Productivity miracle grinds to a halt in US

Uncertainty about the American economy deepened yesterday as new figures showed productivity growing at its most sluggish pace in a year, and Wall Street digested startling new revelations about the extent of the accounting fraud perpetrated by WorldCom.

The US government said productivity grew at an annual rate of 1.1 per cent in the second quarter, further demonstrating that the economic recovery that seemed to be taking hold at the start of the year is losing momentum.

While the numbers will stoke fears among some that the US risks experiencing a double-dip recession, others insisted that they were in line with expectations. The 1.1 per cent growth rate was nonetheless the weakest performance since the second quarter of 2001.

Distracting investors was an announcement from WorldCom, issued late on Thursday, that it had uncovered additional irregularities in its accounting of revenue, pushing the extent of its fraud, between 1999 and 2000, to a stunning $7.7bn (£5m).

WorldCom said auditors had discovered $3.3bn in new accounting irregularities, incurred when operating expenses were improperly booked as capital investments. This comes on top of the $3.8bn that was already recognised as having been mis-reported.

A back-and-forth day in stock-trading in New York seemed to reflect confusion among investors. After rising 8.3 per cent over the three previous sessions, the Dow Jones vacillated between negative and positive territory before ending up 33.4 points at 8745.5.

Other factors were contributing to the muddled climate, including a scheduled meeting of the US Federal Reserve Board on Tuesday on interest rates. While most observers expect rates to be unchanged, speculation continues to ripple about a further cut. If the Fed does cut rates, however, some may take it as a signal that the economy is in more trouble than thought.

Anger over the WorldCom débâcle is certain to redouble with its new confessions. The company admitted that still more details of its accounting chicanery may yet be uncovered. It is notable that the period of number-fiddling stretches back to 1999, a time when WorldCom was presenting itself as an unstoppable force bent, at the time, on taking over the long-distance carrier Sprint.

It may also increase the pressure on federal authorities to seek criminal charges against its former chief executive, Bernie Ebbers. He has so far elluded prosecution while his former chief financial officer, Scott Sullivan, was arrested 10 days ago and charged with fraud. David Myers, the company's controller, was also arrested.

Brad Burns, a spokesman for WorldCom, said the figures announced Thursday had already been reported to the Securities and Exchange Commission and that the additional findings would not impact the company's ability to keep operating.

"The company identified the financial issues to the investigative authorities and we are working hard to get the company back on solid financial footing," Mr Burns said. WorldCom is the parent of MCI, America's second-largest long-distance carrier.

Meanwhile, Martha Stewart, the lifestyle guru under investigation in the ImClone insider-trading investigation saw her prospects darken after revelations that a close friend may testify against her. The Wall Street Journal said the friend is likely to contradict Ms Stewart's version of why she sold her entire ImClone stake a day before the US Food and Drug Administration rejected a new ImClone drug.

On the West Coast, Sun Microsystems revealed last night that it had loaned $6.3m to former and current executives. Such loans would be illegal under new accounting laws passed last month by the US Congress. About $5.4m of those loans are still outstanding.