Economic Pace Stirs Concerns About Inflation

The Commerce Department reported Thursday that the economy picked up more steam last quarter than it previously had estimated, intensifying inflationary pressures and raising the prospect of possible further hikes in interest rates.

Revised figures on the gross national product showed that the economy’s total output expanded at a 3.3% annual rate between April and June--about the same as the 3.4% pace posted during the previous quarter, and two-tenths of a percentage-point faster than was estimated in late July.

Particularly discouraging to analysts was that the speedup in the overall economic growth rate came primarily from stronger-than-expected consumer spending--despite a sizable falloff in apparel purchases so far this year.

Consumer Spending

William C. Melton, economist for IDS Financial Services in Minneapolis, noted that most analysts had been hoping consumer spending would begin to slacken by mid-year so that the nation’s production capacity would not be strained and inflation pressures would be eased.

“But that doesn’t seem to be the case,” he said. “That was the shocker in the numbers.”

The new figures showed that consumer spending rose at a 2.7% annual rate during the quarter, up from a 2.3% pace calculated in the late-July estimate.

Moreover, department economists said, had it not been for crop and livestock losses from the drought, the growth rate for the second quarter would have been 4.3%--far too rapid a pace to ease inflationary pressures, considering that labor is in short supply and many industries are running at full capacity.

The department estimated that overall losses from the drought will cost the economy $14.3 billion over the year after adjustment for inflation and will shave 0.4 percentage-points from overall growth this year.

The revised report confirmed earlier estimates that inflation is accelerating. The GNP price index, the government’s broadest measure of inflation, soared at a 4.7% rate--significantly faster than the 3.5% pace of the January-March period. The inflation figure was unchanged from the late-July estimates.

The figures heightened fears by analysts that the economy is on the verge of overheating and that inflation may be firmly back on the rise--an outlook that could prompt the Federal Reserve Board to push interest rates up further.

David M. Jones, economist for Aubrey G. Lanston & Co., a Wall Street investment firm, said that the second-quarter growth rate was “a whole percentage-point higher than the Fed would like to see at this time, given the high rates of capital and labor resource utilization.”

Lynn Reaser, economist for First Interstate Bancorp of Los Angeles, agreed: “There is a growing concern that the economy is growing too rapidly,” she said. “The risk is clearly on overheating.”

The Fed already has expressed concern that the economy may be expanding too rapidly and intensifying inflation pressures. Hoping to constrain the price surge, the Fed raised its discount rate--the interest it charges financial institutions--to 6.5% on Aug. 9, from 6%.

Economists fear that if the Fed tightens too much, it could spark a recession.

The 4.7% inflation rate is the highest in almost six years.

Economists say that a slowdown in consumer spending also would help reduce the trade deficit because Americans would be buying fewer imports. With demand for exports now so high because of the low value of the dollar, some manufacturers are having difficulty supplying both the home market and orders from abroad.

Meanwhile, the department reported that profits of American corporations rebounded sharply last quarter, rising 5%, or $15.8 billion, to a new annual rate of $332 billion. By contrast, profits rose only at a $100-million rate in the previous three-month period. The figures reflect profits from current production.

Domestic profits of nonfinancial corporations rose $5.7 billion in the second quarter, compared to a $12.2-billion rise in the previous quarter. Domestic profits of financial corporations increased $2.1 billion last quarter after falling $800 million in the first.

The report showed that corporate profits before taxes rose $24.5 billion last quarter to a new rate of $310.7 billion, while profits after taxes rose $17.2 billion to $166.6 billion.