U.S. Economic Growth Held to 1.2% by Trade Imbalance : Final Quarter Total Keeps ’85 Figure at 2.3%

The U.S. economy slumped to a sluggish growth rate of just 1.2% during the final three months of 1985 as a soaring trade deficit continued to batter American industry, the government reported today.

For the second time, the Commerce Department revised sharply downward its estimate of economic growth as measured by the gross national product for the October-December quarter.

The revision did not change the growth figure for the year, a 2.3% increase, which was the weakest performance for the U.S. economy since a 2.5% drop in the recession year of 1982.

The sharp downward revision in fourth-quarter growth had been expected, given the fact that America’s trade deficit soared in the final quarter. However, analysts said it did not change their belief that the economy has rebounded sharply in recent weeks.

4% Growth Projected

Many private forecasters have revised their predictions for growth this year, with some saying the economy is likely to reach the 4% growth rate projected by the Reagan Administration.

The new-found optimism stems from the fact that world oil prices have fallen sharply over the last month, dropping from $25 a barrel down to $15 a barrel.

Lower oil prices mean that the oil bill for American consumers will be less, freeing them to spend more on other goods. It also means inflation will be less, which also helps boost growth in inflation-adjusted terms.

Two months ago, before the quarter had ended, the government estimated fourth-quarter growth at an annual rate of 3.2%. That figure was revised down to 2.4% last month and today was reduced further to the weak 1.2% rate.

Trade Picture Deteriorates

The primary reason for the revision was the deteriorating trade picture. The government estimated that the trade deficit was running at an annual rate of $134 billion in the fourth quarter, $6.4 billion higher than the deficit figure used a month ago.

The country has suffered all year from soaring trade deficits as American manufacturers have been battered by a flood of imports while their overseas markets have evaporated because of the strength of the dollar.

The Reagan Administration in September began a coordinated effort with other countries to push the value of the dollar lower. But analysts say this effort may not bear fruit in lower trade deficits until later this year.

The economy was also pulled down by a plunge in inventory investment by businesses. That fell at an annual rate of $6.7 billion in the final three months. The government had originally estimated that inventories were growing during the period.