GNP Grew by Only 1.7% in Last Quarter of 1986 : Economy Gained an Anemic 2.5% for Year; Effects of Trade Deficit, Weak Dollar, Tax Changes Cited

Restrained by a huge trade deficit, the U.S. economy grew at an anemic annual rate of 1.7% in the last three months of last year, down from 2.8% in the previous quarter, the Commerce Department reported Thursday.

For the entire year, the department said, the gross national product grew by 2.5%, far short of the 4% growth that the Reagan Administration had predicted as the year began. It was the weakest year for the economy since the recession year of 1982.

The Administration, which recently forecast a substantial 3.2% rise in the GNP for 1987, maintained Thursday that “the outlook for a strong 1987 is still bright and clear,” in the words of White House spokesman Larry Speakes.

However, several private analysts were less optimistic.

Warning of Recession

Irwin Kellner, chief economist for Manufacturers Hanover Bank in New York, and Lyle Gramley, his counterpart at the Mortgage Bankers Assn. here, forecast a repetition of last year’s growth rate. Roger Brimmer, chief economist for Data Resources Inc. in Lexington, Mass., saw expansion possibly improving to 3%--but warned of a recession “if the turnaround in trade does not come.”

By one calculation, the deterioration in the nation’s trade posture since 1985 cost more than a full percentage point of economic growth. If imports and exports for 1986 had merely held at their 1985 levels, last year’s economic growth rate would have been 3.7%.

Brimmer said that the economy’s overall 1986 performance, in which total output of goods and services hit $4.21 trillion, reinforced the view of many analysts that the economy is in transition.

“For one thing, we are coming down from the peak of the dollar’s value” in world trade, “paying higher prices for imports but not managing to sell enough more exports,” Brimmer said.

“Also, we are in transition from one tax code to another, and business inventory is soft and getting softer,” partly because firms have lost tax write-offs for expansion, he added.

“Furthermore, we are in transition from higher to lower oil prices, so drilling activity has collapsed. About the only positive thing you can find is the continued boom in stock and bond markets, which have kept the consumer feeling wealthy and spending freely.”

The nation’s trade deficit, which analysts expected to total a record $170 billion when final 1986 figures are in, narrowed modestly in the fourth quarter, according to the Commerce Department’s GNP report. It showed exports rising 16.1%, outpacing a 4.8% rise in imports. The figures, like all others for the fourth quarter, were preliminary estimates subject to revision.

Much of the economy’s weakness in the fourth quarter stemmed from a 0.5% decline in consumer spending--especially on new cars, the sales of which declined somewhat after a burst of growth in September--and a 3% drop in business investment.

Lower Business Spending

“Business spending on capital goods was obviously very depressed by tax reform, bad conditions in the ‘Oil Patch’ and high vacancy rates in office buildings,” Kellner said. “That was the biggest surprise. We didn’t think business spending would drop as much as it did.”

Clarence Brown, deputy secretary of commerce, said that the 1986 growth rate was held down by several factors: lagging exports, sagging investment in the energy sector and declining farm production.

However, Brown added, when such factors as lower inflation, reduced interest rates and higher employment are taken into consideration, “the score card for the U.S. economy after four years of uninterrupted expansion is pretty good.”

Low Inflation

The rosiest news in Thursday’s report was that inflation, as measured by a price index tied to the GNP, turned in its best performance since 1967. The so-called GNP deflator rose just 2.5% in 1986, largely because a dramatic plunge in oil prices kept the lid on costs. Another, more widely cited, inflation rate--measured by the consumer price index--was up only 1.1% in 1986, the government announced Wednesday.