The danger of a double-dip recession in the US economy reared its head again last night amid fresh signs of weakness in key sectors.
Stocks fell back as surprisingly weak readings on manufacturing growth and construction spending fanned fears the US economic recovery was on wobbly ground. The Dow Jones ended down 2.63 per cent or almost 230 points, on 8,506.62, with the Nasdaq giving up 3.63 per cent at 1,280.
The latest data released yesterday show manufacturing activity grew at a much slower rate in July and unemployment claims rose more steeply than anticipated. Manufacturing expanded for the sixth successive month but its more sluggish pace reflected a slump in new orders, according to a closely watched index of output at US factories yesterday.
The Institute of Supply Management said that its index of manufacturing activity fell to 50.5 in July compared to 56.2 in June. Economists surveyed by Thomson Global Markets were expecting a July reading of 55. Readings below 50 indicate contraction of activity in the manufacturing sector.
Another survey showed construction spending fell in June to its lowest level in nearly two years, as spending dropped in all major construction categories. Total construction spending was down 3.7 per cent. Spending on office buildings fell 3.4 per cent in June after a 4.9 per cent drop in the previous month and is at its lowest level since September 1996.
In a sign that leading analysts do not expect a market recovery any time soon, Mr Richard Bernstein of Merrill Lynch said yesterday he had revised downward his year-from-now forecast for the Standard & Poor's (S&P) 500 index from 1,050 to 960. The S&P closed yesterday at 884.
The new data follow a government report on Wednesday that the economy grew at a sluggish 1.1 per cent rate in the second quarter, far below the blistering rate of 5 per cent in the first quarter.
However, the substantial revision of previous growth figures announced at the same time - based on tax returns and other late data - has thrown economic predictions into confusion. The commerce department originally put the gross national product for the first quarter at 6.1 per cent and now states it was 5 per cent. It also said three of the four quarters in 2001 showed contraction, rather than one quarter as it originally declared.
The figure of 1.1 per cent growth for the current quarter is certain to be revised up or down in the coming weeks, so its value as a guide to the annual GDP has been diminished.
President George W Bush yesterday had lunch with treasury secretary Mr Paul O'Neill and Federal Reserve chairman Mr Alan Greenspan to discuss prospects for the economy and the effects of the bear market on future growth.
Mr Greenspan has evidently been blindsided by the restated growth figures. In spring last year he suggested that the US could avoid recession but it now emerges that one was well under way at that time.
The revisions in GDP highlight the risk that the share price collapse on Wall Street is affecting consumer spending, which drives two-thirds of the economy. Consumer confidence and spending have fallen in the past month.
Mr Bush told reporters after meeting his cabinet that the US economy had now grown for three straight quarters, after shrinking for the previous three quarters.
