Economy Expands 4.3% in Strong Third Quarter : GNP, Aided by Gains in Spending, Low Inflation, Shows Steepest Rise Since Early 1984 in Revision
The nation’s economy, aided by solid gains in federal and consumer spending and by continued low inflation, grew at an unexpectedly strong 4.3% annual rate during the third quarter, the Commerce Department reported Wednesday.
The report, showing the strongest growth in gross national product since early 1984, represented a steep upward revision from the government’s estimate last month that the economy had expanded at a 3.3% rate for the quarter.
“Today happens to be my birthday, and this was a very nice present,” said an elated Beryl Sprinkel, chairman of President Reagan’s Council of Economic Advisers.
3% Annual Rate Forecast
Many private economists have scoffed at Sprinkel’s persistent forecast that the economy would shake off its glacial growth from the first half of the year to expand at a 3% rate for all of 1985--which would require a huge 5.7% spurt during the last quarter.
Fortified by Wednesday’s report, Sprinkel told reporters that his forecast remains unchanged.
“We’ll be coming into the new year with some pretty good numbers solidly in the bag,” he said. “Contrary to the views of some people, we’re not on the verge of a sump hole in economic activity. It looks pretty good to me.”
At the same time, many private economists conceded that the strong third-quarter showing caught them off guard. The preliminary, often unreliable “flash” estimate for July through September had projected a 2.8% growth rate.
However, these economists agreed that the third-quarter showing was solid, with a smaller-than-expected accumulation of inventories more than offsetting a bigger-than-expected slump in the nation’s trade balance. In 1985 dollars, the annual GNP was estimated to be $3.9 trillion. The 4.3% GNP figure is adjusted for inflation.
Key factors in the report were a 5.4% gain in sales to consumers and a huge 40.9% increase in purchases, mostly defense spending and farm credit buying. At the same time, inflation, as measured by the GNP’s “implicit price deflator,” slowed to 2.3%.
The burst of car purchases in August and September, induced by auto companies’ offers of bargain financing late last summer, were the major part of the jump in sales to consumers. And increased car sales contributed to at least one statistic in Wednesday’s report: Personal savings were shown to be at a 35-year low of 2.7% of disposable income, down from 5.1% in the third quarter of 1984.
Irwin Kellner, chief economist for Manufacturers Hanover in New York, warned that the savings statistic could be misleading, in part distorted by the surge in car sales. He said the Commerce Department calculates spending on a car or other durable goods by counting the full price of the vehicle, plus financing charges, as spent all at once.
Paradoxically, Kellner said, credit purchase of a car should actually increase the savings rate, because payments now are typically spread out over four to five years.
“The savings rate is not as low as it seems,” Kellner said. “Savings is less than a few years ago, but nobody really sees it at a 35-year low. From a cash-flow standpoint, the consumer really has more money in his sock than it seems.”
‘Pretty Healthy Economy’
For that reason, Kellner dismissed predictions that consumer spending will dry up in the fourth quarter as well as in 1986 while citizens retrench and start building up savings.
“That’s the sign of a pretty healthy economy,” he said of the GNP report. “The money is out there being spent, and as the aftereffects of the decline in the value of the dollar are felt, more of these funds will be channeled into domestic goods.”
However, other private forecasters were more pessimistic. The Lexington, Mass., forecasting firm of Data Resources Inc. is holding to a forecast of meager 2% growth for the remainder of 1985 and the first six months of next year, said Christopher Caton, an economist with the firm.
“We really see nothing there to change our forecast,” Caton said. “Industrial production is dropping, and we see no real strength in consumption or investment through the first two quarters of 1986. We assume consumers are going to stop spending at a faster rate than they earn.”
Donald Ratajczak, director of the economic forecasting project at Georgia State University, also said he expects slower growth for the rest of 1985.
“But that’s not all that bad,” Ratajczak said. “There was more economic activity during the summer, especially industrial production in August, and this should help the productivity statistics, which everybody has been complaining about. People should still feel good about the economy and about inflation going into 1986.”
