Economic Growth Estimate Cut Back to a Stagnant 1.3%

The government on Thursday lowered its estimate of economic growth during the first quarter to a sluggish annual rate of 1.3%, well below the 2.1% estimate reported a month ago and a confirmation of the near-stagnation that set in late last year.

But economists took some comfort in the fact that a larger-than-expected reduction of inventories, mostly on auto lots, accounted for virtually the whole downward revision in gross national product reported by the Commerce Department.

They also noted that the revised statistics masked a big increase in U.S. exports and that demand for U.S. goods and services increased at a healthy annual rate of 4.1%--signals of a possible economic rebound later in the year.

At the same time, the government reported that a key measure of inflation tied to the gross national product hit an unpleasantly high annual rate of 6.7% in the first quarter. That was up from the 6.5% rate reported a month ago, when complete data for the quarter was not in hand.

But the negative numbers had been generally anticipated, and economists found much to cheer in the Commerce Department report because inventory shrinkage in one quarter usually heralds production expansion the next.

“That 1.3% growth is pretty feeble,” said economist Bruce Steinberg of Merrill Lynch & Co. in New York. “But with final sales up at more than 4%, you had a sharp inventory liquidation that suggests a considerable rebound in the second quarter . . . mostly from inventory rebuilding.”

Virtually all of the downward revision in GNP was the result of a decline in business inventories, as manufacturers shut down production to offset sluggish sales. Retail inventories plunged at an annual rate of $26.6 billion in inflation-adjusted 1982 dollars, with the troubled auto industry alone accounting for $23.2 billion of that.

Economists agreed that the inventory reduction should be followed by stronger growth later this year to bring supplies more in balance with demand, both in domestic markets and overseas.

“Inventory is the key here,” said Cynthia Latta of Data Resources Inc. in Lexington, Mass. “There was a much bigger runoff reported this time than the first time around, and that should be good for production in the second and third quarters. Since there are fewer goods on the shelves than we supposed, there is going to have to be more current production.”

The consensus among economists is that demand will remain fairly steady, with economic growth following a sluggish but steady path in the 2% to 2.5% range.

“Inventory pullbacks like this almost never come before a recession, which is usually signaled by the opposite--an inventory overhang,” observed Giulio Martini, an economist with Sanford C. Bernstein & Co. in New York.

“But it’s also rare to see inventory liquidations like this late in an economic expansion,” he added. “Normally you get it during the first quarter of a recovery, when a big burst of demand draws them down.”

U.S. exports increased at an annual rate of 7.7%, or $11.3 billion in 1982 dollars, compared to an original first-quarter estimate of 0.9%, or $1.4 billion. Imports increased 2.7%, or $4.4 billion, compared to a previously estimated decline of 2.8%, or $4.6 billion.

The net result was an improvement in the nation’s trade balance of $6.8 billion, compared to the $6-billion gain estimated earlier.

Economists mostly shrugged off the inflation figure. Significant inflation in goods has been evident from the beginning of the year. Most of it has been attributed to weather-related factors, primarily higher fuel and food prices, which have since begun to reverse.

In a companion report issued Thursday, the Commerce Department said that after-tax profits of U.S. corporations increased only 0.2% during the first quarter after rising 2.8% in the October-December quarter of 1989.

Profits from current production rose 0.7%, after a 3.2% decline, while cash flow from current production fell 2.3%, after a 0.3% decline.

The figures reflected general economic sluggishness and underscored the slow growth and inventory liquidation noted in the GNP report.