By MARTIN CRUTSINGER
WASHINGTON – The high-flying U.S. economy has come back to earth, growing at an annual rate of just 2.4 percent in the summer, the slowest pace in nearly four years.
The Commerce Department’s report on the gross domestic product, the country’s total output of goods and services, dramatically underscored the effect the Federal Reserve’s higher interest rates were having on economic growth and corporate profits.
The department said American corporations’ after-tax profits rose by just 0.6 percent in the third quarter, the weakest performance in nearly two years.
However, the slower economic growth was having the desired effect on inflation. An inflation gauge tied to the GDP showed prices rising at an annual rate of just 1.9 percent in the third quarter, the best showing this year.
The GDP growth rate of 2.4 percent for the July-September quarter represented a sharp slowdown from a sizzling 5.6 percent rate turned in during the second quarter.
It also marked a downward revision from the government’s estimate a month ago that the economy had expanded at a 2.7 percent rate in the third quarter. Economists had been expecting a downward revision about the size of the one the government reported.
“The revised data confirm that the slowdown has arrived and the remaining question is how hard the landing will be,” said Jerry Jasinowski, president of the National Association of Manufacturers.
Jasinowski said manufacturing may suffer more than the overall economy, hurt by a need to work off unwanted inventories and continued deterioration of the trade deficit.
On Wall Street, the Dow Jones industrial average surged ahead today while the Nasdaq index struggled to avoid another loss. At late morning the Dow was up 99 points and Nasdaq held on to an 8-point gain.
GDP growth for the past three years, a period of strong prosperity that the Clinton administration touted as a reason to keep the White House in Democratic hands, has been at rates above 4 percent.
The 2.4 percent GDP increase in the third quarter was the weakest showing since a 2 percent gain in the fourth quarter of 1996.
The downward revision for the third quarter, which stemmed from more economic data, was blamed on a bigger trade deficit than originally estimated, less business investment and a smaller buildup in business inventories.
The Federal Reserve began in June 1999 raising interest rates to slow economic growth as a way to keep inflation under control and bolster the record-breaking economic expansion, now in its 10th year.
The Fed’s goal is to engineer a soft landing in which growth slows enough to relieve inflation pressures being built up by too much money chasing too few goods.
However, some economists have begun to worry whether the Fed has overdone its credit tightening and now faces the threat of tipping the country into a recession.
Those worries have attracted the attention of Wall Street, helping to push stock prices down sharply in recent months on investors’ concerns that the economic slowdown will crimp corporate profits.
The government’s new GDP report showed those concerns are justified. The tiny 0.6 percent rise in after-tax profits in the third quarter was down sharply from a 2.5 percent rise in the second quarter and was the poorest showing since a 1.6 percent drop in the fourth quarter of 1998.
The 1.9 percent inflation rate compared to rises in the GDP price gauge of 2.4 percent at an annual rate in the second quarter and 3.3 percent in the first quarter.
The slowdown in economic growth stemmed from a variety of factors but was particularly apparent in such interest-rate sensitive sectors as housing construction and business investment.
Housing construction actually contracted at an annual rate of 10.5 percent in the third quarter while the growth in business investment spending was cut in half, from a torrid growth rate of 14.6 percent down to 7.8 percent.
Consumer spending, which accounts for two-thirds of total economic activity, grew at an annual rate of 4.5 percent in the third quarter, an improvement from the 3.1 percent rate of the second quarter, but below the 7.6 percent surge seen in the first three months of this year.
Among the factors in addition to housing and business investment that represented a drag on growth were a sharp drop in government spending, reflecting the layoff of temporary workers hired to conduct the 2000 census, and a rising foreign trade deficit.
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