Economic Growth Rate Weakest Since 1986; Drought Cited

The U.S. economy grew at a modest 2.2% annual rate from July through September, the weakest performance in almost two years, the government reported today.

The Commerce Department blamed the weak growth rate on the impact of the summer drought, a deterioration in the country’s trade performance and a drop in government purchases of defense equipment.

The changes left the gross national product, the broadest measure of the economy’s health, rising at the slowest pace since a 1.4% increase in the fourth quarter of 1986.

The GNP advance was down from growth rates of 3.4% in the first quarter and 3% in the second quarter of this year.

With the slower growth came an easing in inflationary pressures as a price index tied to the GNP rose at an annual rate of 4.4% from July through September, down from 5.5% in the second quarter.

‘Burden Off the Fed’

Many economists viewed the GNP report as good news because the slowdown should reduce the need for the Federal Reserve to drive interest rates higher as a way of dampening demand in an overheated economy.

“The burden will certainly be off the Fed to tighten because of inflationary pressures,” said Michael Evans, head of a Washington forecasting firm. “This appears to be heading us toward the soft landing everyone was looking for.”

Commerce Undersecretary Robert Ortner said that the latest GNP report shows the economy is still enjoying steady growth in the expansion following the 1981-82 recession.

But the GNP report could prove to be a modest setback for Republican presidential candidate George Bush, who has pointed to the strength of the economy as a reason why voters should not take a chance on his Democratic rival Michael S. Dukakis.

Peacetime Growth Record

Growth in the October-December period will have to be at least 3.4% to reach the Administration’s prediction of 3.0% for the full year.

The economy has been expanding for almost six years, a peacetime record, and unemployment has fallen to near 14-year lows. But Democrats have argued that the success has been bought at the price of a huge accumulation of debt that has transformed the United States during the Reagan presidency from the world’s largest creditor nation to the biggest debtor.

The government said growth in both the second and third quarters was depressed by the drought.

Without the loss of farm output, the economy would have raced ahead at a 4.3% rate in the second quarter and 2.8% in the third quarter.

Also depressing growth in the third quarter was the first quarterly deterioration in the country’s trade performance in a year.