Economy Grew at Torrid 7.5% Pace in Late ’93
The U.S. economy rocketed forward at a feverish 7.5% rate in late 1993, the most heated performance in nearly 10 years, the government said Tuesday, stirring new inflation fears and sending the stock and bond markets into a tailspin.
The surge in gross domestic product, a sweeping gauge of U.S. economic activity, was even greater than the 5.9% rate that had been estimated initially for the October-December quarter.
Few economists expect--or want--the 7.5% growth to be maintained. That kind of pace would overburden factories, prompt labor shortages and risk a major outbreak of inflation.
Investors were also rattled by another report by corporate purchasing executives that documented signs of emerging inflation faced by a broad array of business.
“The Federal Reserve and bond market aren’t just worried about what inflation is today,” said Hugh A. Johnson, chief investment officer at the First Albany brokerage firm. “They’re worried about what it may become.”
The Dow Jones industrial average ended the day with a 22.79-point loss after plunging as much as 40 points on expectations that the Federal Reserve will soon hike interest rates. The yield on the Treasury’s 30-year bond, a barometer of long-term inflation trends, surged to the highest level in more than eight months.
“I think we’ll see a rise in interest rates in the next several weeks,” predicted Richard B. Hoey, a portfolio manager and chief economist at the Dreyfus Corp. in New York.
Such a move would be the second of the year, reflecting a sea change in economic policy which, until recently, was designed to keep a fragile recovery alive--not prevent it from overexertion. The Fed raised the key federal funds rate to 3.25% from 3% on Feb. 4, in what officials described as a preemptive attack on inflation.
Analysts Tuesday struggled to make sense of a large new batch of economic data, which also contained sketchy evidence that the economy had slowed in recent weeks and that inflation was subdued through 1993.
Sales of existing homes fell 3% in January, the National Assn. of Realtors reported. The group cited harsh winter weather and rising mortgage rates as reasons for the decline. (In California, the pace of home sales fell 4.1% from December but remained 20.2% higher than in January, 1993.)
President Clinton and White House officials portrayed the economy as vigorous and stable, despite rising inflation jitters in financial markets throughout the world. By one Commerce Department measure, U.S. inflation rose at a scant 1.3% rate for the last three months of 1993.
“I am encouraged by the growth figures and by the fact that all the indicators are (showing) there’s no significant increase in inflation,” Clinton told reporters. “It’s good to have that.”
The fourth-quarter growth figures heartened some observers because they showed burgeoning U.S. exports along with continuing strength in business investment, consumer spending and other areas.
For 1993 overall, the U.S. economy grew at a 3% pace, the latest estimates show. That is the highest level of growth since 1988, when the economy expanded 3.9%, according to the Commerce Department.
The latest evidence suggests growth will ease into the 3% range this year, economists said Tuesday. Modest income gains, the lackluster jobs market, the earthquake and severe winter weather all are speed bumps on the expansion’s path. Moreover, a 3% rate would be expected to generate less inflation than the sizzling pace of late last year.
“While it’s hard to imagine how the economy can maintain this torrid pace through 1994, it’s clear that the year is starting off with some very strong and well-balanced momentum,” said Martin A. Regalia, chief economist of the U.S. Chamber of Commerce.
The good news wasn’t clear in the financial markets, which have been on a hair-trigger for signs of inflation since early last month, when Federal Reserve Chairman Alan Greenspan announced the likelihood of interest rate hikes.
Rising interest rates erode the value of bonds and increase borrowing costs for business, which can hurt corporate stocks, as well. They also push up bond yields, attracting some money that otherwise would have gone into the stock market.
Investors Tuesday were particularly alarmed by the National Assn. of Purchasing Management’s monthly survey of more than 300 industrial corporations.
Unlike the fourth-quarter growth report, which was a snapshot of the economy’s recent past, the purchasing manager’s survey offers a possible glimpse into the future. Its message: New inflationary pressures are quietly working their way into the economy.
For example, 58.8% of purchasing executives reported bottlenecks or slower deliveries of products in February, up from 55% in January and 51.7% in December.
Similarly, 67% said they had encountered rising prices, up from 59.8% in January and 51.3% in December. The purchasing managers said prices overall had hit the highest level since October, 1990.
“Those are big jumps--back-to-back increases which will frighten bond buyers and deeply concern the Federal Reserve Board,” said First Albany’s Johnson, referring to the price hikes and bottlenecks.
“The chances are high that the Fed will raise interest rates sooner rather than later.”
While some analysts blamed winter weather and the earthquake for supply disruptions that affected the purchasing statistics, there was also a sense that a further interest rate hike is inevitable.
Indeed, some said that higher rates are just the medicine needed to keep inflation from gradually running out of control in the buoyant national economy.
“Inflation is not rising in a big way,” said Douglas J. Schindewolf, a money market economist at the Smith Barney Shearson investment firm. “But if the Fed were to sit back and just let the economy run, then we’d have legitimate inflation problems down the road.”
Dreyfus’ Hoey predicted that the Fed “will drop the other shoe quickly,” adding an additional one-quarter point to interest rates, further shutting the door on the recent era of sliding interest rates.
Last month, after the Fed hiked the fed funds rate for the first time in nearly five years, San Francisco Federal Reserve Bank President Robert Parry declared: “It’s unlikely that one step is going to be enough.”
* RELATED STORIES: D1, D2
