The nation's economic recovery appeared to be in the process of stalling out at mid-year. According to preliminary estimates coming out of the U.S. Commerce Department, Gross Domestic Product (GDP) increased at an annualized rate of just 1.1% during the second-quarter of 2002. This was far weaker than the 5.0% growth recorded during the first three months of this year or even the 2.7% gain realized over the final quarter of 2001. Increases for the balance of this year are not expected to be much stronger.

In hopeful anticipation of better days ahead, manufacturers, distributors and retailers continued during the second quarter of this year to build inventories from their recently depleted levels. Accounting for more than half of the increase in the first quarter's Gross Domestic Product (GDP), business inventory investment accounted for all of the net gain in second-quarter GDP. With inventories adding 1.2% to the most recent quarter's economic activity, the value of final sales of goods and services actually recorded a decline of 0.1%.

The specific Gross Domestic Product (GDP) component that captures the trend in capital spending by U.S. companies — non-residential business investment — declined for the seventh consecutive quarter during April-June of this year. The good news, however, is that the second quarter's decline in capital investment — 1.6% at an annualized rate — was the smallest since the fall of 2000. While equipment and software spending actually increased at a 2.9% annualized rate, spending on structures dropped for the fifth time in six quarters.

Revisions in the official Gross Domestic Product (GDP) data show that the past recession was actually longer and deeper than previously thought. The government now tells us that economic activity declined during each of the first three quarters of 2001— not just in the third quarter. But preliminary indicators for this year's third-quarter suggest that the second-quarter GDP swoon will prove to be a "hiccup" in the recovery, and not the prelude to a "double-dip" recession. So we believe that GDP gains are likely to accelerate right into 2003.