GNP Grows 3.8% in ‘88, a 4-Year High; Rise Only 2% in Quarter
Lingering effects of the summer drought held the nation’s economic growth to an annual rate of 2% in the last three months of 1988, the Commerce Department said Friday, but growth for all of 1988 came in at 3.8%, the strongest in four years.
Without the drought, the government’s advance estimate of fourth-quarter growth would have been 3.1%, and the year’s expansion would have been 4.2%--well above the 2.5% growth rate the Federal Reserve has set as an optimal target in its long-term fight against inflation.
Without the distorting impact of the drought from economic data, the economy is expected to rebound at an artificially high annual rate during the current, January-March quarter--perhaps as high as 5% or 5.5%, normally enough to spook the Fed into cracking down hard on short-term interest rates.
But market economists were cheered by several signs in Friday’s report that suggest that the economy is just as likely to enter a period of stable, gradual growth with moderating inflation, rather than the kind of hurry-up boom that cheers politicians but throws traders into panic.
Wall Street rallied on all fronts, with the Dow Jones industrial index advancing 31.79 points by the end of the day, to wind up at 2,322.86, its highest level since before the October, 1987, crash.
The gross national product price index rose at an annual rate of 4% for the quarter, compared to 5.3% last summer and 5% last spring. This inflation measure wound up the year 4.6% higher, compared to a 3.6% advance the year before--suggesting that inflation is indeed accelerating but not so fast as had been feared six months ago.
Some of Friday’s market cheer, perversely enough, derived from the fact that two bellwether indicators of industrial health--net exports and capital investment--turned soft in the quarter. Consumer spending and investment in housing were strong, however.
There were indications that consumer spending, which the Fed and some government economists would like to dampen to enhance private saving and further diminish the trade deficit, is gradually stabilizing at a rate not much higher than overall economic growth. Personal savings increased at an annual rate of 4.6% in the fourth quarter and 4.2% for the year, after having slumped to 3.2% in 1987, the lowest in 40 years.
“Overall, the economy, leaving out the drought, was expanding solidly but with a hint of softness in the business sector,” said Allen Sinai, chief economist at Boston Co., in a fairly typical assessment. “That hint of softness conjures up an image of the soft landing the central bank (the Fed) is aiming for. But so far it’s only a hint, and the jury is still out.”
One problem is that an important “hint of softness” took a form nobody welcomes: a worsened international trade picture for the second quarter in a row. Exports increased at a 2.8% annual rate, compared to 14.5% in the third quarter and 17.7% for all of 1988, clearly a declining trend. Imports increased at a 7% rate, not much off the 8.3% increase for the year.
The huge surplus of imports over exports translated into a $6.8-billion decline in real net exports for the quarter, detracting from the $29.8-billion improvement in the deficit in traded goods and services for all of 1988, measured in inflation-adjusted 1982 dollars. In real terms, the trade deficit last year declined to $99.1 billion, compared to $128.9 billion in 1987.
There was also a sharp decline in the last quarter in business investment, which had been booming since the beginning of the year. From October to December, investment fell at an annual rate of 3.7%, after strong increases of 7.6%, 15% and 4% in the three previous quarters.
Economists cautioned, however, that Friday’s growth estimate was based on incomplete data for the quarter and almost certainly does not reflect a lasting slowdown in capital spending, noted David Wyss of Data Resources, Inc. of Lexington, Mass.
Indeed, Wyss noted, the Commerce Department said in a separate report only Thursday that factory orders soared 6.4% in December and orders for non-military capital goods--the key category for business investment, jumped an even more impressive 7.8%.
Furthermore, one of the factors in the quarter’s reported slowdown in gross private investment was a drop-off in accumulation of unsold inventory at the rate of $3.8 billion in 1982 dollars.
An inventory slowdown, if modest and unaccompanied by a collapse in domestic consumption, is generally welcomed as a sign the economy is growing at a stable and sustainable rate.
As for consumption, Wyss suggested, overall consumer spending for goods and services increased at an annual rate of 2.8%, compared to 3.9% last summer, 3% last spring and 4.5% in the first three months of the year.
Since real growth in the quarter was probably closer to the 3.1% it would have attained without drought effects, spending growth seems to have settled down to about the pace of growth in the economy at large.
