Hopes for Economic Boom Dim as Growth Dips to 1%

Economic growth braked to a worrisome 1.1% annual rate in the second quarter, the Commerce Department said Tuesday, dashing some experts’ forecasts of a midsummer boom and potentially denying the Treasury billions in future tax revenues that it once counted on to cut the federal budget deficit.

The April-June rise in the gross national product was the lowest since the winter of 1982, when the last recession ended, and it dragged growth for the first half of 1986 down to a 2.4% annual pace, well below the White House’s projection of 4%.

The slowdown led Senate Majority Leader Bob Dole (R-Kan.) to urge another cut in the discount rate by the Federal Reserve Board, which this month lowered the rate by half a point, to 6%. The discount rate is the interest rate that the Fed charges to lend money to major banks. Some private forecasters said that the Fed is likely to lower the rate by an additional half-point to 1 point by summer’s end.

The gloom was tempered by evidence of continued low inflation--a price index linked to the gross national product rose at a 2.1% annual rate, the lowest in 20 years--and by revised estimates that concluded that the economy had expanded much faster in late 1985 and the first quarter of 1986 than had been believed.

The Commerce Department said that the economy grew at a 3.8% annual pace in the first quarter of 1986, a full 1.1 percentage point more than had been estimated.

But White House Budget Director James C. Miller III, speaking to the U.S. Chamber of Commerce, called the second-quarter figures “bad news.” And private economists, although generally upbeat, questioned whether the slowdown might erase the growth spurt that many have been confidently forecasting for months.

Merrill Lynch economists issued a revised forecast predicting 1% growth in the July-September quarter and a 1% drop in GNP in the last three months of 1986--enough to qualify as a recession.

“We all know what the train schedule is; we all expect it in the second half,” Ira Kaminow, chief economist for Government Research Corp., said of the elusive boom. “But we can’t see the train. We can’t even see the smoke of the train. We can’t even feel the rails vibrating.

“The question now is: Is it coming at all?”

Consumer Spending Is Up

Kaminow, most other private experts and the Reagan Administration remained convinced Tuesday that it will. They point to strong consumer spending and home-building in the second quarter as evidence of overall economic health, despite the downturn.

Consumer spending rose in the quarter at an annual rate of 5.9%, largely because of increased sales of autos and other big-ticket items, and home-building grew at a 15.4% pace. Both are mainstays of a normal economic expansion because they stimulate a wide range of industries from steel to timber to appliance-making.

However, despite those surges, the economy sank because much of consumers’ additional money was spent on imports and because corporations placed little money into capital spending for plant construction and equipment purchases.

The trade deficit, which grew at a $126-billion annual pace in the first quarter of 1986, rose to a $146-billion rate in the second quarter despite the continued fall of the dollar against other currencies. Capital spending by business fell at a 2.6% annual rate--largely because of spending cuts by the petroleum industry, which was crippled by plummeting oil prices.

Basics ‘Very Strong’

The chairman of the Council of Economic Advisers, Beryl W. Sprinkel, said that the good outweighs the bad. “The basics were very strong,” he said of the spending figures. But, if the slowdown continues, “it would be of great concern,” he added.

Commerce Secretary Malcolm Baldrige called consumer purchasing the “bulwark” of the current economic expansion, which has lasted nearly four years, and said that businesses would take up the spending slack once tax-overhaul legislation is completed by a House-Senate conference committee.

He refused to forecast the economy’s growth rate in the second half of the year but said he expects a healthier expansion once the negative effects of lower oil prices and the falling dollar make their way through the economy.

But many forecasters were openly puzzled Tuesday by the failure so far of the oil and dollar declines to give the economy a boost.

Plummeting Oil Prices

The nine-month plummet in oil prices has depressed the petroleum industry, but lower pump prices should give consumers more spending money. So far, that benefit isn’t evident.

The fall of the dollar against other currencies, which began in March, 1985, should have made U.S. exports cheaper and imports more expensive, but “the trade picture just didn’t turn around the way we and other forecasters thought it would,” said Paul A. Getman, an economist with Chase Econometrics Inc. of Bala-Cynwyd, Pa.

Kaminow and David Levine, chief economist at Sanford Bernstein & Co. in New York, said the continued surge in imports may reflect the dollar’s uneven fall, which has hit the Japanese yen hard but has had less effect on the currencies of other major trading partners, such as Brazil and Canada.