The Times May Be Changing
Subject Slowing Growth
Topic Productivity and Growth
Key Words Recession, Economic Growth, Interest Rates
News Story

The Commerce Department reported that the United States economy grew at its slowest rate since the first half of 1995 during the fourth quarter of 2000. The gross domestic product (GDP) grew at an annual rate of 1.4 percent during the quarter compared with an estimated growth of 5 percent for the entire year. The Commerce Department report is consistent with a U.S. economy verging on a slowdown or a recession.

Businesses reduced their spending on new equipment and software by 5 percent in this last quarter, according to the Commerce Department. Consumer spending continued to increase, although at a slower rate than in the first half of the year. Government spending also rose, especially on the military. Exports were down due to economic weakness in other countries.

The slowdown in GDP coupled with two major surveys reporting a strong decrease in consumer confidence were major factors in the Federal Reserve's decision to lower interest rates by one-half percent, its second decrease in a month. According to Alan Greenspan, the Federal Reserve chairman, "we have had a very dramatic slowing down, and indeed we are probably very close to zero at this particular moment."

The Commerce Department report was more bad news for manufacturing. Consumer purchases of motor vehicles and parts fell $11 billion during the quarter. Corporate purchases of transportation equipment fell $21 billion. Business inventories rose by $67 billion; however, this increase was less than in the third quarter. One of the few bright spots in the economic report was that sales of new homes rose 13.4 percent in December.

(Updated March 1, 2001)

1. How is a recession defined?
2. Consumer spending is responsible for what percent of GDP? Why would reports showing that consumer confidence has plummeted worry policy makers?
3. What percent of GDP is business investment responsible for? Why are policy makers concerned if business investment declines?
4. Exports also decreased during the fourth quarter. Weakness in other economics was cited as the reason for the decline. Explain.
Source David Leonhardt, "Economy Grew at Slowest Rate in 5 Years in 4th Quarter," The New York Times, February 1, 2001.

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