Economy Grows at Sluggish 2.9% Rate During Quarter; Stubborn Trade Gap Cited
The nation’s economy grew at an annual rate of only 2.9% from January through March, well below the 3.7% expansion reported last month, the Commerce Department said Wednesday.
Commerce Department economists blamed the nation’s stubborn trade deficit for the sharp downward revision in their estimate of the gross national product.
The projected annual trade deficit shrank at a rate of only $2.7 billion between the last quarter of 1985 and the first quarter of 1986, according to the new estimates. Last month’s estimate showed a much healthier $10.5-billion improvement in the trade gap. The figures are in 1982 dollars and measure the trade deficit on an annual basis.
The revision will add to the difficulty of reaching the Reagan Administration’s goal of 4% economic growth in 1986. Robert Gough of Data Resources Inc., a Massachusetts economic forecasting firm, said he expects sluggish growth of 2% at best in the current quarter and 3.5% at best in the second half of the year. GNP growth for all of 1985 was an anemic 2.2%.
Blames New Procedure
“Trade, trade and trade is the story,” said Allen Sinai, a senior vice president at the New York investment firm of Shearson Lehman Bros. “That is what is resistant. That is the reason for last year’s growth recession and slow growth this year. That is the area that has to turn for the U.S. economy to move to a higher, more sustainable growth plateau. It didn’t happen in the first quarter, and it didn’t happen in April.”
However, Robert Ortner, the Commerce Department’s chief economist, said a main reason for the poor trade showing in the latest GNP revision was the introduction of a new procedure for seasonally adjusting the raw data on imports and exports.
In recent years, with the rapid expansion of international trade, Customs Service monthly reports on goods entering U.S. ports have lagged by as much as three months, Ortner explained, and the Commerce Department has devised a new way of correcting for those lags. The new adjustments, Ortner said, may have contributed to the apparently weak trade performance in the January-to-March quarter.
But Gough said the impact of the seasonal adjustment could be overstated. “My suspicion is that typically what happens when seasonal adjustments change is that magnitudes change but trends don’t,” he said.
Gough warned of a bleak U.S. trade future because the recent sharp decline in the dollar’s value against the currencies of U.S. trading partners has not resulted in corresponding price increases of foreign goods sold in the United States. Consequently, he warned, “we won’t see a (trade) surplus in this country for the rest of this decade.”
Sharp Profit Decline
Sinai noted that trade was not the only factor contributing to the weak first-quarter performance. He said some of the less promising features of earlier first-quarter estimates had not improved in this report: namely, a large $41.6-billion increase in business inventories, much of it unsold autos, and a discouraging $17-billion decline in business investment. These figures are also in 1982 dollars on an annual basis.
In a separate report Wednesday, moreover, the Commerce Department said that after-tax corporate profits declined a steep 6.6% between the last quarter of 1985 and the first three months of this year, the largest such drop in four years. Earlier, the department had put the quarterly profits decline at 4.9%.
On a more positive note, personal consumption was still growing at a healthy 3.8%, according to the new revision, down only slightly from the earlier reported 4.2%. And residential investment remained strong, up 9.7%.
Irwin Kellner, chief economist at Manufacturers Hanover, cited those factors to support his prediction that the economy would grow more strongly in the second half of 1986 than in the first. He added that inventories at Detroit’s Big Three auto makers had dropped to a 60-day supply--"about where they want it at this time of year.”
“The foundations are in place for a stronger showing,” said Kellner, who has been consistently more optimistic than many other private forecasters. “The drop in interest rates has given housing a boost; cheaper oil has added to buying power, which should begin to offset the negatives in the oil-producing sector.
“The increase in total employment since the end of the last recession is the largest in percentage terms of any recovery in the postwar era that has lasted this long,” he added. “That has added to buying power.”