Economy, Surpassing $5-Trillion Mark, Up at Annual Rate of 5.5%

The U.S. economy, surpassing the $5-trillion mark for the first time, expanded at a robust annual rate of 5.5% in the first three months of 1989, the fastest pace in more than a year, the government reported today.

The Commerce Department said almost half of the increase in the gross national product came from a statistical catch-up from last year’s drought.

But even discounting this bookkeeping factor, the GNP, representing the country’s total output of goods and services, advanced at a 3% annual rate, down only slightly from a 3.5% non-farm growth rate in the final three months of 1988.

The Bush Administration hailed the GNP report as good news that the economy is continuing to expand at a healthy rate.

Trade Deficit Improves

Officials noted in particular the fact that the trade deficit, which had been widening for two consecutive quarters, showed improvement again in the first three months of the year while business investments rose at the fastest pace since last spring.

“There is nothing to indicate a recession in 1989 from these numbers,” J. Antonio Villamil, the Commerce Department’s chief economist, said at a news briefing. “We are getting solid, moderate growth with the kind of mix we need at this stage of the expansion.”

The non-farm growth was slightly better than economists had been expecting. Most analysts believe that the U.S. economy will slow substantially this year under the weight of higher interest rates.

For the last year, the Federal Reserve has been pushing rates higher in an effort to fight rising inflationary pressures.

Inflation Rising

However, the report contained information that inflation is rising. A GNP price index that measures a fixed market basket of goods and services rose at an annual rate of 5% in the first quarter, up from a fourth-quarter rate of 4.2%.

Half of the increase came from a pay increase for federal employees, with rising food and home costs accounting for much of the rest.

The 5.5% overall increase in the GNP was more than double the 2.4% advance in the October-December quarter, the last period in which output was held back because of the effects of the drought.

With the start of the new year, the government returned its estimate of farm output to normal levels, thus accounting for 2.5 percentage points of the 5.5% increase in the first quarter.

The first quarter GNP report provided some evidence that the economy was slowing.

Consumer spending, which accounts for two-thirds of all economic activity, rose at a rate of just 1.3%, the slowest advance in more than a year. Purchases of durable goods such as autos actually fell by 3.2% in the first quarter while purchases of products not expected to last three years edged up 2%.

Housing construction, another key consumer sector, dropped at an annual rate of 3.6% in the first quarter, the first decline in a year as the housing industry suffered under the impact of rising mortgage rates.