GNP’s Slow, Steady Pace Quells Recession Fears
The economy grew at a moderate 2.5% pace in the second quarter, the government said Thursday, down somewhat from the first quarter but strong enough to stop any new predictions of imminent recession.
The Commerce Department reported that April-June growth in the gross national product compared to a 3.7% gain in the first three months. The second-quarter GNP was revised downward 0.2 percentage point from the 2.7% growth estimate a month ago.
Nearly two-thirds of the January-March strength came from an anticipated rebound in farm output. Without the drought effect, growth actually was only 1.5%.
“The picture is a pretty one,” said Allen Sinai, chief economist for Boston Co. “Not too much growth, not too little . . . right on the nose for a ‘soft landing.’ ”
“The picture,” said Robert Dederick, chief economist for Northern Trust Co. in Chicago, “is an economy that is continuing to climb, albeit at a subdued rate . . . a laid-back pace, but that’s really what the Fed wants.”
The Federal Reserve has moved for more than a year to achieve a “soft landing” by dampening inflation by slowing the economy without driving it into a recession.
Thus, analysts said, the Fed also should appreciate the downward revision in the GNP’s April-June inflation rate. A price index tied to the GNP showed a 5% gain, rather than the 5.1% estimate a month ago.
Since the April-June quarter, Dederick noted, “inflation has ebbed considerably.” He said the second-quarter GNP rate “is the worst inflation number we’ll have for the year and for some time ahead, at least several quarters ahead.”
And he predicted that “we’re likely to see more of the same on growth, perhaps a bit lower . . . no more than what it has been in the second quarter and more likely less.”
The Fed, which influences the economy by controlling monetary growth, “will not be influenced by this report” to reduce interest rates further at this time, Sinai said. “In fact, had it known in June that the economy would have risen this much, it probably would not have reduced interest rates then.”
In a companion report, the Fed said after-tax profits of U.S. corporations fell 7.2% in the second quarter, a bigger decline than the 5.4% drop estimated a month ago.
Drops in Spending Estimates
It was the second consecutive quarterly decline and, Dederick said, it “shows that economic slowing is not without pain.”
The GNP is the nation’s total output of goods and services and its broadest measure of economic growth.
The downward revision in the second-quarter GNP reflected drops in earlier estimates of consumer and government spending. But consumer spending, which represents two-thirds of all economic activity, still increased a healthy 1.9% in the April-June quarter.
At the same time, business investment spending advanced a strong 8.6% and U.S. exports grew 13.1% for the third straight quarter of double-digit growth.
Housing, adversely affected by high interest rates, fell 12.3%.
On an annual basis, the economy grew at a 3.1% annual rate during the first six months of the year. It will need to expand only at a 2.3% rate for the remainder of the year to match the Administration’s goal of 2.9% growth for all of 1989.
The various changes left the GNP expanding in the second quarter at a seasonally adjusted annual rate of $4.13 trillion.
