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American Morning

What Does Positive GDP Growth Mean for Economy?

Aired August 29, 2001 - 10:06   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
DARYN KAGAN, CNN ANCHOR: Just about 30 minutes ago, the opening bell rang in a new day on Wall Street. The outlook is not as gloomy as initially feared. About 90 minutes ago, the U.S. Commerce Department released revised figures on the growth rate of the gross domestic product.

The report shows a growth of 0.2 percent. What does that mean? Well, that is a drop from the earlier predicted growth of seven-tenths of a percent. Nonetheless, it is still in positive territory, a surprise to many analysts who had predicted a decline.

For the latest on the numbers and what they mean in the overall economic equation -- and more importantly, what it means to you and your pocketbook at home -- let's bring in our Financial News reporter Peter Viles -- Peter, good morning.

PETER VILES, CNN CORRESPONDENT: Good morning, Daryn.

This is sort of a good new/bad news situation -- the good news, as you point out: Growth is still positive. The economy is not shrinking -- the bad news: This is the weakest growth we've had in eight years. And if you take a look at the history of GDP, the recent history, the last year or so, take a look back here in -- if we can bring this up.

This is just about a year ago: 5.7 percent growth. That is terrific economic growth. This is Nasdaq 5000 was right about there. Everything was firing on all cylinders. Then something happens. The economy really hits a brick wall and goes down to 1.3. We had 1.9, 1.3. Now we're at about 0.2. The trend is very clear right here: The economy is slipping.

The question for economists and analysts is: What happens next? Are we about to hit a bottom? Do we move a little higher here? Really hard to know -- the economy rarely slows down like this without going into a recession. But economists aren't so fixated on whether it's a recession or not.

The real question is: Where is strength going to come from? When are we going to see some signs of strength? And, in the meantime, is the American consumer -- the backbone of this economy, really, the hero of this economy right now -- going to hang in while all these layoffs are going on and companies are announcing all these cutbacks? We don't really know. It's like a baseball game in the eighth inning. How it's going to end? It looks like the home team is behind. This number doesn't look very good if you look at this declining GDP number. But we just don't know. A lot of Americans have jobs. There is some strength out there. There is a tax cut coming -- so an open question and a healthy debate for economists -- but as you say, good news in the sense that at least the number wasn't negative this morning.

(BEGIN VIDEO CLIP)

LAKSHMAN ACHUTHAN, ECONOMIST: It's a headline. But I don't think it changes the reality of what the companies are telling you, or the reality of the layoffs, or the reality of the pullback in the consumer. And that global cyclical downturn at the same time, it just puts a bigger headwind in front of us as we try to kick start the economy.

(END VIDEO CLIP)

VILES: That's an economist who is basically saying you're not so fixated on whether growth is up two-tenths of a percent or down two- tenths of a percent. The question is: When is this thing going to turn around? If it's up two-tenths or down two-tenths, economists know the American economy can do a lot better than that, because it very recently did a lot better than that.

So when is the strength going to come and when are we going to start to see it? We didn't see it today. The good news is, we didn't see as much weakness as some had feared we might -- Daryn.

KAGAN: Peter, could this be the beginning of those months and months of interest rate cuts maybe starting to kick in?

VILES: It could be starting to kick in. But, unfortunately, the interest rates have not been passed through the financial system in the way that they usually are. Cutting interest rates takes a while to hit the economy. But it passes through things. It usually sends the stock market higher. Our stock market is lower since the Fed starting cutting rates.

It usually weakens the dollar, which helps exports. The dollar is stronger now than when the Fed started cutting rates. It usually brings down long-term interest rates. They were already pretty low to begin with. They're a little lower. But the interest rate cuts are not passing through in the way that they typically do. It's not anybody's fault. It's just the situation we're in where we had a big bubble in the stock market, a big bubble in corporate investment.

The Federal Reserve can't convince companies to go out and spend money if they felt they spent way too much last year and the year before. So the interest rate cuts are having less of an impact than they have had in the past. It is early. But what we can say at this early point is, they're not being passed through the way they usually are.

KAGAN: Peter Viles, thank you so much.

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