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Economic growth remains below normal

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Posted: Thursday, March 27, 2003 12:40 pm | Updated: 2:24 pm, Thu Oct 6, 2011.

WASHINGTON - The economy that turned sluggish at the end of last year isn't doing much better now - and may well be doing worse - as war uncertainties and the stagnant job market make consumers and businesses more cautious. Some analysts worry about a slide back into recession.

Since the 2001 recession, the economy has tried, unsuccessfully so far, to get back to full throttle.

Optimistic analysts believe the economy in the current January-March quarter has grown at a below-normal annual rate of around 1.5 percent to just over 2 percent. More pessimistic economists are suggesting growth of under a 1 percent rate, and some believe the first quarter could show the economy shrank, a step toward recession.

"I don't think anybody really wants to make significant financial commitments in view of the jobless recovery, the geopolitical situation and higher energy prices, which are eating into purchasing power," said Sung Won Sohn, chief economist at Wells Fargo.

The broadest measure of economic health - gross domestic product - slowed from a decent 4 percent annual growth rate in the third quarter of 2002 to 1.4 percent in the final quarter, the Commerce Department reported Thursday.

That final quarterly estimate was unchanged from a month ago. GDP measures the total value of goods and services produced within the United States.

While Sohn believes the economy will grow at a lackluster 2 percent rate in the first quarter, Carl Tannenbaum, chief economist at LaSalle Bank is more bearish, forecasting 0.5 percent growth rate. "The chance of having a negative first quarter is very real," he said.

The government will release its initial estimate of first-quarter GDP on April 25.

In a second report Thursday, new claims for unemployment benefits last week fell by a seasonally adjusted 25,000 to 402,000, a two-month low, the Labor Department said. Even with the drop, claims are at a level suggesting the job market remains sluggish.

Since the end of 2001, economic growth has been jagged, with a three-month period of strength followed by a quarter of weakness.

That muddled climate - along with concerns about the war, higher oil prices and a turbulent stock market - has made businesses reluctant to make major financial commitments, namely capital investment and hiring. That is the biggest factor restraining the economy's recovery.

Although businesses largely have restrained spending, consumers have been the main force keeping the economy going.

But recent economic reports show consumers are becoming more cautious, especially as the job market has worsened. The unemployment rate rose to 5.8 percent in February as the economy lost a whopping 308,000 jobs.

Economists believe the jobless rate moved up to 6 percent in March and may creep higher in coming months. The employment report for March will be released next week.

In fourth quarter of 2002, consumer spending grew at a rate of just 1.7 percent, a sharp pullback from the 4.2 percent rate in the third quarter. Some economists believe consumer spending in the first quarter may have slowed further.

"Higher energy prices are basically picking the pockets of consumers," said Stuart Hoffman, chief economist at PNC Financial Services Group.

Given all the uncertainty because of the war with Iraq, Federal Reserve policy-makers last week held interest rates steady at 1.25 percent, a 41-year low. They said they would closely monitor economic developments as the war unfolds. Economists said the Fed will not hesitate to cut rates if the economy shows danger signals.

To energize the economy, President Bush has called for $726 billion in tax cuts through 2013. The Republican-controlled Senate, however, approved a budget for next year that would limit the tax reductions to $350 billion. The House passed the full amount asked by the president.

The GDP report said that after-tax profits of U.S. corporations grew at a 4.1 percent rate in the fourth quarter of last year, compared with 2.1 percent in the third quarter. But for all of 2002, after-tax profits fell by 4 percent, on top of a 10 percent drop in 2001.

The sluggish profit environment is another reason why companies have been slow to make big hiring and capital spending commitments, economists said.

"The economy is growing at a snail's pace, and the greater concern is that it could slip into recession," said Richard Yamarone, economist with Argus Research Corp. "Even if the economy avoids a technical recession - two consecutive quarters of negative GDP - it will certainly feel like one."

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