Economic Growth Rate Cools Off Unexpectedly : Production: Modest 2.6% quarterly rise in the GDP falls short of forecasts, setting off interest rate alarms.
The U.S. economy cooled surprisingly in the first three months of the year, after a sizzling growth surge in late 1993, the Commerce Department said Thursday in a report that raised alarm bells about the effect of higher interest rates on the recovery.
The modest growth rate of 2.6% in gross domestic product--the total of all goods and services produced in the nation--came in sharply below the 7% pace for the final quarter of last year, the government said in its first overview of the economy for 1994.
And while economists greeted the data as evidence of steady growth with low inflation, the report sparked a heated and unusually extreme range of reaction.
Long-term interest rates rocketed higher, the stock market plunged and politicians slammed the Federal Reserve Board for interest-rate hikes that they claim endanger the recovery. The yield on 30-year Treasury bonds soared to 7.26% Thursday from 7.10% on Tuesday, and the Dow Jones industrial average slid 31.23 points to 3,668.31.
The GDP report is a statistical snapshot and highlights how quirky and unpredictable the economy can be: A slip in exports that reflected conditions outside the United States, unusually severe winter weather and a drop in federal spending all exerted drag on the quarterly performance, government officials said.
White House officials seized on the report, which will be revised next month, as evidence that the national recovery is cruising ahead without new inflation. And they generally were backed up by private economists who had forecast a brisker, 3% to 3.5% growth pace.
“This should be a clear signal to the market that we have no inflation worry,” President Clinton told reporters. “This rate of growth is enough to keep the deficit coming down and jobs coming into the economy.”
But in the current, jittery financial climate, some investors found cause for worry in the fine print of the report: A somewhat esoteric inflation gauge, known as the GDP price deflator, ticked up to an annual rate of 2.6%, from an even lower, 1.3% rate late last year.
“The one thing in that report someone could seize on is that 2.6% deflator,” said Jack Mackey, managing director of the Piper Jaffray investment firm in San Francisco. “Apparently, people thought it means more inflation, and wanted to sell.”
The Federal Reserve Board, concerned that the late-1993 surge in growth was setting the stage for future inflation, has raised interest rates three times this year and is expected to move again soon, perhaps in May.
For all of the worries, however, economists generally say it can take up to a year for higher interest rates to restrain growth, so that recent rate hikes played little role in the first-quarter data.
“It’s way too early for rising interest rates to slow the economy,” said Donald Ratajczak, an economic forecaster at Georgia State University. “Maybe at the end of the year--but not now.”
Nonetheless, news of the sudden reduction in growth was enough to spread worries about the recovery’s longevity and to unleash a new round of criticism of the Fed.
“The economy already has slowed while the Fed was acting to restrain it,” said Senate Budget Committee Chairman Jim Sasser (D-Tenn.), who joined Sen. Paul S. Sarbanes (D-Md.) in slamming the central bank. “The Fed’s recent moves threaten to choke off the economic expansion.”
Many economists took a more sanguine view of the overall report. Measures of home-building, equipment investment and consumer spending all appeared consistent with a stable recovery, they said.
In addition, slowdowns in business caused by frigid weather in much of the country, such as commercial construction, are likely to be made up in the spring, suggesting the economy is growing in the range of 3% or more.
“The report has a pretty consistent message--and it’s that the U.S. economy is doing fine,” said Nancy J. Kimelman, chief economist at Technical Data, a financial advisory firm in Boston. She added: “The cherry on top of the sundae is that it’s all happening without evidence of accelerating inflation.”
Other statistics released Thursday seemed to tell a more ambiguous tale. The Commerce Department said orders for big-ticket durable goods rose 0.4% in March, somewhat less than expected.
Also, the number of Americans applying for jobless benefits last week fell 31,000 to 333,000, suggesting strength in the job market, although a four-week average of new claims rose slightly.
Economists said Thursday that the 2.6% growth rate, while hardly ebullient, was a comfortable tempo because it falls in a range that the economy can absorb without overheating or going cold. “Any stronger growth, and you have fear of inflation. Any lower growth, and people are concerned that the recovery can’t sustain itself,” Kimelman said.
The Clinton Administration sought to hammer home this theme as top officials echoed the President’s upbeat remarks.
“The report confirms that the underlying fundamentals of the economy are sound,” said Laura D’Andrea Tyson, head of the White House Council of Economic Advisers. “Growth continues to be solid and inflation continues to be modest.”
Actually, growth is expected to rise a bit in the second quarter, analysts said, because temporary events gave the impression that the economy is weaker than it actually is.
Exports, for example, which fell $19.7 billion in the first quarter, could make a comeback when overseas economies grow stronger, analysts said Thursday.
Similarly, construction of office buildings and other commercial structures fell $6.7 billion due to the bad winter weather, and is expected to to bounce back in the spring. Also, earthquake rebuilding could push up home-building in the coming months, a category that nonetheless rose $5 billion in the first quarter.
“Construction is a plus in the next quarter,” declared Michael L. Penzer, a senior economist at Bank of America in San Francisco.
Those are just some of the reasons that economists believe the recovery remains on a growth path of 3% or greater--and that investors expect another interest-rate hike soon.
An analysis of six-month or 12-month periods, contrary to looking at just one quarter, depicts a steady increase in economic growth, Penzer said, suggesting that inflationary pressures could emerge in the future.
“The Fed isn’t looking backwards at what inflation has been,” he said. “It’s worried about where inflation is going to go.”
* MARKETS RATTLED: Bond yields rose sharply and stocks plunged on news of renewed inflation. D1
