GNP Up Hearty 3.8% Last Year : Growth Best in 4 Years Despite Stock Crash, Drought

The U.S. economy shook off the effects of the stock market crash and the drought to grow at a robust 3.8% in 1988, the best performance in four years, the government reported today.

The increase in the gross national product, the broadest measure of economic health, was powered by a big improvement in the U.S. trade deficit and a sharp increase in business capital investment.

The advance occurred even though growth slowed sharply in the final three months of the year. From October through December, the GNP grew at a lackluster annual rate of 2%, the slowest quarterly performance in two years. Weakness in consumer spending and business investment held back growth.

The fourth-quarter GNP increase followed a 2.5% rise in the July-September quarter.

Many economists predict that these trends will intensify this year and will result in sharply lower growth for 1989. That would give President Bush a major headache because his hopes of lowering the budget deficit without an increase in taxes rest on expectations of continued strong economic growth.

Commerce Undersecretary Robert Ortner said there were several positive economic developments during 1988.

“We made significant progress in reducing the trade deficit, the unemployment rate dropped to a 14-year low and the stock market began a sustained recovery from its plunge in late 1987,” he said.

The 3.8% GNP increase for 1988 followed a 3.4% rise in 1987 and was the best showing since a 6.8% rise in 1984.

Higher inflation accompanied the increase in growth. An inflation index tied to the GNP rose 4.2% in 1988, the fastest rise in prices since 1982.

The jump in inflation, up from a 1987 price increase of 3.6%, has set off alarm bells at the Federal Reserve Board, which has been driving interest rates higher in an effort to dampen demand and keep inflationary pressures in check.

Bush complained this week that the Fed should not grow so concerned about fighting inflation that it risks slowing economic growth, but many analysts believe the board’s inflation-fighting efforts will continue and push interest rates even higher.

The 3.8% GNP increase in 1988 was a far cry from what many analysts had forecast when the year began. The most pessimistic of them had predicted that the economy would be in a recession before year’s end, brought on by a cutback in consumer spending as a result of fears triggered by the October, 1987, stock market crash.

Instead, consumers kept right on spending, with personal consumption purchases rising 2.8% during the whole year.