Economy Grows Just 2.5% for All of 1986 : Worst Year Since ‘82; Trade Deficit, Spending Lag Cited

The U.S. economy, held back by a soaring trade deficit, grew at an anemic 2.5% rate for all of 1986, the poorest performance since the last recession, the government reported today.

The growth in the gross national product was far below the Reagan Administration’s expectations when the year began and was, in fact, the weakest showing since an actual decline of 2.5% in the recession year of 1982.

In 1983, the first year of the recovery, the GNP grew 3.6%, followed by an even more robust 6.4% rise in 1984, the best performance in more than three decades.

But since that time, economic growth has turned decidedly weaker. The economy grew just 2.7% in 1985 and 2.5% last year.

While the Reagan Administration is predicting a substantial pickup in activity for 1987, many analysts believe that growth this year will show little improvement from the last two years.

In an ominous sign for the future, the government reported that growth during the final three months of 1986 slumped to an annual rate of just 1.7%, substantially below a 2.8% growth rate in the July-September quarter.

Adverse Tax Change Impact

Analysts are warning that growth is likely to weaken even more in the current January-March period based on adverse impacts from the massive overhaul of the income tax code.

For 1986, inflation, as measured by a price index tied to the GNP, turned in its best performance since 1967. The GNP deflator rose just 2.5% for the year, as a dramatic plunge in oil prices kept the lid on costs.

The poor economic showing in the fourth quarter was a big disappointment for the Reagan Administration, which had been expecting a growth rate better than the third quarter.

In response to the report, White House spokesman Larry Speakes said, “There appear to have been some special circumstances at play in the year’s final four months that affected the computations.”

Much of the weakness came in a 0.5% decline in personal consumption spending, the first drop in this category since the 1981-82 recession.

Analysts are worried that American consumers, already burdened by high debt loads, will further cut back on purchases, a situation that would lead to even weaker growth in the future.

Foreign Trade Hopes

Analysts still believe that the economy will avoid a recession this year because they expect the huge trade deficit, which has been a drag on growth for the past two years, to start showing improvement this year.

That improvement began in a modest way in the fourth quarter, according to today’s report, which showed exports rising a sharp 16.1%, overshadowing a 4.8% rise in imports.

But the trade figures are based on incomplete data because the December trade deficit will not be reported until later this month. If that figure is weaker than the estimate used to prepare the GNP report, then the overall growth rate of 1.7% will drop even further.

The Administration is predicting the GNP for 1987, as measured from the fourth quarter of 1986, will expand at a 3.2% rate, a revision sharply below its estimate last August of 4.2% growth.