America struggling to mount economic recovery

The United States suffered a much longer and deeper recession last year than had first been thought, and is struggling to mount a recovery, official figures showed yesterday.

The economy posted GDP growth of just 1.1 per cent against forecasts of 2.3 per cent. It marked a sharp slowdown from 5 per cent in the first quarter, which has already been revised down from 6.1 per cent.

The weak growth will increase the chance that the Federal Reserve will cut interest rates, although most analysts believe it will hold fire this month. The gloom was compounded by figures showing a sharp slowdown in manufacturing activity in the mid-West, which might herald a similar slump in the US-wide index published today.

"News that the economic recovery is more fragile than previously imagined will ensure the Fed keeps rates on hold until at least the end of this year and quite possibly until the middle of 2003," said Paul Ashworth, international economist at the consultancy Capital Economics.

The government slashed its estimates of growth all the way back to 1999, showing that the economy peaked earlier and slumped further than economists had believed. The economy shrank for nine months last year, rather than the single quarter decline first estimated.

This confirms the US plunged into recession last year and cuts the annual growth for 2001 to just 0.3 per cent from preliminary estimates of 1.2 per cent. The government kept 1999 growth at 4.1 per cent but revised 2000's GDP growth to 3.8 per cent from its first estimate of 5 per cent ­ a cut of almost a quarter.

"That's a lot of money to lose," said Ian Shepherdson, US economist at High Frequency Economics. "What it does is to further chip away at the alleged evidence of miraculous productivity growth. My guess is that when we come out of this you will see forecasts of sustainable growth at 3 per cent, which means the Fed will be less happy to let growth rip as it did in the 1990s."

The revisions drag down the average annual rate of growth of GDP between 1998 and 2001 to 2.7 per cent from 3.1 per cent, which could force investors to lower their estimates of the long-term growth.

However, a brighter outlook came from the Federal Reserve's regional survey ­ the Beige Book ­ which said the economy expanded "modestly" into July. The report triggered a slight recovery on Wall Street.

Retail sales were mixed, demand for housing strong, while labour markets were "slack". "Manufacturing activity, though mixed across districts and industries, appears to have improved, on balance," it said.