The U.S. economy grew at its slowest pace in a year during the quarter that ended in June, as consumers and businesses kept spending at a brisk clip but got much of their goods from foreign suppliers and from manufacturers' inventories, instead of from current U.S. production.
That had the effect of slicing half a percentage point from the already low initial estimate of the nation's total output of goods and services during the second quarter. The Commerce Department reported yesterday that it had revised its figure for growth of the nation's gross domestic product to 1.8 percent, from its month-ago estimate of 2.3 percent, in the quarter that ran from April through June.
The apparent slowdown followed a much more robust first quarter, when the GDP grew by 4.3 percent.
But some economists argued that the second-quarter numbers were misleading. "It's not what it seems," said Ken Mayland, chief economist for KeyCorp, a Cleveland banking firm. Mayland and others noted that crucial, underlying demand numbers--consumer spending, business investment and housing construction--were all revised upward, pointing to continued strong economic momentum.
"In any way, shape or form could you call the economy's performance in the second quarter 'weak'? Not on your life," he said.
Mayland and other economists expect a rebound to something close to the ongoing average GDP growth rate of about 4 percent in the July-September quarter, when increasing U.S. exports are expected to offset more of the nation's enormous appetite for imported products, and manufacturers are projected to rebuild inventories with current production.
David Orr, chief economist for First Union Bank in Charlotte, said this year's 1.8 percent second-quarter growth rate was exactly the same as in the same quarter last year, for exactly the same reasons. Last year's second-quarter slowdown "meant nothing," Orr said. "Domestic demand continued strong--just as was the case this year."
The Federal Reserve Board has raised interest rates twice in the past three months to try to slow growth and head off inflation, but economists doubted that anything in Commerce's revised figures would convince them that a hoped-for slowdown has actually materialized.
"I don't think what we've seen here is enough of a slowing . . . to relieve their fears just yet," said Ray Stone, an economist with Stone & McCarthy Research Associates in Princeton, N.J.
Factors that slowed economic growth in the second quarter included the nation's enormous trade deficit, which set a record in June, and a sharp reduction in domestic inventories, which analysts said was a sign that retailers had underestimated the continuing strength of consumer demand. Government spending also slacked off during the quarter.
Meanwhile, though, Commerce revised its consumer-spending figure upward to 4.6 percent, a sharp bump from the original estimate of 4 percent, though still less than the blazing 6.7 percent increase registered in the first quarter.
Altogether, Orr noted, the "core" GDP factors of consumer spending, business investment and residential construction were revised upward to 5.7 percent for the second quarter, from 5.1 percent, indicating that growth is still strong.
Further evidence of strong consumer demand--which accounts for two-thirds of GDP--was that consumers continued to spend more than they earned in after-tax income, generating a record low personal savings rate of minus 1.3 percent.
In a seeming departure from the strong economic news, corporate profits fell 1.1 percent in the second quarter from their levels in the first quarter, according to the Commerce Department's Bureau of Economic Analysis, which favors a measurement that does not count as profit the increased price of a company's inventory--for example, oil supplies that have soared in value as energy prices have increased.
By more conventional measures, however, Commerce's figures showed after-tax corporate profits up 6 percent in the second quarter over the second quarter of 1998. That was better than the 2.2 percent decline for all of 1998 or the 4.7 percent increase in the first quarter of this year.