Economic Growth Slumps in Quarter; Imports Cited
The nation’s economy, impeded by a surge of imports, grew at a glacial 0.7% annual rate during the first three months of the year, the slowest growth rate since the 1981-1982 recession, the Commerce Department said Tuesday.
Economic growth was barely half the estimate of 1.3% issued last month and one-third of the preliminary estimate of 2.1%, issued in March, before the quarter had ended.
Meanwhile, the Labor Department reported that consumer prices rose 0.4% in April, driven primarily by a 3% increase in the cost of fuel oil and gasoline, a jump that analysts believe will be temporary. Inflation has run at a 4.2% annual rate for the first four months of 1985.
In the face of the sagging economic growth rate, the Reagan Administration sounded an upbeat note. “Despite the downward revision, all advance economic signs point upward, and prospects for renewed growth are good,” White House spokesman Larry Speakes said. “We remain convinced that, if the Congress follows the Senate’s lead of reducing fiscal year 1986 deficits by over $50 billion, the economy will pick up markedly.”
With substantial qualifications, most private economists agreed. Some see the economy rebounding in the current quarter and others expect a delay until summer or fall, but few believe that the weak growth of the January-through-March quarter heralds an immediate recession.
The nation’s massive trade deficit accounted for much of the depressed growth rate. During the first quarter, imports surged at an annual rate of 31.4% over the last three months of 1984, while exports declined 6.1%. The chief reason: the increasingly strong dollar, which makes foreign goods sell for less in the United States and U.S. goods more expensive abroad.
If the nation’s trade picture had not deteriorated from last year, when the merchandise trade deficit hit a record $123 billion, the economy would have expanded at an annual rate of 3.7%, said Leo M. Bernstein of the Commerce Department’s Bureau of Economic Analysis. But that assessment assumes also that consumer spending, which jumped 5.2% in the first quarter at an annual rate, would have been just as strong if cheap imports had not been available.
Fed Action Stirs Hopes
Despite Tuesday’s gloomy economic news, the Federal Reserve Board’s decision last Friday to reduce the discount rate--the interest rate that it charges private banks--has sparked hopes of faster growth in the future. The stock market hit new highs Monday and again Tuesday and the dollar surged in currency markets.
Allen Sinai, chief economist with Shearson Lehman Bros., said that he is sticking with his forecast of 3.5% to 4% growth in the April-through-June quarter. He noted that consumer spending will receive another boost from the long-delayed distribution of federal tax refunds.
“The main uncertainty is exports, and that is a major uncertainty,” Sinai warned. “Our forecast depends on a 1% improvement in net exports, and, if that doesn’t happen, growth will be less. Price differentials between domestic products and foreign imports are so great as to be irresistible to most consumers. But manufacturing isn’t the whole economy.”
Services Sector Surges
Since the beginning of the year, the services sector, which now accounts for nearly 75% of the gross national product, has continued to surge, while manufacturing, hit hardest by the highly valued dollar, has limped along at virtually no growth.
Robert F. Wescott of the economic forecasting firm of Wharton Econometrics sees more “muddling along” in the current quarter before growth spurts to 3% or 4% by fall. But he, too, qualifies that expectation with the proviso that Congress follows through on its promised $56-billion reduction in the budget deficit and that the Fed continues to ease interest rates.
Roger E. Brinner, chief economist at Data Resources Inc., another economic consulting firm, said that he expects the current quarter to be “the best of the year,” with growth in the 3% to 4% range, provided that imports grow more slowly. But then growth will taper off to no more than 2.5% for the rest of the year, he said.
“No matter what happens to the dollar, we’ll have an import problem,” Brinner said. “If it’s higher, we’ll have more imports; if it’s less, we’ll have higher prices. But (steeper inflation) may be a reasonable price to pay for helping out the manufacturing sector with fewer imports.”
Index Discounted
The Commerce Department, in its report on economic growth, slightly raised one of its most frequently used measures of inflation, the “implicit price deflator.” This measure, which takes into account the changing mix of the things that Americans purchase every quarter, rose at an annual rate of 5.6% in the first three months of the year, so far out of line with other inflation indexes that the Commerce Department warned that “its use as a measure of price change should be avoided.”
By contrast, the Labor Department’s inflation report continued to show price increases modest enough for most economists to agree that the economy is far more threatened by slowdown than by renewed inflation.
The Labor Department’s consumer price index, which rose 0.4% in April, stood only 3.7% higher in April than in the same month last year. Partly offsetting April’s jump in oil prices was the first decline in food prices in 11 months. Excluding energy and food, prices rose only 0.3% last month.
