U.S. Economy Continues To Weaken

By John S. McClenahen In Washington, D.C., the cherry blossoms are near their peak. Not so the U.S. economy. It's closer to a business-cycle trough. Last week initial claims for unemployment insurance increased to 445,000 from a revised figure of 407,000 for the previous week, says the U.S. Labor Department. It was the highest level since last April, and the increase of 38,000 claims was more than five times the 7,000 that economists generally expected. The Labor Department's four-week moving average of jobless claims, which many economists consider a more reliable reflection of labor market trends, also increased. It ended last week at 426,250, some 2,500 higher than the previous week's average. "While some of this weakness could be attributed to an early spring snowstorm out west, by and large the job market still appears to be weakening," says Merrill Lynch & Co., New York. Weakening as well is business activity in the U.S. economy's service sector. The Institute of Supply Management's (ISM) non-manufacturing index fell to 47.9% in March, down six percentage points from 53.9% in February. It's the first time the service sector has contracted in 14 months. Earlier this week ISM reported a sharp decrease in manufacturing activity, as both new orders and production fell below the 50% mark that separates expansion and contraction. Merrill Lynch figures that the U.S. economy grew at just a 1% annual rate during the first calendar quarter of this year. And the securities firm is looking for only 1.8% growth in GDP during this quarter. The war in Iraq is "weighing down" both business and consumer confidence, says Merrill. "While both should bounce back after the war with Iraq is resolved, the economic fundamentals suggest that sub-par economic growth will be the status quo for the rest of the year." Merrill is forecasting GDP growth in the second half of 2003 at about a 3.1% annual rate, still below the economy's long-term potential. Merrill expects the Federal Open Market Committee, which is slated to meet next on May 6, to lower the influential federal funds rate by 50 basis points by fall. That would put the key short-term interest rate at 0.75%. It is now 1.25%.

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