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Recession seems imminent, experts say

| Saturday, Sept. 29, 2001

WASHINGTON -- The economy came to a virtual standstill in the second quarter, the government said Friday, another ominous sign that the Sept. 11 terror attacks probably pushed the country into recession.

With those attacks causing billions of dollars in lost business, forcing thousands of layoffs and dragging down consumer confidence, many economists believe a full-blown downturn is unavoidable.

''We're having a crisis of confidence,'' said Mark Zandi, chief economist for Economy.com. ''A bunker mentality has descended. ... Consumers are pulling back. Businesses are retrenching.''

The economy was teetering even before the attacks, suffering through a slowdown that abruptly started in the second half of last year.

Gross domestic product, the output of goods and services produced in the United States, grew at an anemic annual rate of just 0.3 percent in the April-June quarter, the Commerce Department reported yesterday.

It was the weakest performance in more than eight years.

The latest reading on GDP followed a 1.3 percent growth rate in the first quarter and illustrated the continued dramatic weakening of the economy this year.

The new second quarter figure was slightly higher than a 0.2 percent estimate of second-quarter growth made a month ago, an improvement the government said came from a slightly better-than-anticipated trade performance.

Many analysts are predicting it will be the last quarter of economic growth this year.

The Blue Chip Economic Indicators consensus expects the GDP to shrink by 0.5 percent in the July-September quarter and decline by 0.7 percent in the final three months of the year before returning to growth early next year. A recession is commonly defined as two consecutive quarters of declining GDP.

But Wall Street soared yesterday as investors sought out bargains. The Dow Jones industrial average gained 166.14 points to close at 8,847.56. The index regained nearly half of its record 1,369 point loss from last week when trading resumed after the attacks.

''The president remains concerned about the status of the economy,'' White House spokesman Ari Fleischer said. President Bush, he said, is focused on reaching an agreement with Congress on a plan to stimulate economic growth, something many expect to be revealed next week.

Billions of extra dollars for reconstruction and to help the airlines, which were hammered by the suicide hijackings, have already been authorized.

Federal Reserve policy-makers, who cut short-term interest rates last week, are expected to cut them again -- which would be the ninth reduction this year -- when they meet next Tuesday. Analysts are divided on whether they will cut by a half-point or a quarter-point.

Unlike many of his counterparts, Ken Mayland, president of ClearView Economics, believes the Fed's aggressive credit easing and economic stimulus provided by Congress will prevent the economy from tipping into recession.

''But it's going to be real close,'' Mayland conceded.

Many economists are looking toward a rebound in the first half of next year, but that will depend on the severity of the economic fallout from the attacks on the World Trade Center and Pentagon, how the war against terrorism unfolds and how investors and consumers respond.

Consumers account for two-thirds of economic activity and have kept the economy afloat over the past year. The small amount of growth in the second quarter came from a 2.5 percent rise in consumer spending.

Zandi predicted consumer spending in the third quarter will rise by just 0.9 percent, then fall by 1 percent in the final quarter of the year as rising layoffs and anxiety over the economy darken their mood.

Business spending on new plants and equipment, which decreased at a rate of 14.6 percent in the second quarter, is likely to remain depressed in the months ahead, economists said.

Capital spending won't turn around until corporate profits improve, analysts said. Yesterday's GDP report showed after-tax profits of U.S. companies fell in the second quarter at a rate of 1.7 percent, following declines of 7.8 percent in the first quarter and 3.5 percent in the fourth quarter of 2000. It was the longest stretch of profit declines since the country was buffeted by the Asian currency crisis in 1997-98.

A bright spot in the economy: low inflation, which is good for consumers and gives the Fed leeway to cut interest rates as needed. A price gauge tied to the GDP rose at an annual rate of just 1.3 percent in the second quarter, the smallest increase since early 1999. This GDP price measure was up 3.2 percent in the first quarter.

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