Economy downshifts

The turmoil on Wall Street is finally starting to show up on Main Street.

Consumers, perhaps worried about their jobs or retirement funds, are pulling back. As a result, the economy is now growing more slowly than expected.

The slowdown keeps alive the specter of a downturn again later this year. And even if the economy avoids another recession, it appears that any strong recovery will be delayed.

"It looks as if the stock market plunge has had a significant impact on consumers' willingness to spend, and economic growth will be stretched out," says Sung Won Sohn, chief economist for Wells Fargo Banks in Minneapolis.

The latest sign of weakness came Wednesday, when the government, in its first look at the nation's gross domestic product (GDP) in the second quarter, found that the economy had expanded at 1.1 percent, down from a 5 percent growth rate during the first quarter.

This slowdown is likely to cause consternation at the White House, where President Bush and his economic team have been trying to allay investors' concerns by telling them that the economy remains "fundam

entally" sound.

Now, Republicans face the prospect that job growth and industrial production won't be as robust as they had hoped in November. If economic statistics in the next few weeks continue to show this weakness, there may be ramifications for Federal Reserve policy and the value of the US dollar as well.

The weaker-than-expected numbers are causing some businesspeople to call for the Fed to lower interest rates. Even though the latest report, for example, shows that business investment grew for the first time in two years, it should have been stronger at this stage of the economic recovery, says Thomas Duesterberg, president of the Manufacturers Alliance/MAPI in Arlington, Va.

"We believe the Federal Reserve needs to lower key interest rates in order to shore up the recovery and to avoid a double-dip recession," says Mr. Duesterberg.

However, Lyle Gramley, a former Fed governor, says he doubts lower rates are on the Fed's agenda. He expects the economic and financial news may cause the nation's central bank to keep the status quo for a while longer, then raise rates. "The next move by the Fed is up, not down, " says Mr. Gramley, a senior economic adviser to Schwab Capital Markets in Washington.

Gramley thinks the economy is still on track for a modest recovery, starting in the third quarter. Key to this pickup, he says, will be consumers, watching their bank accounts expand because of lower interest rates.

Last week, for example, two-thirds of new mortgage applications were for refinancing. "This is an important channel to energize the economy," he says.

However, the GDP numbers seem to indicate that consumers, stung by the stock market and business scandals, are slowing down. Consumer spending grew at a 1.9 percent annual rate, down from 3.1 percent in the first quarter.

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