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November 29, 2000

U.S. Economy Grew at 2.4% Rate in 3Q, Weakest Pace in 4 Years
By Dow Jones Newswires

Market Rally On GDP News Will Be Short-Lived ... Weiss comments

WASHINGTON -- The U.S. economy grew at an annual rate of 2.4% in the third quarter, a bit slower than the previous estimate of 2.7% growth, the Commerce Department reported Wednesday.

The downward revision in gross domestic product -- a measure of all goods and services produced in the U.S. -- was right in line with the median estimate in a survey of economists by Thomson Global Markets.

The revised third-quarter growth pace marked the slowest rate of expansion since mid-1996, underscoring the growing belief among economists that the U.S. economy has slowed significantly from its torrid pace earlier this year and late last year.

The 2.4% rise in third-quarter GDP includes actual data on trade and inventory-building that showed U.S. businesses didn't fare as well as previously estimated from July through September.

Meanwhile, inflation remained in check during the third quarter as the chain-weighted price index for domestic purchases was revised to 2.3%, down slightly from the prior 2.4% estimate.

A barometer closely watched by Federal Reserve policy makers, the price index for personal consumption rose at a revised 2.1% pace in the third quarter, down from the 2.2% previously reported.

After-tax corporate profits in the third quarter rose just 0.6%, the slowest growth rate in two years. That compares with a 2.5% rise in corporate profits during the second quarter.

Business software and equipment spending was revised downward to a 5.8% annual pace from the previously reported 8.5% rate.

Following a campaign of six rate increases between June 1999 and May of this year, the Fed has begun to acknowledge that the economy is slowing. At their most recent meeting on Nov. 15, policy makers noted a 'softening' in business and household demand. But the central bank is still maintaining its inflation bias.

Michael Moskow, the president of the Federal Reserve Bank of Chicago, warned Tuesday that the risk of inflation still remains the focus at the Fed.

Mr. Moskow said the moderation in demand, coupled with the growth in productivity, has 'meant that the imbalance between demand and potential supply (has) narrowed considerably.

'On the whole, the economic environment seems to be in much better balance than it was in May, but the risk of heightened inflation pressures still dominates,' he said.

His comments suggest the central bank may want to see oil prices come down and the jobless rate rise off its 30-year low before returning to a neutral stance on monetary policy.

You've got to feel sorry for Wall Street gurus. They're so desperate for good news that they're frantically putting a spin on the bad news that keeps showing up like a hungry bear in the front yard.

Let's look at the facts: Corporate profits are growing at the slowest pace in two years. Business investment in software and equipment fell precipitously in the third-quarter, forecasting a severe drop in productivity growth.

So why is the market reacting favorably to this morning's GDP news? Wall Street spin doctors are trying to convince everyone that "the numbers aren't as bad as they could've been." They seem to forget that the numbers are worse than previously estimated. Plus, they're looking for the Fed to cut rates. But inflation indicators didn't even fall enough for the Fed to ease its inflation bias. An actual cut in interest rates is wishful thinking at best. The Fed wants to see oil prices go down and unemployment go up before it even considers changing its bias. Don't hold your breath.

Today's rally won't last long. We won't be surprised to see it sputter out before the end of the day. The market is looking for any glimmer of hope. But the reality is, when investors take a good hard look at the numbers, they'll dump their stocks in a heartbeat.

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