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7/31/2002
02:14 PM
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Report Shows Recovery Slower Than Expected

But there is one bright spot: Outputs in equipment and software increased 2.9% in the second quarter, indicating that capital spending--particularly on technology--is on an upswing.

The second-quarter gross domestic product report released by the Department of Commerce on Wednesday indicates that the economy isn't recovering at the rate many economists had expected.

The national GDP--the total output of goods and services produced in the United States--was up only 1.1% in the second quarter, the slowest growth rate since the third quarter of 2001. The numbers were hurt by an increase in imports; lower consumer spending on nondurable goods; and reduced state, local, and federal government spending. The Commerce Department also revised its first-quarter numbers to show that the GDP expansion rate was 5%, not 6.1% as previously reported.

And the economic decline began earlier and lasted longer than previously thought. The report showed that the economy began declining in the first quarter of 2001 and continued to decline until the fourth quarter. Originally, the statistics indicated that the third quarter of 2001 was the only period of decline. Since two consecutive quarters of shrinking GDP officially constitute a recession, the economy was worse off than most had believed.

But there is a bright spot amid the gloom: Outputs in equipment and software increased 2.9% in the second quarter, compared with a decrease of 2.7% in the first quarter, indicating that capital spending--particularly on technology--is on an upswing.

Ernest Goss, professor of economics at Creighton University in Omaha, Neb., says that this statistic is probably the most important one in the report because it indicates that the slump in technology spending either turned the corner last quarter or is on the cusp of turning the corner. "The tech-producing companies have been where the biggest problems are; now it looks like things are getting better," Goss says. "We've been waiting and saying that we're not going to get back on the economic-growth bandwagon until that sector improves, so this is a very good sign."

Still, the report had some negative effects on the markets. At closing, the tech-stock-heavy Nasdaq closed down 15.92 points, or 1.2%, to 1,328.27. The Dow managed a late-day rally to close up 56.56 points, or 0.7%, at 8,736.59.

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