GNP Up 5.5% in Recovery From Drought

Rebounding smartly from the drought that crippled the nation’s farm belt for much of 1988, the economy grew at a brisk 5.5% annual rate from January to March, up from 2.4% in the final three months of 1988, the Commerce Department estimated Wednesday.

The non-farm economy, however, slowed slightly in the first three months of the year. Without the distorting impact of the drought, the growth rate in the first quarter of 1989 would have been 3%, a decline from 3.5% growth in the non-farm economy in the last three months of 1988.

Even that 3% growth rate is somewhat stronger than the 2.5% growth that the Federal Reserve has called the maximum that can be sustained without an outbreak of inflation. Inflation indicators accompanying the Commerce Department’s economic growth estimate showed prices rising between 4.8% and 5% this year.

“We had some slowing in the first quarter, but not so much as some people had thought,” said Bruce Steinberg of the Merrill Lynch investment house in New York. “Three percent in the non-farm economy is healthy.”

For the first time, the gross national product exceeded $5 trillion on an annual basis in the first three months of the year. The Commerce Department said the economy produced at an annual rate of $5,116.8 billion.

Hidden Factors

Hidden in Wednesday’s statistics, which are subject to two revisions before a final report is issued in June, were several factors that economists said portend slower growth in the near term but stronger growth later on.

Spending on personal consumption, which had been expanding faster than national economic growth for the last three quarters, grew at an annual rate of only 1.3%, the slowest rate since the final quarter of 1987, which included the stock market crash.

Thanks to a slump in auto sales, consumption of durable goods dropped by an annual rate of 3.2%, and private investment in residential housing slumped at an annual rate of 3.6%. At the same time, with disposable income rising at an annual rate of 7.7% after inflation, Americans saved at an annual rate of 5.7%, the highest rate in five years.

Partly offsetting the consumer spending slowdown, business investment resumed the boom-like pace set in most of 1988. Capital spending by businesses advanced at an annual rate of 9.6%, after a 2.9% decline at the end of last year. Investment in industrial machinery, computers and other equipment advanced at a 10.2% rate.

Economists generally agreed that this investment growth is laying the groundwork for continued growth in industrial productivity and enhanced global competitiveness into the 1990s.

The other big contributor to overall economic expansion was a healthy $9.8-billion improvement in the trade deficit, measured in 1982 dollars, after a bad quarterly sag of $11.5 billion at the end of 1988. Exports advanced a healthy $13.3 billion on an annual basis, a 10.6% improvement, while imports grew by $3.6 billion, or 2.3%.

Steinberg pointed to the sharp increase in capital spending as particularly encouraging.

“We may see some wobbles in the manufacturing sector in the near term if consumption keeps slowing, but in the medium to longer term we ought to be in decent shape,” he said. “It looks as though we should regain competitiveness in basic manufacturing.”

Lynn Reaser, a senior economist at First Interstate Bancorp in Los Angeles, predicted a further consumer spending slowdown in the next few months as a result of the higher interest rates that the Federal Reserve has engineered.

“The fact that net exports and capital spending are holding up is a very healthy development,” she said. “It has been the aim of the Fed all along to slow spending as compared to production and that seems to be happening. The improvement in exports was very positive and we expect exports to continue to be stronger, mitigating other aspects of a (spending) slowdown.”

Giulio Martini of the New York investment house of Sanford Bernstein & Co. predicted that the longer-term improvement in the trade balance, which resumed in the first quarter after an interruption late last year, would continue.

“Import prices are increasing faster than domestic prices for the same goods, so we should have a steadily improving trend here,” Martini said.