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US Economy Appears Weaker Than Predicted - 2002-11-02

Stock prices rallied in New York Friday but the market was up primarily because investors believe the central bank will again cut interest rates to boost what is proving to be a very sluggish economy.

The investment community is now assuming that the Federal Reserve will cut interest rates by at least one quarter percent at its meeting early next week. The central bank has cut rates 11 times to boost the economy but the last rate cut was 11 months ago. Analysts view the economy as considerably weaker than had been projected. Short-term U.S. rates are at their lowest level in 40 years.

The closely watched unemployment rate rose a less than expected 0.1 percent in October to 5.7 percent. But significantly, fewer jobs were lost in October than had been expected. And the figures for the previous two months were revised to show a less drastic job loss.

Other reports released Friday showed weakness in the manufacturing sector. Auto sales fell sharply in October even though the U.S. big three continued to give big discounts in order to spur sales. General Motors reported sales off 30 percent from the high level of the same month last year. Ford and Daimler Chrysler sales were off even more. All this despite price incentives worth over $3,000 on the average U.S. manufactured car.

The dollar was weaker Friday closing at near parity against the euro. It was the euro's strongest closing in several weeks.

Earlier this week the government reported that the economy expanded at a 3.1 percent rate in July to September quarter. That is a below par performance for an economy emerging from recession. Even slower growth is anticipated for the current fourth quarter, which includes the critical Christmas gift buying season.