Economy Seen Expanding for Rest of Year
The U.S. economy, displaying almost no ill effects from last October’s stock market crash, grew at a moderate 2.3% annual rate during the first three months of 1988 and laid a solid foundation for continued expansion for the rest of this year, the Commerce Department estimated Tuesday.
“These numbers are uncommonly good,” said Jerry Jasinowski, senior economist at the National Assn. of Manufacturers. “The domestic economy is substantially stronger than expected, and there are no signs of a recession.”
On the surface, the first-quarter growth rate in the gross national product suggested the economy was losing steam after its rapid 4.8% pace of the last three months of 1987.
But in reality, analysts said, the underlying figures indicated the nation’s total output of goods and services was in much better balance at the beginning of 1988, propelled forward by a rebound in consumer spending and business investment rather than the accumulation of unsold goods that propped up the economy at the end of 1987.
The economic news cheered Republican officials, who are counting on a healthy economy this year to help Vice President George Bush defeat his expected Democratic rival, Massachusetts Gov. Michael S. Dukakis, in the battle to succeed President Reagan.
“So much for the recession that was supposed to occur in the first quarter,” Commerce Undersecretary Robert Ortner told reporters. “Whatever the impact (of the stock market crash) was, it’s pretty much behind us.”
Only a few months ago, after the stock market collapse of Oct. 19 wiped out more than $500 billion in accumulated paper wealth, many economists were convinced that consumers would retrench, manufacturers would reduce production accordingly and the U.S. economy would tumble.
Spending Rebounded
It didn’t happen. Consumer spending, after slumping by an annualized $16.1 billion in the final quarter of 1987, rebounded by $23.6 billion--or 3.8%--in the first three months of this year.
As a result, most analysts are now convinced there is little chance that the economy will sink into a recession before the November presidential election.
“This is positive news for Republicans,” said Jerry Jordan, chief economist at First Interstate Bank in Los Angeles. “The Democrats are not going to be able to make an issue out of the domestic economy. A lot of people will be inclined to agree: If it ain’t broke, don’t fix it.”
Indeed, rather than a recession on the horizon, the latest report hinted at the possibility of faster growth and higher inflation in the months ahead.
‘Pretty Strong Economy’
“All the numbers are pointing toward a pretty strong domestic economy,” said David Levine, chief economist at Sanford C. Bernstein & Co., a New York investment firm. “I expect to see stronger growth, higher interest rates and more signs of an overheating economy.”
Inflation remained under control for the first quarter of 1987, however, with the Commerce Department’s price index rising at a moderate 3.7% annual rate, only slightly higher than the 3.6% of the fourth quarter of 1987.
And there was little indication from financial markets that investors are worried about the immediate prospects for more inflation. Interest rates on long-term bonds, which normally rise on news of stronger-than-expected economic growth, showed little reaction to the GNP report.
One of the reasons for the bond market’s complacency may be that the signs of economic improvement lay buried deep within the figures released by the Commerce Department on Tuesday.
Expansion Faster
Although the economy expanded at a much faster 4.8% during the last three months of 1987, nearly all of that quarter’s increased production piled up unsold on retailers’ shelves and in auto dealers’ back lots. Business inventories rose at an annual rate of $39.4 billion.
In the first three months of this year, by contrast, inventories dropped by $13.2 billion, setting the stage for production increases in the months ahead.
Underlying demand for the output of the U.S. economy picked up at a 4.3% rate during the first three months, a sharp turnaround from the slight 0.1% dip during the final quarter of 1987. But many analysts failed to note the rebound because it was obscured by a dramatic but meaningless fluctuation in government purchases of farm products.
‘A Sawtooth Economy’
“Even more than usual, the overall numbers don’t tell the full story,” said Jeffrey Leeds, an analyst for Chemical Bank in New York. “It looks like we’re in the midst of a sawtooth economy. The first quarter looked weak but actually it was very strong, while the fourth quarter looked strong but generated fears that the expansion would weaken.”
The U.S. trade deficit, adjusted for changes in the prices of exports and imports, improved at only a modest $3.6-billion annual rate, but analysts noted that the underlying improvement in the nation’s trade balance was held back by a surge of oil imports.
A big jump in business investment at a 32.5% annual rate, much of it on computers and related equipment, provided the economy with a shot in the arm that should help manufacturers improve the efficiency of their factories and ease production bottlenecks in several critical industries.
But two factors held back GNP growth in the first quarter. Home building fell 9.4%, and the record swing in farm subsidy payments accounted for most of a 22.3% drop in federal government spending.
