Mixed signals from latest US economy report
The US economy contracted faster during the summer than the government initially estimated, the Commerce Department has said. The updated report will only serve to raise fresh doubts about how long the current recession will last.
During the third quarter - and taking account of inflation - the economy shrank at an annual rate of 1.1% - its worst performance since the country's last recession in 1991. Originally, a decline of 0.4% had been reported, but data for the quarter's final weeks led to the steeper decline being noted in the regularly scheduled version.
The report paints a picture of an economy that was even more fragile than was first thought, with corporate profits being especially hard hit. At the same time, however, it showed businesses are reacting aggressively, leading some economists to think that recovery, when it arrives, will stem from a determined effort by businesses to clear stock from their shelves.
Wall Street forecasters, many of whom are predicting that recovery will arrive soon, have also cited the upswing in companies' investments in new equipment and software. Spending of this kind declined 9.3% during the quarter, up from an originally reported 11.9 percent drop and from a 14.6 percent decline in the second quarter. This suggests businesses are gradually narrowing the gap that exists between how much capacity they have and much they need, the analysts claim.
However, the Commerce Department also reports that corporate profits fell 8.3% during the quarter and decreased 22.2% compared to the year-before period - the largest year-on-year monthly fall since records began - and an indication that the corporate sector is unlikely to prove the main engine for growth.
Analysts are also concerned that cutbacks in new recruitment that corporate businesses will have to take in order to right themselves could also deepen and prolong the recession. To date, consumer spending has prevented the recession from being as severe as those of the mid-1970's and early 1980's, with American households increasing their spending 1.1% during the quarter.
Despite this, retailers were still unable to meet their sales forecasts that had begun to grow during the summer, before being knocked back by the September 11 terrorist attacks. Retailers' inventories increased by $1 billion during the quarter – even if manufacturers’ stocks declined.
The 1.1% contraction in the $10 trillion American economy came after an overall growth rate of just 0.3 percent in the second quarter and 1.3 percent in the first quarter. In the late 1990's and in 2000, the economy grew more than 4% a year.
