Sat, Nov 02, 2002 page12

• US economy set for an end-of-year slump

  SCANDALS AND WAR The Iraq issue, slumping stock markets and corporate scandals had depressed consumer confidence to a nine-year low last month

  • AFP
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  The US economy is set for an end-of-year slump, and policy makers may further trim 40-year-low interest rates next week despite a third-quarter pickup, experts said on Thursday.

  Gross domestic product expanded at an annual pace of 3.1 percent in the July-September quarter, bolstered by fierce demand for new cars, the government said.

  Despite outpacing 1.3 percent growth in the previous three months, experts said the driving force behind growth -- consumer spending -- was now under threat.

  

  New Jaguar cars are lined up ready for sale at the Gaudin Jaguar Porsche dealership in Las Vegas on Thursday. The dealership broke its sales record in August and nearly broke it again in September. The US economy, powered by strong auto sales, rebounded to a 3.1 percent annual growth rate in the summer, but a year-end slump is now being predicted.

  PHOTO: AP

  War in Iraq, slumping stock markets and corporate scandals had depressed consumer confidence to a nine-year low last month, the Conference Board said.

  US orders for durable goods fell a much steeper-than-expected 5.9 percent in September.

  All eyes were yesterday focused on October employment data scheduled for release later in the day.

  Any sign of labor market weakness is widely expected to nudge the hand of the powerful Federal Reserve chairman, Alan Greenspan, into cutting the key federal funds target rate, already at a 40-year low of 1.75 percent.

  "Today's release shows that economic recovery is driven by consumer purchases of big-ticket items, which are very vulnerable on a month-to-month basis and dependent upon aggressive price discounting," said Manufacturers Alliance/MAPI chief economist Daniel Meckstroth.

  Manufacturers wanted a weaker dollar, which makes their exports cheaper to foreign customers, he said.

  "The Federal Reserve can help now by aggressively lowering short-term rates," Meckstroth said. Lower rates cut the return on US investments such as bonds, tending to reduce demand for dollars to buy them.

  The policy-making Federal Open Market Committee meets Wednesday to decide whether to lower the federal funds target rate -- the rate charged between commercial banks for overnight loans.

  Experts were divided over the outcome.

  Sal Guatieri, a Chicago-based economist with Bank of Montreal, said the employment figures would have to be strong to stop the Federal Reserve taking action.

  Consumer demand powered the economy in the third quarter, he said, but growth was likely to drop back to 1.8 percent in the last quarter of the year as demand for autos declined.

  "Unfortunately, because a lot of the growth was concentrated in sales of autos in the quarter, we will likely see a pullback in spending in the fourth quarter and therefore a sharp slowdown in economic activity," he said.

  The latest figures showed consumption expenditure surged 4.2 percent in the third quarter.

  Purchases of durable goods such as cars and washing machines shot up 22.7 percent, spending on other goods rose a milder 1.3 percent and services spending expanded 2.3 percent.

  Exports advanced 2.1 percent, federal government spending and gross investment rose 2.9 percent, spending on equipment and software climbed 6.5 percent and final sales grew 3.2 percent.

  Fixed business investment rose 0.6 percent.

  US economic growth in the third quarter was curtailed, however, by a 16.0 percent slide in investment in non-residential structures. Imports, which erode growth, increased 2.5 percent.

  Adding to the grim outlook, an index published by the Chicago Purchasing Management Association showed business activity in the US Midwest slumped in October.

  The index of regional manufacturing business activity defied analysts' forecasts of a mild improvement, sliding to 45.9 points in October from 48.1 in the previous month.

  A reading below 50 points signals a contraction in economic activity.

  The slump in the Chicago region was an ominous sign the day before the release of a similar nationwide survey by the Institute for Supply Management.
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