The US economy slowed to a barely perceptible 0.7 per cent growth rate in the second quarter of 2001, its weakest performance in eight years, as businesses cut technology spending and reduced output to get rid of bloated inventories. The US Commerce Department blamed a 13.6 per cent cutback in investment in new plants and equipment by US businesses, the steepest decline since the second quarter of 1982, when the US was suffering its worst post-second World War recession.

The slump in growth is slightly greater than predicted by US Federal Reserve chairman Mr Alan Greenspan in testimony to Congress this week. He said most Fed governors and bank presidents expected real GDP growth over all four quarters of 2001 of 1.25 to 2 per cent, rising to more than 3 per cent next year. The Commerce Department said GDP increased at an inflation-adjusted annual rate of 0.7 per cent in the April-June quarter. That followed a 1.3 per cent gain in the first quarter, revised up from a previously reported 1.2 per cent increase.

While barely managing to avoid recession, popularly defined as two consecutive quarters of negative growth, the US economy has just come through its most sluggish quarter since a 0.1 per cent fall in GDP in the winter of 1993. However, analysts say the second quarter may be the weakest point of the slowdown which began last year.

There was some good news for the economy in new house sales for last month, which rose by 1.7 per cent, twice the rate analysts had been predicting. This reflects a continuing round of refinancing and new buying by householders taking advantage of a reduction in mortgage rates following the cut by 2.75 points in short-term rates by the Federal Reserve since January.

Consumer sentiment hovered around the same mark for the month, at 92.4 compared to 92.6 in May, according to the University of Michigan index.

US consumers have kept the economy out of recession by continuing to spend enthusiastically on houses, cars and durables. Their expenditures increased by 2.1 per cent in the second quarter following a 3 per cent gain in the first quarter.

It could fall, however, as the full effect of rising unemployment is felt. US manufacturers, hardest hit by the slowdown, have laid off almost 800,000 workers over the past year.

Business inventories fell $26.9 billion (#30.1 billion) after a $27.1 billion decline in the first quarter. Business fixed-investment plunged 13.6 per cent in April-June, the biggest drop in 19 years. It had fallen 0.2 per cent in the first three months of the year. The reduction in spending on computers and software in the second quarter was an even sharper 14.5 per cent, the biggest quarterly decline since the spring of 1982. Spending on new factories and office buildings fell at a rate of 11.2 per cent.

The Bush administration is counting on $40 billion in tax relief cheques to give consumer spending an extra stimulus in the third quarter, as the full effect of the Fed rate cuts also become apparent. A further 0.25 rate cut is expected after the Fed policy committee meets on August 21st. The Commerce Department revealed yesterday that growth in 2000 was not 5 per cent as it originally reported but 4.1 per cent. It blamed a flawed calculation method, now corrected.