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Economic Slowdown Expected to Continue

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Times Staff Writer

The U.S. economy slowed this spring to a 1.7% annual growth rate, the Commerce Department reported Thursday, and analysts predicted that economic activity probably will do little more than tread water over the next few months.

The weak second quarter reflects lackluster consumer spending on big-ticket items such as automobiles and housing. The slowdown apparently came in response to the Federal Reserve Board’s efforts to combat inflation by pushing up interest rates.

Last quarter’s economic growth was the weakest improvement in America’s gross national product--the broadest measure of the nation’s output of goods and services--since a 0.8% gain in the third quarter of 1986.

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For the first quarter, revised figures show, the GNP expanded at a 3.7% rate. Most of that gain is apparently a reflection of the farm economy’s recovery from last year’s drought. The non-farm economy grew at a rate of just 1.5% in the first quarter.

Despite the Fed’s efforts, inflation continued to rise in the second quarter. One key inflation indicator climbed at a 5.2% annual rate; it was with 4.6% for the first quarter.

There are signs, however, that inflation may have peaked. After increasing sharply earlier this year, food costs have declined in recent weeks, and energy costs have leveled off.

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Indeed, the Fed recently reversed direction, since early June encouraging short-term interest rates to fall because of fears that the current economic slowdown could deteriorate into a nasty recession. The central bank knocked borrowing costs down another notch this week, allowing the federal funds rate on money that banks lend each other to fall to about 9%.

Analysts have generally agreed that, after 6 1/2 years of uninterrupted economic expansion, a slowing of the rapid growth rate of 1987 and 1988 was necessary to prevent inflation from accelerating.

They remain divided, though, over whether the Fed’s inflation cure will turn out to be worse than the disease.

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“The Fed has done as well as anybody could expect,” said John Makin, a top economist at the American Enterprise Institute. “You can’t get inflation down without slowing the economy. The worst that’s likely to happen is a mild recession that will make room for stronger growth next year.”

David Levine, chief economist at Sanford C. Bernstein & Co., a New York investment firm, said that the latest data convinces him that there is almost no danger of a recession this year “unless oil prices go to $50 a barrel or an asteroid hits Kansas.”

Levine said he is more worried that inflation will start accelerating later this year than he is about a possible downturn in the economy.

But Irwin Kellner, chief economist at Manufacturers Hanover Bank in New York, fears that the Fed’s credit policy may already have pushed the economy into what could become a sharp downturn.

The central bank’s recent efforts to ease up may be “too little and too late,” Kellner warned. “The economy is like an airplane. Once it hits the stall speed, it’s not easy to pull it up again.”

The GNP report shows that consumer spending remained weak for the second quarter in a row, rising at a sluggish 1.1%, while spending on expensive longer-lasting goods such as cars and appliances actually fell at a 4% rate.

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Housing construction dropped at a rate of 13.6% for the spring, the steepest plunge since the first quarter of 1982.

The nation’s trade imbalance continued to narrow but only by a slight $2.4 billion, contrasted with a strong $18.8-billion improvement for the first quarter.

With the release of Thursday’s figures, the government also disclosed its annual revisions of past GNP gains. The new data show that the economy grew a robust 4.4% in 1988, an improvement over the earlier estimate of 3.9%.

A key sign that the economy remains in good shape is the indication that inventories grew no faster than final sales to buyers during the spring. That suggests that business planners are unlikely to face demands to cut back much further on production later this summer.

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