GNP Growth Slows to 2%; Trade and Drought Cited

The economy grew at a lackluster annual rate of 2% in the final three months of 1988, the slowest pace in two years, reflecting a worsening trade deficit and the lingering effects of the summer drought, the government said Tuesday.

The Commerce Department said the slowdown in the gross national product, the total output of goods and services, was accompanied by a pickup in the inflation rate as food prices and the costs of imports both rose.

While the 2% overall growth figure was unchanged from an initial report a month ago, economists labeled the new GNP statistics disturbing because of the weakness in trade, the speedup in inflation and an acceleration of consumer spending.

“The shape of the economy looks worse than we thought,” said David Wyss, senior financial economist for Data Resources Inc. of Lexington, Mass. “All the changes were in the wrong direction.”

Economists were concerned because the new GNP report showed that the country’s trade imbalance worsened even more than previously estimated during the fourth quarter as imports grew at an annual rate of 13%, swamping a 7% gain in exports.

Consumer spending rose at a robust 3.5% annual rate, too fast given current constraints on production resulting from tight labor markets and high operating rates, economists said. The jump in consumer spending, which went primarily to big-ticket items such as cars, also showed that Americans’ appetite for foreign goods is unabated.

“The surge in consumption pulled in more imports with the result that the deterioration in the trade deficit was worse than previously assumed,” said Jerry Jasinowski, chief economist of the National Assn. of Manufacturers.

It marked the second consecutive quarter that the GNP trade deficit worsened and served to emphasize economists’ contention that America’s trade woes are a long way from being solved.

The fourth-quarter GNP increase followed a 2.5% third-quarter rise and was the slowest quarterly increase since a 1.4% rate in the final three months of 1986.

The fourth-quarter figure was depressed by the lingering effects of last summer’s drought.