Economic Output Up More Than Expected, Still Weak

The nation’s economy grew somewhat more strongly than expected during the third quarter of this year, the government reported Tuesday, but the expansion still was anemic and did not alter predictions that the nation may be headed for a modest recession.

Commerce Department figures showed that the real gross national product, the broadest measure of the economy’s output, expanded at a surprising 1.8% annual rate from July through September, after a second-quarter pace of 0.4%.

But analysts warned that the figures are preliminary and do not include the full effects of the crisis in the Persian Gulf, which has raised crude oil prices sharply, dampening the economy. The impact of that did not hit until late September.

The Bush Administration was circumspect about the report. Michael J. Boskin, the President’s chief economist, said that, although the new figures are “pleasant news about the third quarter, we are concerned about a sluggish fourth quarter and the early part of 1991.”

A broad range of analysts said they still expect the economy to fall into a recession during the last three months of this year, though there are sharp differences over how long--or how severe--it will be. Most forecasters had expected that the economy would grow at an annual rate of 0.8% for the third quarter.

Allen Sinai, chief economist of The Boston Co., a New York financial firm, said the third-quarter figure “was not a false reading on GNP” but “is a false reading on the state of the economy as a whole.”

Irwin L. Kellner, chief economist for Manufacturers Hanover Trust Co. in New York, agreed. “The GNP has not caught up with the real world, and the real world tells a different story,” Kellner said.

“The question is not whether we are in recession, but how long--and how bad?”

Tuesday’s report is expected to ease pressure on the Federal Reserve Board to push interest rates down. Although the Fed nudged one target rate down slightly Monday, it has been reluctant to go further for fear of exacerbating inflation.

The figures came as the department reported separately that sales of new single-family homes fell a steep 6% in September--another sign of weakening in the economy. The decline followed a 1.8% drop in August.

As had been expected, the decline in new home sales was uneven. Total sales plunged 15.6% in the hard-hit Northeast but dipped only 0.7% in the Western and Mountain states. Economists said the housing industry generally has been in a mini-recession.

Despite the continued bearishness among economists, analysts said the third-quarter report contained evidence that the economy had not weakened as much as had been widely believed before the Persian Gulf crisis began:

--Confounding expectations, consumer spending rebounded last summer--particularly for big-ticket items such as automobiles and light trucks--with overall consumption up at a 3.6% annual rate, after a 0.4% pace in the previous quarter.

--Stockpiles of unsold goods, which some analysts feared would be rising so precipitously that they would prompt cutbacks in new production later this year, actually rose at a slower pace last quarter than in the spring.

--Spending on durable goods, which fell at an alarming 9.5% rate during the second quarter of the year, recovered smartly during the July-September period, rising at a respectable 3.6% rate.

--And capital spending by business--often a harbinger of industrial expansion--also grew robustly. Business spending on new plant construction rose at an annual rate of 5.1%, after a 9% dip in the spring. Corporate spending on equipment soared at an 8.2% rate.

Nevertheless, analysts cautioned that the outlook will remain uncertain until economists can measure the impact of the gulf crisis, which will show up in reports covering late September and October.

For example, analysts said that the pickup in automobile sales, which accounted for the bulk of the rebound in consumer spending during the quarter, stemmed largely from rebates and dealer incentives that well may have spurred buying artificially. They said auto sales most likely will fall off again in the fourth quarter.

Lynn Reaser, economist at First Interstate Bancorp in Los Angeles, said the situation “is not quite one of an economy that is collapsing, but of one that is quite weak” and might well decline at a 1% annual rate in the fourth quarter of the year.

“This GNP report may overstate the strength of the economy last summer, but it may not be so bad going into the fourth quarter as it is pictured,” Reaser said. “Perhaps the pendulum had too sharp a swing from optimism a few months ago to pessimism now.”

Even so, Giulio Martini, an economist at Sanford C. Bernstein & Co. in New York, contended that the third-quarter numbers were more impressive than economists seemed to think and could mean that any coming downturn will be mild.

“I would not dismiss this number,” Martini said in a telephone interview. “We had good demand growth and lean inventories . . . . So despite credit and financial problems and the real estate slump, this reflects an economy that can absorb them.

But Richard W. Rahn, economist for the U.S. Chamber of Commerce, predicted that Tuesday’s figures will be revised downward sharply as the government updates its initial estimates with later information, and that the slump will begin in earnest later this year.

He also predicted that inflation ultimately will prove to have been more virulent than the initial estimates have shown.

“Analysts who expected the recession to start in the third quarter are one quarter off,” Rahn declared.

For all the apparent improvements, Tuesday’s report also showed a slight rise in the rate of inflation. The GNP deflator index, the broadest measure of inflation, rose at a 4.1% annual rate during the quarter, up from 3.9% from April through June.

But analysts cautioned that such measures may be misleading because they play down the increase in the price of oil imports. They said that, when petroleum imports are included in the computation, the inflation figure for the period rises to a 5% annual rate.

The report showed that U.S. exports continued to grow robustly at an annual rate of 1.2% but that imports grew by 6%, reflecting increased purchases of foreign-made capital goods.