Report on Economy Sends Mixed Signals : 4.4% GNP Rise Tied to Bookkeeping, Not Real Growth

The U.S. economy appeared to grow at an annual rate of 4.4% in the first three months of the year, slightly better than previously believed, but actually slowed dramatically, the government reported today.

The Commerce Department said more than half the growth in the gross national product came from a rebound from last summer’s drought, a one-time boost that is more of a reflection of the government’s accounting methods than a measurement of the real economy.

Discounting the bookkeeping entry to return expected farm production this year to its pre-drought levels, growth actually slowed dramatically in the January-March quarter.

Sluggish Non-Farm Growth

The non-farm economy grew at a sluggish annual rate of 1.9%, contrasted with a 3.5% rate in the final three months of 1988.

This slowdown is in line with many economists’ expectations. Private analysts predict that the U.S. economy will slow dramatically this year under the impact of an anti-inflation campaign waged by the Federal Reserve. The central bank in March, 1988, began to drive interest rates higher in an effort to dampen demand.

The new GNP report contained some good news on the inflation front as a GNP price index rose at an annual rate of 4.6%, down from a preliminary estimate of 5% a month ago.

The increase in the GNP price index that measures a fixed market basket of goods was up only slightly from a 4.2% increase in the fourth quarter of 1988. The government said the downward revision came from slower price increases for farm products and industrial supplies than earlier estimated.

Many analysts are predicting that overall growth will slow this year to what is known as a growth recession, a period when the economy keeps expanding but at such a sluggish pace that unemployment rises.

Some economists believe that is already occurring. After falling to a 15-year low in March, the unemployment rate has risen to 5.2%, with job growth dropping in May to its slowest pace in three years.

While the expectation of slower growth this year is virtually universal, there is still a hot debate over whether the slowdown will worsen into a recession, ending the record six-year peacetime economic recovery.

Interest Rates Lowered

The Federal Reserve sent signals last week that it has begun lowering interest rates slightly. Optimists are hoping that move will occur in time to revive important sectors of the economy, such as housing and auto sales, that have been hurt by rising interest rates.

The effect of the economic slowdown was evident in a companion report released today that showed the after-tax profits of American corporations fell by 1.1% in the first three months of 1989.

It was the first setback for corporate profits since a 2.5% decline in the first quarter of 1987.

The primary reason for the slight upward revision in the overall 4.4% GNP figure was a better performance in trade than previously believed.

The U.S. trade deficit, as measured by the GNP, narrowed by $19.5 billion in the first quarter as exports shot up by 15% and imports fell by 0.5%. It was the first quarterly trade improvement since the spring of 1988.