Revised Growth Report Shows Economic Surge
U.S. economic growth surged at a 3.9% annual rate between July and September, the most powerful quarterly performance in almost four years, challenging widely held views of the economy as a stricken colossus gasping for breath.
The surprise finding by the Commerce Department--a revision in the gross domestic product from an initial 2.7% estimate--sent pessimistic analysts scurrying back to their computers and prompted President-elect Bill Clinton to reconsider his short-term plans to stimulate the economy next year.
Moreover, it was the latest in a flurry of signs that something unexpected may be taking place on the troubled economic landscape: Consumers are buying, factories are churning and public confidence appears on the mend.
“The patient’s vital signs are improving,” said Lyle E. Gramley, chief economist with the Mortgage Bankers Assn. and a former governor on the Federal Reserve Board. “Things have been going on that make for a stronger economy.”
Wednesday’s Commerce Department report held a certain poignancy for President Bush, who insisted all along that times were better than his critics made out and paid a heavy price for the public’s pessimism. As Bush left the White House for a long Thanksgiving holiday in Kennebunkport, Me., his spokesman, Marlin Fitzwater, said: “He feels very good about the economy. The Bush recovery is coming on strong.”
Like pieces in a jigsaw puzzle, miscellaneous hints of improving conditions have become evident in the last few days. Each piece is tentative, and questions remain about the recovery’s staying power.
Still, there are a growing number of signs that the picture is improving:
--Sales of existing single-family homes jumped 9.1% last month to their highest level in almost four years, featuring double-digit gains in the Midwest and the West, the National Assn. of Realtors reported.
--Initial claims for unemployment insurance dropped by 12,000 in the week ended Nov. 14, the latest sign of a downward trend for such claims, the Labor Department said.
--Consumer confidence, as gauged by the University of Michigan index, will show a substantial gain to 85.3 this month, up from 73.3 in October, the Dow Jones news service reported.
--Orders for big-ticket transportation equipment and other factory items increased in October at the fastest pace in 15 months, the Commerce Department said earlier this week.
--Major retailers reported solid gains in October, one in a series of gains that include reports of increased bank lending, truck sales and factory production.
“The U.S. economy is moving forward,” Commerce Secretary Barbara Hackman Franklin said Wednesday. “President Bush’s policy of low taxes, low interest rates and low inflation is paying off--as is his commitment to opening markets and promoting exports of U.S. goods and services.”
The new hints of an upward shift in the economy seemed to surprise Clinton’s team, which had previously been signaling plans to stimulate the listless economy next year as part of its short-term strategy to create jobs.
Just 24 hours earlier, Clinton’s communications director, George Stephanopoulos, said the President-elect was preparing to move forward with a stimulus plan for the economy next year.
Word of an economic shift spread to Wall Street on Wednesday, where the Dow Jones average of 30 industrials, up 25.66 points the day before, rose another 17.56 points to 3,266.26.
Hints of a shift in mood also have been detected by the Conference Board, a business research organization, which this week reported that consumers’ spirits were much improved, a development “consistent with recent economic news,” said Fabian Linden, executive director of the Conference Board’s Consumer Research Center.
Linden cautioned, however, that confidence levels remained low by historical levels and that “we have a long way to go before we are in a full recovery mode.”
Certainly, the economy has traveled a slippery on-again-off-again path for more than a year, a pattern that continues to raise questions about the recovery’s staying power. In the first three months of this year, for example, the economy expanded at a 2.9% rate, but then downshifted to a 1.5% pace in the second quarter.
Pessimists point out that job growth has been anemic--actually negative in the private sector--and income gains have barely been measurable. It is hard to envision a healthy recovery without consistent gains in job creation and consumer incomes, economists agree.
California and parts of the Northeast, meanwhile, continue to suffer sub-par conditions that weigh down the rest of the country, according to a study by the Federal Reserve Bank of San Francisco.
Even Wednesday’s upbeat report on growth contained some less-than-upbeat news. After-tax corporate profits slid 6% between July and September, the largest plunge since 1986, a setback that may have been exacerbated by Hurricanes Andrew and Iniki.
“We’ve been fooled before when we thought we were out of the woods,” said Mark M. Zandi, an economist with Regional Financial Associates in West Chester, Pa.
Experts were quick to warn Wednesday that a seemingly robust quarter of growth is not a guarantee of economic salvation. The new report on gross domestic product for the third quarter was influenced by unusual factors, such as an against-the-grain increase in defense spending, which can’t be counted on in the future.
For instance, business inventories--merchandise on shelves and in warehouses--rose $20.2 billion, significantly more than the $14.7 billion initially reported last month. But fluctuations are common in the size of inventories, said Carol Carson, director of the Commerce Department’s Bureau of Economic Analysis.
The military spending increases, which fueled part of the 3.9% growth rate between July and September, go against a broader trend of cutbacks, and reflected payment for large deliveries of missiles and defense research contracts that may not be repeated soon.
Government spending climbed by $3 billion more than previously estimated, also helping boost the growth rate. Overall, the quarterly pace was the most robust since a similar performance in the final quarter of 1988, the end of Ronald Reagan’s presidency.
“The economy is going to do a little better--not a lot better,” Gramley said. “It’s not going to explode next year.”
While the revised report on growth came as something of a bombshell, so did the initial estimate last month--but for different reasons.
A controversy erupted last month when the Commerce Department initially computed a third-quarter growth rate of 2.7% in the tense days before the presidential election. Critics argued that the 2.7% figure overstated the strength of the economy and may have been manipulated by the Bush Administration.
That charge drew strong reaction from Carson on Wednesday. “This is a fishbowl operation,” said Carson, a career civil servant. “We have no evidence that our source data were anything but representative of what was happening in the economy.”
The new report, pointing to even headier gains, raised a different sort of question, one that had nothing to do with politics: whether the report, while calculated honestly, offered an accurate portrait of the economy.
“As much as we would like to give thanks for this spectacular upward revision, the revised GDP numbers are actually a ‘mystery wrapped around a riddle inside an enigma,’ ” said National Assn. of Manufacturers economist Gordon Richards, borrowing a description of Soviet Russia once made by Winston Churchill.
“While it would be tempting to speculate that the economy is finally breaking out of its extended period of stagnation, there are too many ambiguities in these figures to reach a prognosis,” he said.
The latest figures also caught AFL-CIO economist Rudy Oswald off guard. He said higher employment should accompany any substantial increase in output. Since the jobless figures remain high, 7.4% of the work force in October, Oswald is dubious of the significance of the current report.
“I think there’s more unreliability in these latest figures than in the previous ones--I’m totally convinced they are too high” he said.
A skeptical Michael Penzer, an economist at the Bank of America, said the figure is seemingly “a miracle,” because the high rate of unemployment implies an astounding increase in productivity.
But at least one observer said the news of an economic pickup, while startling, could still be true.
“This is the real thing, and a real thing is always a surprise when it comes,” said economist Allen Sinai of the Boston Co. investment firm.
Peterson reported from Los Angeles and Rosenblatt from Washington. Staff writer Matt Marshall in Washington also contributed to this story.
