Economic Growth Slows to 4.3% Rate : Expansion of GNP in First Quarter Is Much Lower Than Earlier 5.5% Estimate

The U.S. economy grew at a 4.3% annual rate in the first three months of 1989, much slower than previously thought, the government reported today.

The Commerce Department’s estimate of growth in the gross national product, the broadest measure of economic health, was well below an initial estimate a month ago that put the GNP increase at 5.5%.

The slowdown was even more pronounced when the effects of a rebound from last year’s drought in the farm sector were removed.

That rebound added 2.5 percentage points to growth in the first quarter after the drought had subtracted 1.1 percentage points in the last quarter of 1988.

Non-Farm Economy

Thus, growth in the non-farm economy slumped to a lackluster 1.8% in the first three months of the year, down from a non-farm growth rate of 3.5% in the fourth quarter and the slowest quarterly GNP advance in more than two years.

At the same time, inflation grew at an annual rate of 5% during the January-March quarter, unchanged from the earlier estimate.

The 4.3% overall GNP increase was substantially lower than expected. In advance of today’s report, many forecasters were looking for only a slight downward revision to 5.4% GNP growth.

However, Michael Evans, head of a Washington forecasting firm, said the GNP report was actually good news for the economy because much of the weakness came from a big downward revision in the amount of inventories being accumulated by businesses.

While inventory growth adds to the GNP growth rate, it is often worrisome to economists who fear that it will lead to big cutbacks in production in later months as companies try to get their stockpiles more in line with sales. If the production cutbacks and job layoffs are too severe, then an unwanted inventory buildup can trigger a recession.

‘Won’t Be a Cutback’

“The fact that inventories were well under control means there won’t be a cutback this quarter,” Evans said. “The economy is in amazingly good shape. There seem to be no signs of a serious slowdown.”

Commerce Secretary Robert A. Mosbacher said the Federal Reserve’s efforts to fight inflation by slowing growth appeared to be having the desired effects.

“Fed policy over the past year appears to be succeeding in steering the economy to a more moderate, but sustainable, growth path,” he said in a statement. “A more moderate pace of economic growth at this stage of the record expansion will assist in reducing inflationary pressures in the quarter ahead.”

Even with the effects of the drought, the GNP expanded last year at a four-year high of 3.9%. That rapid pace helped to drive unemployment down sharply and the overall prosperity was credited in part with helping the Republicans hold onto the White House.

However, the expansion, which has lasted a peacetime record of more than six years, is expected to slow this year under the impact of the credit-tightening engineered by the Federal Reserve in an effort to keep inflation under control.