reported, indicating the labor market continues to tighten. Jobless claims fell 40,000 to 275,000, lowering a four-week moving average of claims to 300,000.

Concerned that economic growth is too rapid and might spark inflation, the Federal Reserve in June raised interest rates by a quarter of a point. Fed Chairman Alan Greenspan in his midyear report to Congress this week said the nation's central bankers have not ruled out another rate increase this year if inflation flares.

Some analysts said the numbers should not ring alarm bells, since wage and price increases are only moderate after an unusual lull.

"In a sense we're really having what Dr. Greenspan ordered and if that's the case I would suggest that he doesn't at least immediately need to do anything to help it along," Dederick said.

During the lingering international financial crisis, overseas markets for American products have dwindled and a flood of imports from troubled countries trying to unload their own goods here at discount prices has helped keep inflation in check.

However, there has been some recent improvement in the trade picture as foreign economies have begun to recover. The record U.S. trade deficit shaved just 0.75 percent off total economic growth in the second quarter of 1999, compared to a 2.23 percent offset in the first quarter.

Meanwhile, investment by American businesses -- spending on new equipment and plants -- picked up from April through June, growing by 10.8 percent, compared to 8.5 percent in the first three months of the year.

Rising mortgage rates, however, dampened the housing market, with spending on new homes and apartments growing by 5.1 percent, much slower than the 15.4 percent rate in the first quarter.

Even though consumers tempered their buying spree in the second quarter, they are still spending more than they earn. The personal savings rate, savings as a percentage of disposable income, fell to a record low: negative 1.1 percent.