Economy Up 3.8%, Inflation Falls but Economists Worry
The economy grew at a healthy 3.8% annual rate last summer, far higher than expected, and consumer price inflation was only 0.2% in September. But economists shaken by the week’s huge Wall Street sell-off reacted to both government reports Friday by expressing worries about the future.
“If Monday hadn’t happened, this would be pretty hot news,” said David Levine of Sanford C. Bernstein & Co., a New York investment banking firm.
“Under normal circumstances, this news would have been terrific,” added Allen Sinai, chief economist for Shearson Lehman Bros. “But, looking ahead, the economy is very likely to soften more in the fourth quarter and next year because of the severe market decline.”
30% Market Plunge
Economists were almost unanimous in noting that consumer spending and business investment--the main engines of growth in the July-August-September quarter--are likely to decline because of the massive loss of wealth suffered in the market’s 30% plunge from its August high.
And there is disappointment in the fact that the trade improvement of recent quarters, which Commerce Undersecretary Robert Ortner said had contributed nearly one-third of the past four quarters’ 3% growth, turned down slightly last summer.
Thus the news was decidely mixed, even though Friday’s Commerce Department report of strong economic growth and sharply lower inflation at a 2.4% annual rate should have “poured some oil on the waters,” as Georgia State University’s Donald Ratajczak put it.
Meager Growth Seen
Levine, who said he still is bullish on the economy, has lowered his fourth-quarter growth estimate to just 3%--still far higher than almost anyone else’s. Sinai sees a meager 0.5% growth by the end of the year, less than one-fourth of his earlier estimates.
And Irwin L. Kellner, chief economist at Manufacturers Hanover in New York, a persistent bear in his recent comments, sees a recession by the beginning of next year if consumer spending kills the Christmas buying season, as he expects.
The one area of agreement among economists is that inflation is no longer a prime worry. Overall, the yearly inflation rate measured by the consumer price index so far this year has dropped to 4.8% after hovering above 5% most of the year.
Clothing Costs Rise
The only discouraging note, economists said, was a steep 1.1% increase in the cost of clothing, reflecting higher import prices brought on by the weaker dollar. In the report, a 0.5% drop in energy costs offset a 0.5% increase in food prices.
Before seasonal adjustment, the consumer price index rose by 1.7 to 344.4 in September. The index is based on a value of 100 in 1967, meaning that a selected cross-section of consumer goods costing $100 in 1967 now costs $344.40.
In the Los Angeles-Long Beach metropolitan area, inflation for the month, unadjusted for seasonal variations, was 0.5%--exactly in line with the unadjusted 0.5% increase in the consumer price index nationwide.
In the GNP report, consumer spending, which had lagged behind overall economic growth for a year, surged at an annual rate of 4.3% in the third quarter. This was by far the largest share of the $35.9-billion real growth in the economy during the quarter.
Investment in plants and business equipment, spurred especially by purchases of new computers and oil and gas drilling equipment, surged 23.7%, or $23.9 billion, the strongest surge in capital investment since the boom year of 1984.
But dampening GNP growth was the trade deficit, which grew at an annual rate of $5.2 billion in the third quarter. A surge in oil imports in the quarter was largely responsible. The huge increase--as importers replenished storage inventories--is not expected to be repeated.
Because U.S. exports increased at an annual rate of $16.1 billion and non-oil imports increased by only $2 billion, the trend toward a stronger U.S. trade performance continued and will continue in the fourth quarter, Commerce’s Ortner predicted.
In Ortner’s view, that continued improvement in net exports of U.S. goods and services should keep the economy growing in the fourth quarter and beyond, and non-government economists generally agreed.
Lower Oil Imports
Ratajczak, for example, estimated that lower oil imports are a virtual certainty for the near future. That is because oil was imported at a level of 230 million barrels a month during the quarter, when about 200 million a month are needed to meet consumption needs.
“We have been witnessing an acceleration of economic activity which should carry us in the fourth quarter,” he said.
Ortner, who agreed with private economists that consumer spending would slow down, noted that car manufacturers, who sold heavily in the summer because of concessional financing, planned to build up their inventories in the fourth quarter, thereby helping to keep the economy in motion.
But Kellner warned that consumers frightened by this week’s turbulence in the markets likely would slow down buying for months to come.
“The consumption part of the economy is going to look very different in the fourth quarter and 1988 because of what happened,” he warned. “Some large retailers were already reporting a consumer slowdown last week. They must be very nervous because, with the approaching holiday season, some of them have already ordered goods and some have already paid for them.”
Kellner added: “If the consumer stays home from the annual Christmas party, then there is going to be a huge surplus of inventory and a slowdown in production for months after that. A recession could start as early as the turn of the year.”
