In the face of October's stock market crash, the nation's output of goods and services increased at a surprising 4.2% annual rate during the final three months of 1987, the government reported Wednesday, but the impetus came from a huge buildup in unsold goods that threatens a production slowdown in 1988.
Consumer spending took its biggest dive in more than seven years. To clear the shelves of the merchandise customers didn't buy, businesses are likely to cut production and may dismiss some workers in coming months, many economists fear.
"On the surface, the numbers look good; underneath, they look terrible," said Donald Straszheim, chief economist for Merrill Lynch. "Consumer spending fell right out of bed."
The single bright spot came from exports, which rose a healthy 16.2% on an annual basis. "To keep the economy out of recession in 1988 will require a further significant improvement in trade," Straszheim said.
For all of 1987, the gross national product rose 3.8%, its strongest performance since 1984. And, despite the ominous signals during the final three months, the Reagan Administration remains confident that the economic expansion that began in 1983 will continue.
Growth in 1988 Seen
"We believe we can look forward to another year of economic growth in 1988, though more moderate than last year's pace," said Commerce Undersecretary Robert Ortner. "We had anticipated a slowdown in consumer spending in the fourth quarter, even before the stock market drop."
Private economists expect a slowdown at the beginning of this year as businesses dispose of the big inventories, but many still hope a recession can be averted.
"I'm looking for a rebound in consumer and business spending," said David M. Jones, chief economist for Aubrey G. Lanston & Co., a New York securities firm. "Auto sales are beginning to perk up and department store sales look better. I think we'll have a rebound and no recession. But the first quarter will certainly be unnerving for Republicans."
Threat of Slump Cited
S. Jay Levy of Levy Economic Forecasts of Chappaqua, N. Y., still expects about 2% economic growth in 1988. "We are not predicting a recession," he said, "but we are emphasizing that the threat of a recession is too great to be blithely passed by."
The Reagan Administration, which revised its forecast for 1988 after the stock market plunge, is predicting that the economy will grow by 2.4% this year.
In the fourth quarter of last year, the gross national product increased by $74 billion to an annual level of $4.6 trillion. The Commerce Department adjusts for inflation by measuring the size of the economy according to the dollar's purchasing power in 1982, and, on that basis, the economy grew by $39.2 billion in the fourth quarter.
But businesses were producing goods faster than the public was buying them. Of the $39.2-billion growth in economic output, the piling up of inventories by businesses accounted for a whopping $33.7 billion.
Sharp Spending Drop
Consumer spending plunged at an annual rate of 3.8%, the steepest decline since the second quarter of 1980, when the country suffered a short, sharp recession. In dollar terms, consumer spending fell $24 billion, due in large measure to a decline in auto sales, compared with an increase of $33 billion in the previous quarter.
"These are real weak numbers," said Roger Fulton, director of research at Shilling & Co., a New York forecasting firm. "Consumption was down more steeply than we had anticipated."
Economists hope growing sales abroad will pick up the slack caused by declining sales in the United States.
"Exports of goods and services were the engine of growth" for the economy in 1987, said Graciela Ortiz, director of the forecasting section of the U.S. Chamber of Commerce.
Factory Orders Rise
Ortner took heart from Tuesday's report that factory orders jumped 6.7% in December, the biggest rise in more than a year. That report, he said, "is consistent with our expectation of growth in business . . . investment."
Wednesday's report, the preliminary estimate of the fourth quarter's economic activity, was based partly on actual performance and partly on educated guesses by Commerce Department economists.
Revised estimates will be issued next month, but the preliminary report usually serves as an accurate guide to the state of the economy.