Economy Grows as Inflation Stays on Shelf : Inventories: Factories push growth to 3.7% annual rate, but Times Poll finds consumers are wary, keeping demand in check.
Busy factories drove the nation’s economy forward at a brisk 3.7% annual rate in the second quarter, the Commerce Department said Friday, but growth in the second half of 1994 could slow dramatically because wary consumers are reining in their spending and goods are starting to pile up on store shelves.
Analysts said the report was good news for inflation, because rising inventories should prevent manufacturers and retailers from raising prices. Wall Street traders gave their inflation fears a day off too, sending bond yields tumbling and stocks sharply higher.
Consumers, however, don’t seem nearly as upbeat about the country’s economic future.
A new, nationwide Times Poll found that only 14% of Americans think the economy will be better three months from now--down from 26% in January--while the percentage of people who think it will grow worse has jumped to 20% from 12% over the same period.
Consumer spending, which accounts for two-thirds of all economic growth, has been tapering off since the beginning of the year. The growing nervousness the poll found could portend an even sharper decline in spending and slower overall growth in the months ahead.
“People tend to spend less when they get nervous about the economy and their jobs,” said Susan Pinkus, assistant director of the Times Poll. If spending drops further, she said, “it’s reasonable to assume that the overall economy will also slow.”
Nonetheless, Friday’s report of a 3.7% growth rate in the gross domestic product showed that the nation is enjoying the best of both worlds: solid economic growth with very little inflation.
Investors took advantage of the upbeat news, sending the prices of stocks and bonds higher. The Dow industrial average of stocks jumped 33.67 points, its best one-day gain in more than a month, to close at 3,764.50.
The yield on the Treasury’s benchmark 30-year bond, which moves in the opposite direction of bond prices, tumbled to 7.39% from 7.55% Thursday--a sign that traders think inflation will remain at bay for at least a while longer.
The Commerce Department report says business inventories in the second quarter rose at their fastest rate in nearly three years, as factories kept working overtime even as consumer spending dropped.
Now, many economists said, manufacturers are likely to begin throttling back production to avoid glutting the market further. As a result, growth in the second half of the year should drop to about 3%--a rate that is good enough to prevent companies from starting massive layoffs but low enough to keep inflation away.
“There’s really no sense in keeping factories running at full speed when there’s no one to buy your products,” said Martin Regalia, chief economist of the U.S. Chamber of Commerce in Washington. “We should see the economy slow down in the coming months, which should keep inflation in check.”
Regalia and most other experts said Friday’s report also takes some pressure off the Federal Reserve Board to raise interest rates again soon in its effort to keep inflation under control.
The Fed has raised short-term rates four times since February to discourage businesses and consumers from borrowing and spending too much. Excess spending can overheat the economy and create inflation.
But the new Times Poll indicates that consumers do not seem ready to go on a spending spree.
Although private and government economists say the national recession technically ended in late 1991, 53% of all Americans think the country is still in one, the poll shows.
Nearly two-thirds of the respondents said the overall economy is shaky, and one-third said their own finances are on unstable ground.
Another survey, also released Friday, found that consumers’ confidence appears to be waning.
The University of Michigan said its consumer sentiment index dropped to 89 this month from 91.2 in June, as rising interest rates drained off some of their optimism about the economy.
THE TIMES POLL
The Economy: Americans Say They’re Worried
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A recent Times poll indicates that more Americans appear worried about the direction of the nation’s economy, even though it grew at a 3.7% annual rate from April through June, cheering investors in the securities markets.
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Do you think we are in an economic recession or not? (If yes) Do you think we are in a mild recession, a moderate recession or a serious recession?
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No recession:
July ‘94: 41%
Jan ‘94: 37%
Jan ‘93: 25%
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Mild recession:
July ‘94: 17%
Jan ‘94: 18%
Jan ‘93: 17%
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Moderate recession:
July ‘94: 20%
Jan ‘94: 20%
Jan ‘93: 27%
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Serious recession:
July ‘94: 16%
Jan ‘94: 20%
Jan ‘93: 27%
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Not sure:
July ‘94: 5%
Jan ‘94: 5%
Jan ‘93: 4%
*
Refused to answer:
July ‘94: 1%
Jan ‘94: 0%
Jan ‘93: 0%
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Would you describe the nation’s economy these days as very robust, fairly robust, fairly shaky or very shaky?
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Very robust:
July ‘94: 3%
Jan ‘94: 1%
Jan ‘93: 1%
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Fairly robust:
July ‘94: 31%
Jan ‘94: 30%
Jan ‘93: 20%
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Fairly shaky:
July ‘94: 42%
Jan ‘94: 46%
Jan ‘93: 51%
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Very shaky:
July ‘94: 20%
Jan ‘94: 20%
Jan ‘93: 26%
*
Not sure:
July ‘94: 3%
Jan ‘94: 3%
Jan ‘93: 2%
*
Refused to answer:
July ‘94: 1%
Jan ‘94: 0%
Jan ‘93: 0%
*
Would you describe the state of your own personal finances these days as secure or shaky?
*
Secure:
July ‘94: 63%
Jan ‘94: 60%
Jan ‘93: 57%
*
Shaky:
July ‘94: 35%
Jan ‘94: 39%
Jan ‘93: 42%
*
Don’t know:
July ‘94: 2%
Jan ‘94: 1%
Jan ‘93: 1%
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Three months from now, do you expect the unemployment situation in your area to be better than it is now, worse than now or about the same as now?
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Better:
July ‘94: 17%
Jan ‘94: 28%
Jan ‘93: 28%
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Worse:
July ‘94: 21%
Jan ‘94: 18%
Jan ‘93: 15%
*
Same:
July ‘94: 58%
Jan ‘94: 52%
Jan ‘93: 55%
*
Not sure/refused:
July ‘94: 4%
Jan ‘94: 2%
Jan ‘93: 2%
*
Three months from now, do you expect the nation’s economy to be better than now, worse than now or about the same as now?
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Better:
July ‘94: 14%
Jan ‘94: 26%
Jan ‘93: 25%
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Worse:
July ‘94: 20%
Jan ‘94: 12%
Jan ‘93: 11%
*
Same:
July ‘94: 62%
Jan ‘94: 58%
Jan ‘93: 61%
*
Not sure/refused:
July ‘94: 4%
Jan ‘94: 4%
Jan ‘93: 3%
* Gross Domestic Product
The GDP measures all the goods and services produced by workers and capital in the United States, regardless of ownership.
Percent change from previous quarter:
‘94: 2nd quarter +3.7%
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Source: Commerce Department * How the Poll Was Conducted
The Times Poll interviewed 1,515 adults nationwide, by telephone, July 23-26. Random-digit dialing techniques were used so that listed and non-listed numbers were called. Interviewing was conducted in English and Spanish. The sample was weighted slightly to conform with census figures for sex, race, age and education. The margin of sampling error for the total sample is plus or minus 3 percentage points.
