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Economic Expansion Held Back by Drought

From Associated Press

The economy expanded at a moderate 2.4% annual rate in the last three months of 1988, the government reported Thursday, but analysts said the figure was held down by last summer’s drought and masked strong underlying growth at year’s end.

The increase in the gross national product, the broadest measure of economic health, would have been closer to 3.5% last quarter were it not for the drought, the Commerce Department said.

Analysts are divided over how much of that momentum extended into 1989, but most expect a slowdown as the aging economic expansion stretches through its seventh year.

The fourth-quarter GNP figure was revised upward from an initial government estimate of 2% and contributed to growth of 3.9% for all of 1988, the best showing since a 6.8% increase in 1984.

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Fed Wants to Slow Growth

“The upward revision underscores a banner year for the economy growth-wise in 1988 and indicates the strong momentum that the economy carried over into 1989,” said economist Allen Sinai of Boston Co.

Several recent government reports, however, have offered signs the economy already may be cooling off in response to efforts by the Federal Reserve Board to raise interest rates to dampen inflationary pressures.

Retail sales, housing construction, orders for durable goods and factory operating rates all were down last month, while inflation remained above last year’s levels.

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The Federal Reserve wants to slow growth to a more sustainable pace to reverse what Fed Chairman Alan Greenspan has called “disturbing” price increases, although some critics are afraid the central bank could go too far and push the country into a recession.

Economist Lawrence Chimerine of the WEFA Group in Bala-Cynwyd, Pa., said the critical question is how significantly the economy is cooling, although it appears the nation is moving toward slower growth rather than an outright downturn.

“It’s much too premature to conclude we’re heading into a recession,” Chimerine said.

The Fed’s anti-inflation efforts and a trade deficit that is worsening as the export boom stalls both are expected to contribute to slower growth this year.

GNP growth is likely to decline by more than a percentage point in 1989 to around 2.7%, analysts believe, despite an anticipated sharp upswing in the first quarter due to a rebound from the drought.

The Bush Administration is counting on growth of 3.2% to help it reduce the federal budget deficit while adhering to the President’s “no new taxes” campaign pledge.

The government next month will release its initial estimate for GNP growth in the first quarter. Forecasters are pegging the figure at around 4.7%, with a 2.5 percentage-point boost from the farm rebound masking a broader economic slowdown.

Michael Evans, head of a Washington consulting firm, said the economy could be particularly sluggish in the second half of this year, with the risk of recession running at about 40%.

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Nevertheless, the Fed had “no choice but to tighten” its grip on the money supply, given the troubling inflation numbers, Evans said.

Some analysts warn that the nation could experience a double negative this year if the economy cools but inflation fails to respond quickly to that slowdown.

“This may be the year in which real growth may be slowing while inflation is accelerating,” said economist David Jones of Aubrey G. Lanston & Co.

An inflation index tied to the GNP rose at an annual rate of 5.3% in the October-December quarter, up from 4.7% in the third quarter. Those figures represent high levels for the GNP deflator, which had risen at an annual rate of 3.8% or less for the last three years.

Corporate profits, meanwhile, were up 2.8% in the fourth quarter and 14.6% for all of 1988, the government reported. Last year’s increase was the biggest since a 22.4% post-recession jump in 1983.

The upward revision in last quarter’s GNP figure reflected higher government spending than earlier estimated and a smaller drop in business investment.


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