Nov. 1, 2001 New York Times
After 8 Years, U.S. Economy Finally Falters By DAVID LEONHARDT
The longest economic expansion in American history has ended.
The nation's economy shrank this summer for the first time in more than eight years, the government said yesterday, with businesses further cutting investment while consumers increased their purchases only slightly. The terrorist attacks of Sept. 11 played a key role, pushing an already-weak economy over the brink, analysts said, as travel temporarily stopped and spending briefly froze.
"The recession has begun," Stuart Hoffman, the chief economist of the PNC Financial Services Group (news/quote) in Pittsburgh, declared. "The fourth quarter will show an even deeper drop than the third quarter."
President Bush, speaking to manufacturing executives yesterday, said the new evidence provided yet another reason for Washington to act quickly to pump money into the weakening economy. "People are having tough times in America," Mr. Bush said. "People are losing their jobs, and I'm concerned about that."
"My call to Congress is, get to work and get something done," he added.
In the three months that ended Sept. 30, the economy contracted at an annual rate of 0.4 percent, after adjusting for inflation. That is the only significant quarterly decline since early 1991, when the last recession ended, and the first drop other than a one-quarter downward blip of 0.1 percent in the spring of 1993.
While the nation will not officially be considered in a recession until the downturn has continued for another quarter, most analysts are now preparing obituaries for what turned out to be the broadest and most enduring expansion on record.
Ten years of essentially uninterrupted growth, including a boom in the second half of the 1990's, sent the stock market to record levels, pushed the unemployment rate to its lowest point in 30 years, produced unprecedented budget surpluses, and caused some starry-eyed executives and consultants to predict that recessions were a relic of the past.
In the last year, however, the economy has barely advanced, and few analysts believe healthy growth will return within the next few months because many companies still have more machines and employees than they can profitably use.
In hopes of shortening the downturn, the Republican-led House last week narrowly passed a $99 billion stimulus package, consisting mainly of tax cuts for businesses and more affluent taxpayers. Treasury Secretary Paul H. O'Neill yesterday used the latest economic data to press the administration case for passing the stimulus measures.
But Democratic leaders in the Senate, who met with the president at the White House yesterday, say the House bill will not adequately stimulate the economy because many of the corporate tax cuts simply return money to companies, rather than providing them with new incentives to invest.
The Democrats hope to win Senate approval next week for their own plan, which would offer greater benefits to lower-income taxpayers and people who have lost their jobs.
The contraction in the third-quarter was less severe than the 1 percent rate of decline many analysts had expected. Stocks shrugged off the report.
Bond prices soared yesterday, but that was attributed to the Treasury Department's announcement that it would no longer issue 30-year bonds, causing investors to scramble to buy the existing supply.
Consumer spending — which accounts for about two-thirds of gross domestic output — rose slightly in the third quarter, as pre-Sept. 11 increases outweighed the fall after the attacks. Business investment in new buildings and equipment fell sharply, but not as dramatically as in the second quarter.
Still, the overall economic picture looked grim.
The value of exports and imports each fell more than 15 percent in the third quarter, for the first time since 1975, when all of the world's largest economies were struggling at once and companies were failing to find any healthy markets eager to buy their goods.
Since the beginning of 2000, the growth rate of consumer spending in the United States has fallen to a meager 1.2 percent from a robust 5 percent, as layoffs and falling stocks have left people with more worries and less money.
In the third quarter, spending on durable goods — expensive, long- lasting items like cars and appliances — grew just 1.7 percent, down from 7 percent in the previous quarter.
Even as consumers were cutting back, they received more income largely because of the tax rebates the government mailed over the summer. But most of that was saved rather than spent.
Meanwhile, business spending on equipment and software fell 11.8 percent in the third quarter, placing the level below where it was at the end of 1999. In the late 1990's, such spending was growing more than 10 percent a year. Most economists now blame companies' misplaced optimism and zealous overinvestment during the final years of the boom for the current collapse.
The rapid cutbacks do offer one potential bright spot, however, since many companies have already reduced their costs and excess stockpiles significantly, clearing the way for an eventual upturn.
"We've had nothing but declining production, employment, wealth and living standards all year long," Steven Wieting, a senior economist at Salomon Smith Barney, said. "The only good news is that we're fairly far along in the process."
In all, the American economy produced $10.2 trillion worth of goods and services in the quarter, the Commerce Department said.
Most economists do not expect growth to resume until next year, with many predicting that it will be weak until at least the middle of 2002, according to a survey by Blue Chip Economic Indicators, a newsletter based in Kansas City, Mo.
The National Bureau of Economic Research, a group of academics based in Cambridge, Mass., is generally considered the official judge of the business cycle. With employment having peaked in March, some analysts believe that the bureau's recession-dating committee, when it eventually meets to review month-by- month data, will declare that a recession actually began before this summer.
Whatever the eventual date, the expansion of the last decade will surpass the previous record of eight years and two months in the 1960's. [end]