Economy Rose at 4.2% Annual in Fall but Outlook Is Clouded : Spending Slump, Inventory Growth Arouse Concern

The economy expanded at a surprisingly brisk 4.2% annual rate from October through December despite a huge slump in consumer spending, the government reported today.

The growth rate, however, masked some worrisome trends in the economy that could indicate a recession is on the way, some experts said.

The Commerce Department said that overall economic growth, as measured by the gross national product, was not affected by the record collapse in stock prices of Oct. 19. The 4.2% fourth-quarter GNP growth rate was little changed from a rate of 4.3% in the July-September quarter.

The bulk of the $39.2-billion improvement in GNP growth in the fourth quarter came from a sharp $33.7-billion rise in inventories held by businesses.

Consumer Spending Plummets

This increase was occurring at the same time that consumer spending was plummeting by $24.1 billion. The drop in consumer spending translated into an annual percentage rate decrease of 3.8%, the biggest setback in this area in more than seven years.

Economists are worried that consumer spending, which accounts for two-thirds of the overall GNP, will weaken in the wake of the collapse in stock prices, dragging the country into a recession.

With consumer spending falling at the same time that inventories are soaring, businesses probably will have to cut back production in coming months to work off unwanted stockpiles.

Many economists are forecasting that GNP growth in the first half of 1988 will be below 1%.

At the White House, spokesman Marlin Fitzwater said: “This report shows that strong growth in production and income continue through the fourth quarter. It’s also good to see that real net exports resume their improvement. . . . The economy continues to perform with considerable strength.”

‘Confirms Worst Fears’

But Michael Evans, one of the private economists who is predicting a recession this year, said the GNP figures confirm his worst fears.

“This is the clearest indication we have seen yet that a recession is on the way,” said Evans, who heads his own Washington forecasting firm. “Such a big rise in inventories and such a big drop in spending is a lethal combination.”

Officials of the Reagan Administration agreed that the large rise in business inventories would mean slower growth in coming months, but they maintained that businesses will be able to work off the excess supplies without cutting production so much that the country topples into a recession.

The unexpectedly strong fourth-quarter growth helped push growth for all of 1987 to 3.8%, when measured from the fourth quarter of 1986. This contrasted with growth of 2.2% in 1986 and was the best showing since 1984.