4.5% Growth Rate Ends Robust ’94 : Economy: The gross domestic product posts a 4% gain overall last year, the biggest in a decade. But last-quarter surge is expected to prompt another interest hike.

The nation’s economy grew at a supercharged rate of 4.5% during the final three months of 1994, the government said Friday, increasing the likelihood that the Federal Reserve Board will push interest rates higher as early as next week.

The economy gained 4% for all of 1994--its strongest showing since the end of Ronald Reagan’s first term as President when it soared 6.2% in 1984. Inflation, in the meantime, remained below 3% for the year.

President Clinton said that 1994 produced “the best combined rates of high growth and low inflation in . . . 25 years. We’re moving in the right direction.”

Heavy consumer spending--particularly for big-ticket durable goods--propelled the surge.

“We had strong economic growth combined with low inflation,” said Sung Won Sohn, chief economist of Norwest Corp., a Minneapolis bank. “What more do you want?”

While the President and others in his Administration portrayed the fourth-quarter growth in gross domestic product--which measures the total value of the nation’s goods and services--as healthy, some economists worried that the nation’s economic engine was running too fast.

With the labor market remaining tight, commodity prices increasing and factories running at a high rate of capacity, “there’s a very good chance of inflation picking up next year,” said John Taylor, a Stanford University economics professor who served on the White House Council of Economic Advisers under former President George Bush.

On Wall Street, investor reaction to the report was mixed. The Dow Jones average of 30 industrial stocks gyrated slightly before losing 12.45 points to close at 3,857.99.

The economy is widely considered likely to slow down this year as the series of interest-rate increases begun by the Federal Reserve last February takes stronger hold.

Inflationary pressure remains moderate at 2.7% as measured by the latest consumer price index. Taken together, that index and the latest gross domestic product report suggest that--although economic growth has been hefty and unemployment rates have continued to drop--neither trend has caused a significant increase in prices.

But, analysts said, the strong growth rate at the end of 1994 means that the Federal Reserve is likely to continue its series of preemptive strikes against potential inflation. The Federal Open Market Committee, the central policy-making panel of the central bank, will meet next Tuesday and Wednesday to decide whether to boost short-term interest rates again. There have been six increases over the last year that raised its key interest rate 2.5 percentage points.

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“The real question for next year is what’s happening with inflation,” Stanford’s Taylor said.

Offering an optimistic forecast for 1995, Lewis Alexander, the Commerce Department’s chief economist, said that economic recoveries in Europe and Japan and growth in Asia should sustain U.S. export growth. Moreover, growing corporate profits will help maintain business spending on plants and equipment, and “strong growth in employment, as well as high consumer confidence, should support further increases in consumer spending,” he said.

“We expect 1995 to be another good year,” he said.

Others were muted in their evaluation. Laura D’Andrea Tyson, who chairs the President’s Council of Economic Advisers, praised the economy’s performance in 1994 but she said that “many Americans did not participate fully” in the expansion.

“On average, wages increased at just about the rate of inflation, so American workers saw no significant real gains in their income,” she said. “In addition . . . a record number of Americans remain in poverty and 40% of those Americans are children.”

House Majority Leader Dick Armey (R-Tex.) said that comparisons to 10 years ago are “hard to believe” and predicted that the economy will “wane seriously” by the election year of 1996.

Growth during the last three months of 1994 was fueled by consumer spending, growth in inventories and outlays for capital goods.

But Lynn Reaser, chief economist of First Interstate Bancorp in Los Angeles, said that the strong growth, particularly in inventories, is not sustainable, leading to the likelihood of a more moderate pace in 1995.

Indeed, auto makers have been warning in recent weeks that the Fed’s interest rate increases are leading to a slowdown in auto sales and they are beginning to ease the pace of production in their factories.

Although Federal Reserve Board Chairman Alan Greenspan said Thursday that the economy is no longer “torrid,” there was little expectation that it had cooled enough to avert another interest hike by the central bank, whose rates become benchmarks for commercial lending throughout the country.

“We still believe the Federal Reserve will raise interest rates about 1/2% to move the economy down more toward a more moderate track,” Reaser said.

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Higher interest rates increase the cost of doing business and the cost of borrowing for major purchases and thus encourage less economic activity. This, in turn, exerts less pressure on prices, holding inflation down but risking an increase in unemployment.

If the Fed approves such an increase next week, it “would be more of an insurance policy,” Reaser said, and would likely be “the end or near the end of the very necessary tightening that will be seen in 1995.”