Deficit Offsets Good GNP, Inflation News

The nation’s economy expanded at an annual rate of 2.5% while inflation fell to 2.9% in the third quarter, the Commerce Department said Thursday. But the favorable combination was accompanied by the worst quarterly trade performance in three years.

A surge in domestic consumption caused imports to soar at an annual rate of 15.1%, while exports of U.S. goods neither grew nor declined. As a result, the trade deficit increased by $22.9 billion, the biggest deficit since the second quarter of 1986.

The 2.5% growth rate in the gross national product matched the rate posted during the second quarter and followed a 3.7% annual rate during the first quarter of 1989, indicating that the economy has continued to slow without stumbling.

Inflation, as measured by a price index tied to the GNP, fell to an annual rate of 2.9% in the third quarter from 5% in the second, the department said, underscoring other indications that prices are moderating after big gains earlier this year.

While the combination of temperate growth and declining inflation was hailed by the Bush Administration, the Dow Jones industrial index fell 39.55 points as financial markets focused on the worsening trade picture and an anemic 1.4% annual growth rate in final sales.

“This is exactly the kind of GNP composition the Federal Reserve (Board) does not want to see: strong domestic demand, high consumer spending and a sharp deterioration in trade,” said Giulio Martini, an economist with Sanford C. Bernstein & Co. of New York.

The Commerce Department reported that personal consumption, which had increased at a modest annual rate of barely 2% during the first two quarters, ballooned to 5.8% in the third quarter.

Martini noted that the jump in consumer spending was fueled by a 15% increase in purchases of durable goods, mostly autos and trucks, and other big-ticket items that many economists would categorize as investments rather than consumption. Without those purchases, the increase in spending would have been about 4%.

Martini said the collapse of export growth, which fell to zero after gaining at an annual rate of about 18% in the first half of the year, was an anomaly attributable to the dollar’s recent strength against foreign currencies.

Analysts took some comfort from the fact that Thursday’s report, an advance estimate subject to revision, consisted of July and August data that was projected into September. In July and August, U.S. business invested heavily in foreign capital goods and U.S. consumers splurged on motor vehicles, many of them imports.

Both trends are believed to be unsustainable and may not have continued into September at the same rate.