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Peter Viles: Economic numbers tell a murky tale

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CNNfn Correspondent Peter Viles  


The latest Gross Domestic Product numbers show almost no growth in the second quarter. CNNfn Correspondent Peter Viles takes a look at what those numbers may mean, and what they say about the economy.

Q. Does the government report on GDP tell us whether we're in a recession or not?

A. The short answer is no, it doesn't. It appears the economy is continuing to grow, but at a very weak pace -- an annual rate of just 0.2 percent. That would argue that the economy avoided slipping into a recession in the second quarter. But economists try to pinpoint the month in which a recession starts, and it's possible -- possible -- a recession began in May or June, but there was enough growth in April for the entire quarter to show positive growth.

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2Q GDP still positive  
 

Q. What's wrong with the economy?

A. The main problem is in business profits and business spending -- there is a recession in corporate profits and corporate spending right now. Big companies have responded by slashing production and slashing costs. That cost-cutting is rippling through the consumer sector, dampening consumer spending.

Q. Are the interest rate cuts and the tax cuts helping the economy at all?

A. The tax rebates didn't hit the economy until the third quarter, so they would not show up in this morning's GDP report. But it's likely that both the tax cuts and the interest rate cuts have already started to help the economy; the problem is the underlying economy is very weak. But it would probably be even weaker if the government and the Federal Reserve had not acted so quickly.

Q. When is the economy going to turn around?

A. Most forecasters believe the economy will return to healthy growth in 2002. But predicting turnarounds in the economy is difficult -- most forecasters initially believed the economy would show some strength in the second half of this year, and have now pushed their recovery forecasts further into the future.

Q. Is the shrinking government surplus hurting the economy?

A. Probably not. It's the other way around -- the weak economy is causing the surplus to shrink.

Q. Is there anything else the government can do to jump-start the economy?

A. By historical standards, the government has already acted quickly by cutting taxes and, through the Federal Reserve, cutting interest rates. The other government policy that might make sense in an economic downturn is very unlikely -- increasing federal spending. Spending federal money to pump up the economy has fallen out of favor in Washington -- politicians are more concerned with protecting Social Security money and keeping the federal budget in surplus.







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