Sluggish U.S. Economy Up by Only 0.7% : Slump Could Scrap Budget Cuts Under Gramm-Rudman

The U.S. economy slumped to a sluggish growth rate of 0.7% from October through December, a weak performance which, if it persists, could trigger a scrapping of the government’s budget-balancing targets next year, officials said today.

The Commerce Department reported that growth in the gross national product, the broadest measure of the economy’s health, fell sharply in the final three months of the year, down from a growth rate of 3% in the July-September quarter.

This marked the third time that the estimate of GNP growth in the October-December quarter has been revised downward.

The latest change puts growth in the quarter below 1%. According to provisions of the Gramm-Rudman budget-balancing law, if economic growth as measured by the GNP falls below 1% for two consecutive quarters, Congress must vote on a resolution to suspend the provisions of the law for the current fiscal year and the next fiscal year.

Cuts Have Occurred

But Edwin L. Dale Jr., a spokesman for the Office of Management and Budget, said today that the $11.7 billion in budget cuts for this fiscal year will not be affected because they have already taken place.

Officials also note that most economists are expecting growth in the current January-March quarter will be well above the 1% trigger in the Gramm-Rudman law.

Even if the procedure were triggered, it would still take a majority vote in both the House and the Senate to suspend the $144-billion deficit target for fiscal 1987, which begins Oct. 1. President Reagan, a strong supporter of the Gramm-Rudman process, could also veto any suspension legislation as well.

The latest revision in the GNP put growth for the entire year at 2.2%, the slowest pace since a 2.5% decline during the recession year of 1982.

Rebound Predicted

Despite the weakness in the final three months of 1985, many analysts are predicting a substantial rebound in growth this year.

The Administration is calling for growth this year of 4%. Many private economists have revised their forecasts in recent months to come close to that projection.

The optimism stems from the belief that the economy will receive a substantial boost from the sharp decline in oil prices.

The government said today that inflation, as measured by an index tied to the GNP, rose at an annual rate of 3.9% from October through December, up considerably from the 2.7% rate of the third quarter. For the entire year, however, this price index, which measures a fixed set of goods, rose just 3.6%, the best performance since 1972.

The overall economic weakness for the year was confirmed in a companion report that showed corporate profits fell 2.2% last year, the first decline since 1982.

For the final three months of 1985, after-tax profits rose 6%. Analysts say this is a good signal that American companies will enjoy a better year in 1986.