Economy Stalls; Analysts Expect Recession, Inflation
The U.S. economy came to a virtual standstill in the spring, growing at an imperceptible 0.4% annual rate and actually declining in most private sector categories, the Commerce Department said Tuesday in its final report on the gross national product for the second quarter.
The revision indicated that economic growth during the April-June period was significantly lower than the 1.2% annual rate estimated earlier, an ominous sign that the economy was virtually in recession two months before the Persian Gulf crisis began.
The emerging consensus among economists is that the economy is heading into a recession, even as inflation accelerates, and the economic impact of the gulf crisis and soaring oil prices seems certain to lead to even more slippage later on.
“It didn’t take the Persian Gulf to make this economy look sick,” said Bruce Steinberg, an economist with Merrill Lynch in New York. “There was no growth last spring, and only 1% growth in the 12 months that ended in June. Every time in the past 45 years that kind of slowdown has happened, the economy was already in recession. The Middle East crisis will be only the final shove over the edge.”
Economist Allen Sinai of the Boston Co. noted that many third-quarter economic indicators have come in “massively negative,” demonstrating weaker jobs growth, higher unemployment, higher inflation, a worsening trade deficit and declining consumption and production.
“The economy is lousy and getting worse in lots of businesses and lots of areas,” Sinai said.
White House officials, although insisting that the revised numbers do not mean that the economy already has slipped into a recession, cited the GNP report as further evidence that the nation needs to get its fiscal house in order.
“It’s not good news,” said White House Press Secretary Marlin Fitzwater. “The number is very low. Obviously, we are concerned about the economy and the growth rate. Something like that is certainly cause for concern.”
Fitzwater said he hopes the report will spur White House and congressional negotiators, who have been unable so far to agree on a long-term pact to reduce the federal deficit and avert automatic spending cuts scheduled to occur when the new fiscal year begins next Monday.
“I guess if there is any single message that these numbers give us, it’s that the urgency for a budget agreement is real, and I would hope that all parties to the negotiations, Republican and Democrat alike, would understand that the consequences of their negotiations are central to the course of the economy, and these numbers clearly show the urgency of that need,” he said.
Shortly after the Commerce Department figures were published, a member of the President’s Council of Economic Advisers said the White House was lowering its targets for GNP growth during the fourth quarter by about half from the previous estimate of 2.2%.
“We are not, however, forecasting a recession,” council member John Taylor told the National Assn. of Business Economists.
The largest factor in the reduction of the second-quarter growth figure was a bigger trade deficit caused mostly by larger flows of business and investment income to foreigners, a development that may reflect nothing more than a quirk in normal interest rate differentials between the United States and other countries.
The second-largest factor was a smaller accumulation of business inventories than initially reported.
“Most of this revision came from lower investment income from abroad, which isn’t a real economic fundamental,” said economist Giulio Martini with Sanford C. Bernstein & Co. in New York. Unlike economists who interpreted the worsening trade picture evident in the GNP report as an ominous sign, Martini took it merely as a reflection that the earning power of U.S. investments abroad was less than earlier expected.
The revised report showed that the overall trade deficit in both goods and services widened by $9.2 billion in the second quarter to an annual rate of $44.6 billion in inflation-adjusted 1982 dollars. The deficit previously had been pegged at $39.9 billion.
Of the $4.7-billion difference between the two estimates, merchandise accounted for less than $1 billion, while a combined decline in income from U.S. investments abroad and higher payments on foreign investments in the United States accounted for nearly $3 billion.
Inventories accumulated in non-farm businesses increased at an annual rate of $11.6 billion last spring, barely making up for the $8.2 billion inventory sell-off recorded in the first quarter. The government previously had reported an inventory accumulation of $14.2 billion.
Private sector consumption increased at a mere 0.2% rate, a tick slower than the 0.3% recorded earlier, and a decline in federal, state and local purchases of goods and services pushed final sales down at a 0.7% rate, compared to the 0.2% contraction estimated earlier.
The Commerce Department reported also that after-tax profits earned by U.S. corporations fell a revised 0.6% in the second quarter, worse than the 0.2% drop first reported and the poorest showing since a 5.9% decline in the third quarter of 1989.
Corporate profits from current production were estimated to have increased 3.3%, the same quarterly increase reported earlier, and before-tax profits increased by 0.8%, an improvement over the 0.2% increase reported last month.
