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Moderate Economic Growth Calms Fears : Indicators: 3.8% rate in second quarter is below forecasts. Buildup in inventories is cited as a major factor.

From Times Staff and Wire Reports

The government said Friday that the economy grew at a moderate 3.8% annual rate in the second quarter, easing analysts’ concerns that inflation is poised for a comeback.

Although the Commerce Department’s revised estimate of quarterly growth in the gross domestic product was up slightly from its original 3.7% estimate made last month, it was below economists’ forecasts.

The department also said that most of the growth came from a sharp buildup in inventories of unsold goods. That’s a sign that consumers are reining in their spending and that the economy is expanding at a more sustainable rate.

Investors greeted the news by sending stock prices sharply higher. The Dow Jones industrial average zoomed 51.16 points to close at 3,881.05--up nearly 126 points for the week and its highest level in five months--on heavy volume of 305.02 million shares.

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Bonds rallied too. The yield on the bellwether 30-year Treasury bond, which declines when bond prices rise, fell to 7.48% from 7.53% on Thursday.

Stocks also got a boost from a second Commerce Department report that said after-tax profits of U.S. corporations rose a strong 7.4% in the second quarter. Rising corporate profits typically push stock prices higher.

The department’s GDP report said the 3.8% growth rate in the output of goods and services was largely attributable to a strong increase in the amount of unsold goods that are piling up in warehouses and on store shelves across the country.

Economists said the inventory jump--the largest in 6 1/2 years--and moderating consumer spending are likely to force producers to cut output to clear their shelves of unwanted items. That should keep the economy from overheating and keep inflation in check.

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“Most of the buildup in inventories was probably unanticipated. Business may have failed to anticipate the extent to which consumer demand would slacken off,” said Gordon Richards of the National Assn. of Manufacturers. “What this means is that the economy is poised on the verge of a slowdown in the second half.”

GDP expanded at a 3.3% in the first quarter, making for growth in the first six months of just over 3.5%. The revised growth level was well below the 4.1% annual rate forecast by economists.

Economists noted that nearly two-thirds of the growth in GDP last quarter came from the jump in business inventories.

Stockpiles of unsold goods rose $56.3 billion--or $2.3 billion more than previously estimated--after a rise of $25.4 billion in the first three months of 1994.

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The net change between quarters--equal to $30.9 billion--was the largest since a $54.5-billion change in the fourth quarter of 1987.

The inventory jump was accompanied by weakening in consumer spending, which rose just 1.4% after spurting 4.7% in the first quarter. It was the smallest gain since a 0.5% drop in the fourth quarter of 1991.

“The economy is still pretty strong, but fortunately it is losing momentum. I say ‘fortunately’ because that takes a little bit of pressure off the inflation front,” said Ward McCarthy of Stone & McCarthy Research Associates Inc.

McCarthy also said Friday’s good inflation report should ease pressure on the Federal Reserve Board to raise interest rates again as part of its ongoing battle against inflation.

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Meanwhile, consumer optimism about the economy grew this month compared to July, but not as fast as originally expected, according to a widely watched University of Michigan survey.

ANALYSIS: Why stocks rallied. A1

MARKETS: What gained and lost. D2

Gross Domestic Product

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Percent change from previous quarter:

Second quarter, 1994: +3.8%

Source: Commerce Department


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