NEWS AND COMMENTARY January 31, 2001 U.S. Economy Grew at a 1.4% Rate in Fourth Quarter By Siobhan Hughes, Bloomberg Economic Slowdown Rapidly Moving From Dip to Disaster ... Weiss comments WASHINGTON - The U.S. economy expanded in the fourth quarter at the slowest pace in 5 1/2 years, as consumer spending cooled and business investment fell for the first time since 1992, a government report showed. Gross domestic product, the total of all goods and services produced in the U.S., rose at a 1.4% annual rate in the quarter, down from 2.2% in the prior three months and the slowest since a 0.8% pace in the second quarter 1995, the Commerce Department said. U.S. government securities rose after the report showed the economy grew in the second half of 2000 at the slowest annualized pace in five years -- a loss of momentum that raises the odds Federal Reserve Chairman Alan Greenspan and fellow policy makers may have to lower interest rates several times to revive growth. "We could already be in a recession, and if we're not, we're close," said Tim McGee, chief economist at Tokai Bank Ltd. in New York. "The Fed is going to do what it takes to make any recession as short as possible." After expanding at a 5.9% annualized rate in the first six months of last year, the economy slowed to a 2.8% annualized rate of increase in the last half of 2000. That's the slowest since 2.6% in July-December 1995. The threat of recession is "the real deal," said David Orr, chief economist at First Union Corp. in Charlotte. Inflation Inflation accelerated. The GDP deflator, a broad measure of inflation tied to the report, rose at a 2.1 percent annual pace, compared with a 1.6 percent rate in the third quarter. The personal consumption expenditures index, a measure of inflation watched by Fed policy-makers and tied to spending, rose at a 2.2 percent annual pace, compared with a 1.8 percent annual pace in the third quarter. Just last month there were throngs of economists, analysts, and pundits telling us that the economy was absolutely not going into a recession. They acknowledged a dramatic slowdown, but under no circumstances, they contended, would the economy experience negative growth. Now, even Alan Greenspan admits that growth is "close to zero" and headed lower. And all of those economists, analysts, and pundits have jumped on the recession bandwagon. In fact, the lousier the economic reports, the more Wall Street cheers. Reason: Wall Street believes that more negative reports will force the Fed to keep slashing interest rates and that will pull the economy out of its nosedive. But nobody has stopped to consider the negative consequences of more rate cuts. Just as they were wrong about the possibility of recession last month, the pundits are equally mistaken when they say inflation is under control. Inflation indicators have edged steadily higher and will likely accelerate over the next year. Just when businesses and consumers start to feel that they can afford to spend more as a result of tax and rate cuts, inflationary pressures will erode any extra spending power. As the economy slides into recession and inflationary pressures continue their steady climb, Wall Street will watch in horror as consumer confidence and spending craters. So, instead of a short recession with a quick recovery, the economy will sink into a long recessionary nightmare. Stocks may rally for a few weeks or months before investors realize that the end of the recession is not coming quickly. And when the selling wave comes, it will be unstoppable. Printer Friendly Version

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