Economic Growth in Late ’85 Lagged, New Data Shows
The U.S. economy grew even more sluggishly at the end of 1985 than first reported, expanding at a bare 1.2% annual rate during the final three months of the year, the Commerce Department said Thursday.
The report represented a steep downward revision of growth of the gross national product from the original estimate of 2.4% in the last quarter. However, growth for the entire year remained pegged at the 2.3% announced earlier.
Paradoxically, economists generally saw in the rollback further reason to be hopeful about 1986. They noted that the lower growth was caused primarily by the deluge of imports in November and December, which helped push the nation’s merchandise trade deficit to a record for the year, and by the continued liquidation of business inventories at an unexpectedly high rate.
“It seems to me that both of these negative factors--trade and inventories--bode well for the current quarter and for 1986,” said one analyst, Irwin Kellner, chief economist for Manufacturers Hanover Trust Co. in New York. “Both factors made the economy seem weaker than it was for all of 1985.”
The original estimate of the quarterly gross national product included only October trade figures, and economists who were aware of the worsening trade picture at year’s end fully expected the net export balance to be revised downward. In the quarter, imports actually soared 18.6%, compared to a projected 13% increase.
Now, the Administration is cautiously predicting that the $148.5-billion trade deficit will begin to fall this year, helped by the long decline of the dollar. Special Trade Representative Clayton K. Yeutter told the House Ways and Means Committee that he believes “we might trim those numbers by $10 billion or so in 1986.”
Treasury Secretary James A. Baker III also predicted a lower trade deficit, testifying before the Joint Economic Committee that “by the end of 1986, I do believe we will see some good results in beginning to lower the deficit.”
However, of even greater weight in the new Commerce Department report was a $6.9-billion swing in inventories, from the earlier estimate of a $1.9-billion increase to a $5-billion decrease.
The inventory figures include goods manufacturers have in inventory and products on retailers’ shelves.
Analysts pointed to the inventory factor in particular as reason to look for stronger expansion in the economy this year.
“The inventory declines sow their own seeds for a future rebound,” said Robert F. Wescott of Wharton Econometrics, a Philadelphia forecasting firm. He added that the manufacturing expansion foreshadowed by the sharp growth in manufacturing employment reported for December and January should show up positively in the first quarter of 1986.
Along with most private forecasters, Wharton recently has upgraded its overall GNP growth projections from below 3% to about 3.5% for the first quarter and to 3.7% for all of 1986.
Kellner noted that it has been more than a year since the dollar began its slide from its peak and that it has declined nearly 30%, more than enough to begin to reduce domestic demand for imports.
More cautious was Robert Gough, a vice president of Data Resources Inc., an economic forecasting firm in Lexington, Mass. He argued that the impact of exchange rates on trade may be less direct than other economists believe and that the nation’s trade woes will at best stabilize near the end of 1986.
Even so, he said, the recent plunge in oil prices has led Data Resources to revise its characteristically pessimistic 1986 growth forecast to more than 3% from an anemic 2% to 2.5%.
In his Capitol Hill testimony Thursday, Baker was at pains to minimize an apparent conflict between his own frequently expressed desire for a still-weaker dollar and Federal Reserve Chairman Paul A. Volcker’s warning Wednesday that the dollar had “fallen enough” and could rekindle inflation were it to continue its steep slide.
“Clearly, no one wants to see a dramatic or precipitous drop in the currency. Clearly, nobody wants to see a free fall. Clearly, no one wants to see a loss of confidence,” Baker said.
But at the same time, he reiterated, the Treasury would “not be displeased to see a further, orderly, gradual decline in the dollar, provided it was in response to normal market forces.”
Times staff writer Karen Tumulty contributed to this story.
