Originally created 08/27/99

Economy slows in second quarter



WASHINGTON -- The U.S. economy grew at a substantially slower annual rate of 1.8 percent in the second quarter, reflecting the drag from a bloated trade deficit.

The Commerce Department reported today that the increase in the gross domestic product -- the total output of goods and services -- from April through June was slower than the 2.3 percent the government had estimated one month ago.

The second-quarter slowdown came after the economy surprised many analysts by growing at a brisk annual rate of 4.3 percent in the first three months of 1999.

On Tuesday, the Federal Reserve nudged up interest rates for the second time this summer in an effort to cool the economy and keep inflation at bay. The Fed also signaled that additional rate increases this year may not be needed unless the economy shows signs of overheating or inflation dangers.

Even though the economy has slowed in recent months, it is still expected to grow almost 4 percent this year, a robust pace.

The revised GDP report said economic growth was reduced by 1.34 percentage points by a second-quarter trade deficit that was $14.4 billion worse than originally estimated.

During the April-June quarter the trade deficit swelled to $33.8 billion as a 14.4 percent jump in imports overwhelmed a 4.3 percent rise in exports.

The surging trade imbalance reflects the impact of the global financial crisis, which has cut into American export sales while increasing competition on U.S. manufacturers from a flood of cheaper imports.

Also today, the government said the profits of U.S. companies decreased at an annual rate of $9.2 billion in the second quarter, the biggest drop since the end of 1997. In the first quarter of the year, profits rose at a $47.1 billion rate.

In addition to facing stiff price competition from imports, U.S. companies are being pinched by increasing labor costs resulting from the lowest unemployment rates in three decades.

In a separate report today, the Labor Department said the number of Americans filing for unemployment benefits last week fell by 5,000 to 283,000. Jobless-claims levels below 300,000 are generally considered an indication of an extremely tight labor market.

Many economists had expected the ballooning trade deficit to cool economic growth and calm fears that the economy could overheat.

The booming U.S economy has been powered by robust consumer spending, which accounts for two-thirds of total economic activity.

The government said today that consumer spending in the second quarter rose at an annual rate of 4.6 percent. That was brisker than estimated one month ago but still slower than the torrid 6.7 percent pace of spending in the January-March quarter.

Consumers continue to spend even more than they earn, pulling the nation's personal savings rate -- savings as a percentage of disposable income -- to a record low of negative 1.3 percent in the second quarter.

The government did not revise an inflation gauge tied to second-quarter GDP, which rose 2.1 percent. In the first quarter of this year, that inflation measure rose 1.2 percent.

Business investment -- spending on new equipment and plants -- rose at an annual rate of 11.2 percent in the second quarter, an even stronger showing than the government first estimated.

Meanwhile, the government said spending for new homes and apartments increased at a 7.7 percent rate, better than the 5.1 percent rate originally estimated, but still slower than the first quarter of 1999. Analysts believe the housing market will cool in the coming months because of rising mortgage rates.

All the changes show the economy growing at an annual rate of $34.7 billion in the second quarter of the year, pushing the country's total output of goods and services to $7.8 trillion, after adjusting for inflation.