Economy Expands at 3.3%; Figures Buoy White House

The economy expanded at a heartening 3.3% annual pace in the third quarter as consumers and the federal government, neither deterred by their record debt burdens, spent well beyond expectations, the Commerce Department said Thursday.

A buoyant White House said the figures suggest that the nation is poised for a new burst of production and economic growth, and several leading forecasters agreed. Irwin Kellner, chief economist for Manufacturers Hanover Trust Co. in New York, said that 1986 “is pretty much in the sock, and it looks like a good year.”

But more skeptical experts called the third-quarter numbers a fluke, pumped up by the federal government’s end-of-fiscal-year spending spree and by auto makers’ end-of-model-year distress sales.

The Commerce Department’s other announcement Thursday--that housing starts had plunged in September to their slowest pace in 11 months--only deepened their pessimism.

“The builders are trying to minimize their inventory,” Glenn E. Crellin, research director for the National Assn. of Realtors, said of the disappointing housing statistics. “There continue to be indicators in other parts of the economy that there are hard times ahead.”

“The fourth quarter is going to be worse than the third, and the first half of ’86 looks to be as bad as the first half of ‘85,” said David A. Wyss, senior vice president at Data Resources Inc., a Lexington, Mass., forecasting firm.

The 3.3% expansion in the gross national product--the total value of the nation’s goods and services--was revised upward from a 2.8% “flash” estimate that the Commerce Department had issued last month. Added to the skimpy 1.1% GNP growth in the first six months, the third-quarter figures raised the 1985 rate so far to a still-sluggish 1.8%.

The White House had predicted a total 1985 GNP growth of 3%. Commerce Secretary Malcolm Baldrige said Thursday that reaching that level would be “difficult.”

White House spokesman Larry Speakes said the new GNP figure shows that the economy “is clearly performing well. With inventories now at a very low level and consumer demand very strong, we expect a sharp increase in production and continued acceleration of growth in the GNP.”

Decline of Dollar

Kellner said the third-quarter growth stems partly from the seven-month decline in the value of the dollar, which has spurred factory production by making American exports cheaper to buy and foreign imports more costly for Americans to purchase. A drop in inventories--mostly the sell-off of 1985 model cars--also contributed.

But strong spending fueled most of the expansion: Personal spending rose 4.8%, while federal spending soared 33.4%.

“The economy’s star performer last quarter was the consumer,” Baldrige said, and Kellner and others said the spending strength bodes well for the rest of this year and for 1986.

“It would appear that the economy has awakened from its year-long slumber, and I think we’re in for several quarters of pretty good growth and falling unemployment,” Kellner said.

May Foreshadow Boom

David Levine, chief economist for the New York forecasting firm of Sanford Bernstein & Co., said the third-quarter data may foreshadow the start of a genuine economic boom.

“The longest slowdown we’ve ever had in 30 years is five quarters,” he said. “It doesn’t seem like the odds are high (that) we’re going to have a (longer) period of sluggishness, particularly since the one event you need to get you out of a slowdown--inventory reduction--has already happened.”

Still, Levine said, what seems healthy 3.3% growth at first is more anemic on close inspection.

Spending was inflated by unusually large federal Commodity Credit Corp. loans to farmers, which are counted in the GNP as purchases, and a burst of defense buying that was $4.4 billion greater than in the second quarter.

Personal Expenditures

Among consumers, most of the $13.1-billion jump in personal expenditures went for 1985 cars cleared out with cut-rate financing. That buying flurry may be mirrored by a sales dip this fall, some experts fear.

More ominously, the personal savings rate--an indicator of how much spare cash consumers have to spend--dropped to 2.9%, a 35-year low.

Subtract those factors, and the remaining GNP expansion was about 2.5%, with a small rise in inventories instead of a decline.

September housing starts fell 9% from August and 5% from the September, 1984, seasonally adjusted rate. Single-family home starts dropped even faster, by 10%.

Experts did agree that the third-quarter GNP data foretell continued low inflation.