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Higher Military Spending Boosts Second-Quarter Growth But Expansion Pace Was The Lowest In More Than Two Years

Sat., Sept. 30, 1995, midnight

While the economy barely grew in the spring, the pace of expansion was more rapid than previously believed.

But expectations of a rebound were dampened by a big drop in the sales of new homes in August and a surprising dip in the Midwest’s economy.

The Commerce Department said Friday the economy grew at a sluggish 1.3 percent annual rate in the second quarter of 1995, the slowest pace in more than two years.

That was revised upward from a month-old estimate of 1.1 percent. Still, the government said, the slight difference does not alter the picture of an economy that slowed dramatically in the April-June period.

The department also said sales of new homes fell 9.6 percent in August, the biggest decline in six months, after soaring to a 16-month high in July. Sales were off in every region except the West.

And in another sign of economic weakness, the Chicago Purchasing Management Association said its index of area economic activity dipped to 49.0 from 49.3. A reading below 50 is considered a portent of slower growth.

Also, a consumer confidence index published by the University of Michigan dropped sharply for September, and the Labor Department said lower fuel costs pushed import and export prices down in August.

“Most of the numbers were weaker than expected,” said Carl Palash, chief economist of MCM Money-Watch, an investment firm in New York City. “But we still have an economy that is growing moderately. I think consumption and housing are the main catalysts.”

Palash said the threat of hurricanes in the South could account for much of the drop in home sales, and a truckers strike may have held down economic activity in the Midwest.

Analysts said most evidence still points to a solid recovery in the third quarter, which ends today, and continued improvement the balance of the year.

“The second quarter will clearly end up being the weakest one of 1995,” said economist Bruce Steinberg of Merrill Lynch & Co. “Overall, economic growth remains moderate and inflation therefore remains low.”

The small upward revision in second-quarter gross domestic product was due to higher military spending and more inventory investment by businesses. But overall, businesses have been trimming their stockpiles of goods on shelves and in warehouses as the economy weakened this year.

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