Spring GNP Growth Hits 2.7% Rate, Puts Recession Fears Off : Pace 1 Percentage Point Higher Than Expected, U.S. Says

The U.S. economy expanded at an annual rate of 2.7% in the spring, significantly faster than previously believed, the government said today in a report that further dispelled recession fears.

The Commerce Department said the increase in the gross national product, the broadest measure of economic health, was a full percentage point higher than its original estimate a month ago.

The initial report had put GNP growth in the April-June quarter at an anemic 1.7%. That was the poorest performance in three years and had increased fears that the economy could be facing an imminent recession.

However, more recent government statistics have shown that economic activity in the second quarter was not as weak as previously believed, prompting economists to set aside their gloomy forecasts of an impending downturn.

No New Inflation

The White House was sure to be cheered by the upward revision since more robust economic growth makes it easier to meet the Administration’s deficit-reduction goals.

In more good news, today’s report showed that inflation did not worsen even though growth was stronger than originally thought.

An inflation gauge tied to the GNP rose at an annual rate of 5.1% from April through June, down slightly from an original estimate of 5.2% a month ago. The increase in prices, which followed a rate of 4.8% in the first quarter, was blamed on higher energy costs.

Almost two-thirds of today’s upward revision in growth came from higher consumer spending than previously believed.

Consumer purchases climbed at an annual rate of 2.2%, double the previously reported rate.

Housing Construction Off

Other areas of strength were government purchases, which rose at a rate of 12.3%, and spending for business investment, which rose 8.2%.

One remaining area of weakness was housing construction, which fell 12.6% in the second quarter, the biggest decline since the recession year of 1982.

The Administration is forecasting that the economy will expand 2.9% this year, down from GNP growth of 4.4% in 1988, the fastest pace in four years.

To meet the Administration’s growth forecast, the economy would have to expand at an annual rate of just 2.2% in the second half of the year, a level that many economists believe is obtainable.

Corporate Profits Fall

The Administration two weeks ago criticized the Federal Reserve for keeping interest rates so high that they threatened to topple the country into a recession.

However, today’s report was likely to strengthen the Fed’s resolve to keep rates about where they are now, given the business signals showing that growth remains fairly robust.

In another report today, the government said corporate profits after taxes fell a sharp 5.4% in the second quarter. The decline, which followed a 1.1% drop in the first three months of the year, was the biggest setback since a 16.5% decline in the first quarter of 1986.

Trade was another bright spot in the GNP report. The trade deficit declined $2.5 billion in the second quarter, reflecting the fact that exports grew at a faster rate than imports.