Economic rebound expected late in '01


The U.S. economy grew less than was previously thought in the first three months of 2001, but analysts are predicting a late-year rebound that will carry into 2002.

Gross domestic product -- the measure of all the goods and services produced within the U.S. economy -- grew at an annualized rate of 1.3 percent in the first quarter. While that represented a downward revision from the earlier estimate of 2.0 percent, it was an improvement over the growth rate of 1.0 percent in the fourth quarter of last year.

Many economists believe that the economy has hit bottom and that the pace of growth will increase.

"We have experienced a true bottom," said Maureen Allyn, chief economist for Zurich Kemper Investments in New York. "But it's probably like the Michigan lakes I grew up around: The bottom isn't really there -- you can't see it, [and] it's all covered with muck."

Economic risks remain. In a speech Thursday night to the Economic Club of New York -- which Allyn attended -- Federal Reserve Chairman Alan Greenspan said the worst part of the slowdown could lie ahead.

"The period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, requiring further policy responses" in the form of additional interest-rate cuts, Greenspan told the audience.

Yesterday's economic news seemed to underscore Greenspan's viewpoint.

Orders to U.S. factories for "durable goods" -- products expected to last at least three years -- fell 5 percent in April, the first drop in three months, according to the Commerce Department. Also, sales of existing homes fell more than expected last month, said a separate report from the National Association of Realtors.

Those reports "play right into what [Greenspan] said ... and illustrate the economy has a tough road ahead," said Douglas Porter, a senior economist at BMO Nesbitt Burns Inc. in Toronto.

Stocks sold off slightly yesterday. The Dow Jones industrial average dropped 117.05 points, or 1.05 percent, to close at 11,005.37. The Nasdaq composite index dropped 30.99 points, or 1.36 percent, to end trading at 2,251.03. While some analysts attributed the declines to the economic news, others said the selling was owed in part to investors who wanted to pare their holdings before the long holiday weekend.

In fact, Greenspan's comments and the bad economic news might be good news for stocks, said David A. Citron, a managing director for the Pikesville office of New York money manager Carret and Co. The reason: It gives the Fed cause to cut interest rates even more than it has.

Despite some late-week selling, stocks have rallied substantially from their lows, thanks partly to the Fed's rate-reduction campaign. Five times this year, central bank policy-makers cut short-term interest rates by half of a percentage point, and many Fed watchers expect more cuts.

The policy-making Federal Open Market Committee next meets in June.

While further rate reductions might be needed, several indicators hint that a turnaround is at hand.

For example, corporate profits continue to disappoint, but stock rallies often indicate that a profit turnaround is in the offing, as shares typically rise ahead of improving earnings, analysts say.

An improvement in profits is possible, because businesses were more successful in slashing their stockpiles than was previously thought, the Commerce Department said yesterday. Inventories fell at an annualized rate of $18.9 billion in the first quarter, compared with the previous estimate of $7.1 billion.

Clearing out inventories opens the way for firms to jump-start production, and profits. This was the first inventory reduction since third-quarter 1991, and it was the largest since a $42 billion decrease in the first quarter of 1983, the government said.

Interest rates present more evidence of an economic turnabout. The so-called "yield curve" has steepened, since long-term interest rates have risen well above short-term rates, analysts and economists say. The surge in long-term rates is the market's way of saying that the demand for borrowed money will pick up -- something that happens only in a healthy economy, said Carret & Co.'s Citron.

Conversely, an "inverted yield curve" -- when short-term rates are higher than long-term rates -- signals a severe slowdown or even a recession, he said.

A second interest-rate indicator is the "spread," or difference, between the yields on U.S. Treasury bonds and investment-grade corporate bonds.

When that spread is wide, and yields on corporate bonds are much greater than on the risk-free Treasury bonds, it signals an increase in the risk of corporate defaults, another symptom of steep downturns.

But the spread is narrow, hinting at improvement in the country's economic fortunes.

Greenspan has maintained "proper respect" for the risks of a recession, which is one reason the central bank has so aggressively slashed interest rates, said Zurich Kemper's Allyn. But in his talk Thursday night, Greenspan appeared confident in the outcome, she said.

Because the Fed has opened the liquidity spigot, and a "wall of money" is set to pour through the economy in the next few quarters, Allyn said growth could rebound to more than 4.0 percent by next year.

"The current quarter will be the trough of the slowdown," she said. "A wall of money will soon begin to churn [through] and fix the economy. The first interest-rate cut was Jan. 3, and the first waves of that rate action should begin to hit sometime in the third or fourth quarter -- at the latest."

Wire reports contributed to this article.

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