US economy slows in wake of vehicle slump

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The Independent Online
Growth in the US economy in the three months to June was the lowest for three and a half years. Lower production of cars and trucks was blamed for most of the sharp slowdown between the first and second quarters, according to figures published by the US Commerce Department yesterday.

The dip had been anticipated, and analysts concluded that there is no danger of a recession. ''The Federal Reserve was eager to see slower growth, but not too slow. It has to be ecstatic about these numbers,'' said Christopher Low, an economist at HSBC Markets in New York.

However, the bond market reaction to strength outside the auto sector was negative, with the benchmark 30-year Treasury bond losing half a point. The dollar dipped below DM1.38.

Gross domestic product grew at an annualised rate of 0.5 per cent in the second quarter, down from 2.7 per cent in the first. Prices measured by the GDP deflator rose by 2.7 per cent, lower than expected.

Commerce Undersecretary Everett Ehrlich said growth would pick up in the remainder of this year. Next week will bring the first important figures on the state of the economy in the third quarter, including July employment figures on Friday.

Without cutbacks in the auto industry, GDP would have risen by 1.9 per cent. Consumer spending on durables - mainly cars - rose by only 0.4 per cent. Reductions in levels of inventories held by the car manufacturers accounted for lower stockbuilding in the second quarter.

However, other categories of spending remained buoyant, including exports, consumer spending on services and business investment. David Bloom, US economist at brokers James Capel, said: ''The auto industry has masked fairly strong underlying growth.''

An alternative measure of GDP will be released next Wednesday. It will show significantly lower growth, both for the second quarter and back through the five-year-old recovery. The reason is that the alternative ''chain-weighted'' GDP, which will eventually replace the existing measure, updates the weights used to estimate real output annually instead of revising a fixed weight every five years.

More than a third of the growth in this recovery is attributable to investment in computers. Their prices have fallen very rapidly, but by sticking to a base-year price, the old GDP measure has given them too much weight in measuring total output. The new one is likely to reduce average annual GDP growth since 1990 by 0.5 points a year to 2.6 per cent.