GNP Rises 2.4% in Quarter but Gain May Be Temporary
The nation’s economy grew at an annual rate of 2.4% between July and September, the first sign of growth in a year and the biggest quarterly increase since the economy began to run out of steam in mid-1989, the Commerce Department said Tuesday.
Although renewed expansion of the gross national product--the nation’s total output of goods and services--means that the recession officially has ended, both government and private economists cautioned that the upswing may be only temporary and may already have been overshadowed by weaknesses elsewhere. In fact, many are warning of a so-called double-dip recession, in which the economy goes from recession to weak recovery to recession.
The chairman of the President’s Council of Economic Advisers, Michael J. Boskin, said that the GNP figure is “right in line with what we expected” but conceded that the recovery is proving “more sluggish than we would like.”
Typically, in economic recoveries since World War II, annual growth rates have been almost double the 2.4% rise recorded in the third quarter.
Moreover, some analysts predicted that the third quarter’s economic vigor ultimately will prove to have been fleeting. “It was a real pickup,” said Bruce Steinberg, an economist with Merrill Lynch, Pierce, Fenner & Smith Inc. in New York City, but he added that the third-quarter numbers appear to be merely “a false start to the recovery.”
Said Roger Brinner of Data Resources Inc./McGraw Hill in Lexington, Mass., “We are sticking to a forecast of a half-speed recovery--disappointingly slow.”
The highlight of the report is consumer spending, which grew by 3.8%, surprising many forecasters.
Purchases of durable goods--such as cars, appliances and furniture--rose 9%. Economists consider that figure an important measure of consumer confidence, because large purchases can be postponed when consumers are expecting bad times. “If you’re worried about the future, you just use your old (appliances, etc.),” Brinner said.
But new figures released Tuesday indicate that any optimism may already have vanished. The Conference Board, a business research group, said that its consumer confidence index plummeted 12.5 points, to 60.4 from September’s 72.9.
In the board’s survey of 5,000 households, 41.1% described business conditions as bad, compared with 39.7% a month ago. Analysts said that the drop in consumer confidence, to a level only six points higher than it was during the worst of the 1982 recession, does not bode well for the Christmas shopping season.
The last few weeks have seen a torrent of gloomy economic reports. Initial unemployment claims are up. Auto sales are down, reflecting a relatively poor reception for Detroit’s new models. Housing starts, after rising for several months, have fallen again.
Many analysts expect more bad news later in the week with the release of the most recent employment figures. “We’ll understand why consumers are feeling uneasy,” Steinberg said.
On Monday, Federal Reserve Board Chairman Alan Greenspan told a business group that the economy had turned “demonstrably sluggish” recently and described it as “moving forward, but in the face of 50-mile-an-hour head winds.” His comments bolstered Wall Street’s expectations that the Federal Reserve may try to put new life into the economy with another interest rate reduction by the end of the year.
The Bush Administration has urged further interest rate reductions, and Boskin said that he took hope from a price index, released with the GNP figures, which indicated that inflation had slowed. “That should take some pressure off the Federal Reserve in its deliberations about easing interest rates,” he said.
Despite the overall increase in the GNP, the third-quarter economic results were decidedly mixed. Consumption, inventories and residential construction were up, but declines were registered in the trade balance, commercial construction and government spending.
As the election year draws near, the economy’s continuing malaise has prompted several lawmakers on Capitol Hill to propose middle-class tax cuts as a stimulus.
However, Boskin said that the President remains committed to a two-year budget agreement that prohibits legislative action that would increase the deficit.
Boskin noted that the mere discussion of tax reductions caused long-term interest rates to rise last week. He contended that such an increase--which is reflected in the interest costs of government borrowing--adds more to the financial burden on taxpayers than the proposed tax cuts would save.
