U.S. Economy Slows Down
The booming U.S. economy lost momentum during the second quarter, growing at its slowest rate in a year as consumers reined in spending, the Commerce Department said Thursday.
The nation's gross domestic product — the value of all goods produced within U.S. borders — expanded at a 2.3 percent annual rate in the April-June second quarter, little more than half the first quarter's 4.3 percent pace.
That was well below the 3.3 percent rate Wall Street economists had forecast for second-quarter GDP growth and was the weakest since a 1.8 percent rate of growth in the second quarter of 1998.
Separately, the Labor Department said the second quarter Employment Cost Index, a closely watched gauge of wage inflation, rose 1.1 percent for civilian workers, picking up the pace from a record low 0.4 percent rise in the first quarter. The figure marked the largest quarterly jump since June 1991.
A panel of economists surveyed by CBS.MarketWatch.com was looking for a gain of 0.8 percent in the ECI.
The ECI rose 3.2 percent on an annual basis in the second quarter, easing off of the 3.5 percent annual growth rate seen in the second quarter of last year.
The ECI, which has long been viewed as a key indicator, has attracted further attention in recent months as Federal Reserve officials have repeatedly raised concerns over the inflationary potential tied to extremely tight labor markets.
The Labor Department said the wages and salaries component of the index gained 1.2 percent, the largest quarterly rise since June 1990. Benefit costs increased 0.9 percent over the second quarter.
The data will likely fuel fears of further rate hikes by the Federal Reserve amid concerns extremely tight labor markets may begin to fuel a pick-up in inflationary pressures.
Federal Reserve Board Chairman Alan Greenspan, while marveling at the ability of the U.S. economy to grow at a rapid pace amid the lowest unemployment levels in three decades, has consistently cautioned that a growing dearth of available workers will inevitably feed inflation at some point.
The bond market interpreted Greenspan's recent Humphrey-Hawkins testimony before Congress as carrying a strong warning that the Fed was prepared to further hike interest rates if it caught a whiff of inflationary pressures. The question now is whether the stronger-than-expected rise in ECI will be enough to prompt the central bank's rate-setting Federal Open Market Committee to raise interest rates when it meets next month.
During the lingering international financial crisis, overseas markets for American products have dwindled and a flood of imports from troubled countries trying to unload their own goods here at discount prices has helped keep inflation in check.
However, there has been some recent improvement in the trade picture as foreign economies have begun to recover. The record U.S. trade deficit shaved just 0.75 percent off total economic growth in the second quarter of 1999, compaed to a 2.23 percent offset in the first quarter.
Meanwhile, investment by American businesses — spending on new equipment and plants — picked up from April through June, growing by 10.8 percent, compared to 8.5 percent in the first three months of the year.
Rising mortgage rates, however, dampened the housing market, with spending on new homes and apartments growing by 5.1 percent, much slower than the 15.4 percent rate in the first quarter.
Even though consumers tempered their buying spree in the second quarter, they are still spending more than they earn. The personal savings rate, savings as a percentage of disposable income, fell to a record low: negative 1.1 percent.
In a separate report, the Labor Department said weekly jobless claims plunged 40,000 in the week ended July 24 to 275,000 - the lowest weekly figure in two years. The four-week moving average fell 6,500 to 300,000. Analysts were expecting initial weekly claims to total 314,000, compared to a revised 315,000 the previous week.