THE ECONOMY : Economy Grows More Slowly Than Expected
The nation’s economy grew at an annual rate of 4.3% during the first three months of the year, well below the 5.5% estimated a month ago and far slower than analysts had expected, the Commerce Department said Thursday.
And excluding the farm economy, which rebounded briskly from last year’s drought, economic expansion was only 1.8%, down from the 3% reported earlier. By contrast, the non-farm economy grew 3.5% in the last quarter of 1988.
The slowdown in reported growth had little impact in financial markets Thursday, as the Dow Jones industrial index fell by barely more than a point.
And it drew varying interpretations from economists. Some said a slowdown of near-recession proportions might be imminent; others predicted a quick turnaround and faster growth next year.
Hidden in the revised estimate was evidence, welcome to most economists, that a previously reported slowdown in domestic consumption was offset by a stronger trade performance than earlier reported, mainly because of greater exports.
Bigger sales overseas of American goods in turn permitted manufacturers to reduce business inventories at a faster clip than earlier reported. Although that retards economic output in the short term, it prepares the way for renewed production later on.
Meanwhile, in a separate report Thursday that likewise pointed to slower growth so far this year than earlier had been expected, the Commerce Department said corporate profits in the first quarter fell $21.6 billion, or 1.7%, to a seasonally adjusted annual rate of $319.3 billion.
Signs of Slowdown
This was the biggest decline in profits since a 2.5% drop in the fourth quarter of 1987, when the stock market crashed. In the fourth quarter of 1988, profits increased $10.9 billion, according to a revised report issued Thursday.
“With this revision, it looks even more like a slowdown has already set in this year,” said Giulio Martini of Sanford C. Bernstein & Co., a New York investment banking firm. “But with this drop in business inventories, the question now becomes, how much further can the slowdown go? It now looks much more likely that the economy will be primed to rebound in the fourth quarter, rather than waiting for next year.”
Bernstein’s current estimate: two more quarters of limping growth at or near the non-farm 1.8% annual growth now estimated for the first quarter, then a big rebound to 4% in the last three months of the year.
Likewise, First Interstate Bancorp of Los Angeles sees an economic slowdown for the rest of the year before a rebound next year.
“What this indicates was that the first quarter was much weaker than we had thought, that March was weaker than February and that February was weaker than January,” said Kenneth Ackbarali, a First Interstate economist. “It supports our case that we are close to the onset of a mild and brief recession.”
But thanks to the strong growth in exports and the inventory slowdown, Ackbarali predicted, there will be nothing like the collapse of jobs growth that occurred in 1982, and thanks to expected vigorous reaction by the Federal Reserve Board, a quick rebound can be anticipated early next year.
Good News for Fed
Even economists like Ackbarali, who see a recession as imminent, generally agree that the Fed has stopped squeezing the economy as inflation has moderated and will act to head off a serious slowdown.
David Wyss of Data Resources, Inc., a forecasting firm in Lexington, Mass., said the Fed could not have asked for a more favorable report than Thursday’s.
“Real growth was a lot slower than expected,” he said, “but inventories accounted for all the revision, so there’s much less danger of an inventory correction later in the year. If anything, this increases the chances of a soft landing for the economy and reduces the chances of recession this year.”
In the language of economists, a soft landing is a slowdown to growth rates well within the Fed’s declared inflation-moderating target of 2.5% a year, then a gradual resumption of the expansion.
Final sales, to some economists a crucial tell-tale measure of productive growth because they remove inventories from the accounting, were pegged by Thursday’s report at an annual rate of $4.039 trillion in 1982 dollars, compared to $4.035 trillion in the earlier report. Final sales grew at a 3.5% rate over the previous quarter, compared to 3% in the earlier report.
