Economy’s Growth Rate Rises to 4.8% : But GNP Movement Overstates Strength, Analysts Caution

The U.S. economy, helped out by the first back-to-back quarterly improvements in the trade deficit in six years, grew at a surprisingly strong 4.8% rate in the first three months of the year, the government said today.

Analysts, however, cautioned that the performance of the gross national product deceptively overstated the strength in the economy and they continued to predict a sharp drop in the growth rate for the current April-June quarter.

The new report reflected an upward revision from a month ago, when the government estimated the GNP growth at 4.4% in the January-March quarter.

Additional Decline

All the improvement came in an additional decline in the nation’s trade deficit above what had been estimated previously. The report said the trade deficit shrank for a second consecutive quarter, something that has not occurred since the spring and fall of 1980.

The trade improvement is good news for the Reagan Administration, which has been basing its hopes for stronger growth this year on a substantial drop in the trade deficit.

While growth was up in the first three months of the year, inflation shot up as well, with an inflation index tied to the GNP rising at a 4.2% annual rate, the fastest pace in three years. This GNP deflator had risen just 0.7% in the fourth quarter. The big jump in prices was blamed on rising energy costs.

Improved Performance

The 4.8% GNP growth in the first three months of the year was more than four times the 1.1% growth rate turned in during the last three months of 1986. It was the fastest performance since a 5% GNP increase in the second quarter of 1984.

Since the spring of 1984, the country has been mired in an extended period of sluggish economic activity, stemming primarily from huge trade deficits that have robbed American manufacturers of sales at home and abroad.

Even with the improvement in trade, economists discounted much of the GNP increase in the first quarter because it came from a $69.2-billion rise in business inventories, concentrated in a buildup in unsold cars.

That advance in inventories came as consumer spending was plunging at an annual rate of $25.7 billion. This led to a 2.7% rate of decline in final sales, representing the first drop in sales since the low point of the last recession in the third quarter of 1982.

The weakness in sales included a 1.1% drop in consumer spending, an 11.5% fall in business capital spending and a 2.4% decline in residential construction.

The decline in consumer spending, which accounts for two-thirds of all economic activity, was particularly worrisome to economists because it was the second consecutive drop in spending, something that has not happened for 13 years.

Weak Growth Expected

With sales falling and inventories rising, analysts believe the second quarter of this year will be a period of very weak growth as businesses are forced to cut production to work down high levels of unwanted inventories.

Some economists are even forecasting a declining GNP, something that has not occurred since the last recession.

But analysts do not believe this will signal the start of another recession. Instead, they are predicting that the GNP will strengthen to a respectable pace again in the second half of the year, once businesses have trimmed inventory levels.