Economy Grows 3.7%; Continuing Gains Seen : Quarterly Rise in GNP Is Higher Than Predicted, Reducing Likelihood of Interest Rate Cut by Fed
The U.S. economy grew at a healthy 3.7% rate during the first three months of the year, the Commerce Department said Tuesday. Although the government report uncovered some weakness that could retard growth during the current quarter, most analysts are now convinced that the economy will improve strongly later this year, probably beginning by early summer.
After an unusually long period of sluggish growth that began nearly two years ago, “the economy has gotten a second wind,” said Allen Sinai, chief economist for Shearson Lehman Bros., a major New York investment firm. “We could be on the verge of two to three years of renewed solid growth.”
The January-to-March growth rate was the highest since the first quarter of last year, when the gain in the gross national product also was 3.7%. Growth in the fourth quarter of last year was only 0.7%.
The 3.7% figure represented an increase from last month’s estimate that the nation’s output of goods and services had grown at a 3.2% annual rate in the first quarter. Most analysts had expected growth to be weaker than originally estimated.
The boost from the initial estimate, however, stemmed largely from a surge in the production of cars that remained unsold in dealer inventories. The unwanted increase in inventories should be a modest drag on the economy during the current quarter because dealers now have to sell off more existing cars before ordering new ones from the factory.
Vigorous Growth
After that, many economists look forward to vigorous growth. They predicted that the Federal Reserve, which met Tuesday to decide on monetary policy for the coming weeks, will avoid further cuts in interest rates because the economy does not appear to need much additional stimulation.
“For the Fed, it’s steady as she goes,” said Irwin Kellner, chief economist at Manufacturers Hanover Bank. “Even though the current quarter is likely to be weaker than the first, it is clear that we are setting the stage to give the U.S. economy a mighty kick forward in the second half of the year.”
Despite the unexpectedly strong growth, all measures of inflation remained under control in early 1986.
The Reagan Administration, which had predicted that the economy would grow at a solid 4% rate this year, was cheered by the latest report. White House spokesman Larry Speakes said the 3.7% increase in economic output, which factors out any effects of inflation, reflected the “sustained strength of the American economy.”
Consumer spending moved ahead at a healthy 4.2% rate in the first quarter, although little of the growth in spending was aimed at autos and other durable goods.
Record Trade Deficit
The nation’s record trade deficit showed the first signs in several years that it might be shrinking, with the deficit improving by $10.5 billion, compared with an annualized $26.7-billion increase during the last quarter of 1985.
The nation’s output of goods and services, measured in 1982 dollars after adjusting for seasonal variations, rose to $3.624 trillion during the first quarter from $3.591 trillion for the fourth quarter of last year.
Measured in current dollars, the GNP grew 6.3% to $4.121 trillion.
The Commerce Department reported also that after-tax profits of U.S. corporations fell by an estimated 4.9% in the first quarter to an annual rate of $139.5 billion, the biggest drop since the first quarter of 1982, when the nation was in a recession.
