GNP Growth Rate for 2nd Quarter Revised Up to 2.0% From 1.7%
The nation’s economy slogged ahead at an annual growth rate of 2% in the second quarter, the Commerce Department said Tuesday, a pace that experts called anemic but still strong enough to stave off the recession that some had feared could begin this autumn.
The latest estimate of growth in the gross national product, the primary index of economic activity, was barely above a tentative 1.7% projection issued last month. The revision was spurred by greater spending for business inventories and state and local government operations and by a less-than-expected drop in net exports--all cause for modest optimism, economists said.
But imports held to their near-record level of 1985’s first quarter, suggesting that much of the second-quarter growth in consumer spending still went for goods made abroad instead of stimulating investment and jobs in this country.
White House Reaction
White House spokesman Larry Speakes, in California with vacationing President Reagan, called the 2% figure “another pointer toward the expected resurgence in GNP growth in the third and fourth quarters of this year.” He said that resurgence would be all but guaranteed if Congress sticks to its agreement this month to limit federal spending when it votes on appropriations bills this fall.
Most outside experts were more restrained, saying that the economy would expand by a sluggish 2.5% to 3% at best in the second half and by no more than 2.5% for the year. The Administration has forecast that 1985 GNP growth will total 3%.
“We’ll have growth rates over the next six to 12 months that are nothing to brag about. But on the other hand, we don’t have a recession,” said Robert Gough, senior vice president at Data Resources, a Lexington, Mass., forecasting firm.
“It’s reasonable to postulate that this is a harbinger of better times--at least through the balance of the year,” said Manufacturers Hanover Trust Co.’s chief economist, Irwin L. Kellner. “It doesn’t mean we’re on the verge of boom. But it does reduce the probability that we’re in a recession as some people were looking for.”
Prospect of Recession
The prospect of recession had seemed very real after economic expansion in the January-March period averaged a sickly 0.3%, and the 1.7% growth rate first announced for the second quarter failed to quiet those fears.
In fact, the latest figures mean that the economy grew at a leaden 1.1% annual pace through the first six months of 1985. But the fact that second-quarter growth measures are generally upbeat--and that the usual harbingers of a recession seem nowhere to be found--gave some economists cause for cheer.
Most heartening was Tuesday’s upward revision of business inventory investment by $2.5 billion over July’s figure.
“Inventories by and large are a little lean now,” said Robert Parry, chief economist at Security Pacific National Bank in Los Angeles. Growth in the third quarter probably will be in the 2.5% to 3% range, he said, “and the reason is that you could see a little more rapid addition to inventory by business than occurred in first half of the year.”
The revision is a good sign, Kellner agreed, as long as consumers are willing to spend money to buy up those stocks. Consumer spending was strong in the second quarter, he said--up by 5.3%--but much of the growth went to buy imported goods.
American spending on imports held basically steady in the second quarter, while U.S. exports fell. The result was a widening trade deficit that further crippled the manufacturing sector.
Kellner and other economists forecast slower growth in consumer spending for the rest of the year. But they added that U.S. firms may grab more of that spending because of the declining strength of the dollar--which makes American exported goods more affordable and imports more expensive--and a decline in interest rates, which makes fixed investments such as homes more affordable.
Moreover, Gough said, some typical indicators of an economic slowdown, such as excessive consumer debt and inflation, have yet to become concerns. One little-known inflation index, the implicit GNP price deflator, rose by just 2.7% in the spring quarter, the slowest rise in two years.
“Barring any unforeseen shock to the system in the next 12 months, it’s highly unlikely we’re going to experience any kind of recession,” Gough said. “But that doesn’t mean the outlook is for dramatic growth.”
In another indicator of economic sluggishness, corporate profits after taxes fell 0.4% in the second quarter to an annual rate of $136.5 billion, the fifth straight quarterly decline. However, the drop was less severe than the 2.8% drop in after-tax profits registered in the first quarter of 1985.
