The US economy shrank in the third quarter for the first time in more than eight years, dropping to - 0.4 per cent annual rate, bringing to an end the longest economic expansion in US history.
But US Treasury Secretary Paul O'Neill said a full-blown recession - two successive quarters of negative growth - might still be avoided if Congress sank its differences and passed a $60-75 billion stimulus package before the end of November. The negative growth rate was in fact "mildly positive", he said, in that many analysts had predicted it would be much worse, falling perhaps to -2 per cent.
Gross domestic product, the total of goods and services produced in the US, fell at a 0.4 per cent annual rate, the US Commerce Department said. This was the first lapse into negative growth since 1993, and the biggest since the first quarter of 1991 when America was deep in recession.
The slowdown reflected growing economic weakness, the weakest pace of consumer spending in eight years, and a prolonged sharp drop in investment by businesses, the report said. This had been underlined by the almost negligible growth rate of 0.3 per cent in the second quarter. Many analysts believe the US has already been in recession for many months and this will become evident only when revised figures are available. GDP decline does not include government estimates of the impact of the September 11th attacks, which will only show up fully in the October-December period.
Analysts are divided over the effect of Washington pumping federal dollars into the economy. The attacks lowered consumer spending at an annual rate of $700 million, but federal spending on police and fire services overtime was raised by $800 million.
The better-than-expected GDP brought some cheer to Wall Street yesterday with the Dow Jones industrial index rising sharply in morning trading to close at 9,075.14. The stimulus package on which the administration is placing its hopes for resumed growth is mired in Congress. President George W Bush held a crisis session with House and Senate leaders yesterday morning to try to get it back on track, and incidentally to put the onus on House and Senate members to avoid a recession.
Congress needed to get to work on "behalf of the American worker and the American business person", and "pass a stimulus package and get it on my desk by the end of November", Mr Bush said. The president has been criticised from both sides for not showing leadership in proposing an acceptable bipartisan deal for workers and business worst hit after the September 11th attacks.
Critics of the draft package put together by the Republican-dominated House of Representatives say it contains little more than massive tax cuts for corporations and individuals and it has evoked scathing criticism from Democrats and in the media. Economist Paul Krugman claimed in the New York Times yesterday that the big winners would be firms engaged in energy and mining that had made large contributions to the Republican Party. Responding to Mr Krugman's allegations, a White House spokesman said the President had proposed a stimulus package to apply universally for all corporations penalised for their investment plans. After meeting Mr Bush, Senate Democratic leader Tom Daschle said Democrats would not pass a bill if it did not address the "critical needs" of workers. Mr Bush claimed to represent business and workers' concerns after September 11th. He said the administration had already allocated $55 billion for emergency spending, a "big chunk" of which had gone on defence and the rest on recovery in New York city and on airlines.
