Slow Growth in Economy Draws Praise
The nation’s economic recovery slowed sharply in the first three months of this year from the speedy pace of late 1994, a possible setback that many economists actually hailed as good news.
The Commerce Department reported that the gross domestic product expanded at a modest 2.8% annual rate from January through March, down from the 5.1% tempo in the final quarter of last year. The slowdown came as consumers abruptly cut back purchases and businesses wrestled with a growing inventory of unsold products.
The new report provided the most definitive sign to date that the Federal Reserve Board’s 14-month-old policy of raising interest rates has put the brakes on an economic upturn that had threatened to fuel inflation as growth accelerated over the last year. Spending declined on big-ticket items such as cars and the pace of home-building slowed as well.
A majority of economists believe that the high-flying U.S. economy is headed for a “soft landing”--a period of modest growth with little inflation, although the report did raise fears in some quarters that the Federal Reserve had thrown the economy into reverse.
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“It appears that the soft landing is very much on course,” declared Lynn Reaser, chief economist at First Interstate Bancorp in Los Angeles.
The Commerce Department, in its first estimate of overall economic growth in 1995, found that consumers lost much of their buying fervor in the first three months of the year, with spending growing at only a $12.4 billion annual rate. That is a notable drop from the buoyant growth rate of $44.9-billion in late 1994.
Consumers, whose spending accounts for two-thirds of economic activity, restrained their purchases on an entire marketbasket of items, from clothing to furniture to home appliances.
“Is this a pause that depresses or is this a pause that refreshes?” asked Joel L. Naroff, chief economist at First Fidelity Bancorp in Philadelphia. “That’s the question everyone is asking.”
The most likely outcome, he continued, was a new chapter of “modest growth,” possibly lasting for a year.
Such opinions were not unanimous, however. Friday’s report provided fresh evidence for pessimists who believe that the economy is headed toward a troubled phase of rising unemployment and other problems.
For example, inventories of unsold goods piled up in retail stores, warehouses and factory stockrooms at a $63-billion annual rate, the biggest increase in inventories since late 1984. Inventories had expanded at a less dramatic, $49.4-billion rate, in the final three months of 1994.
Such accumulation creates a false impression of growth in the short run, economists said, as factories and their employees continue to churn out the merchandise. Indeed, undesired inventory growth--an unknown part of the overall $63-billion rate--has contributed to the expansion so far this year.
But correcting the imbalance and eliminating excessive stocks of goods can lead to a disruptive chain reaction as businesses trim back orders, causing cuts in factory production, which lead to layoffs and further damaging ripple effects. The risks of such a correction are growing, however, pessimists contended Friday.
In a further sign of a slower economy, exports decreased at a $1-billion annual rate, in contrast to the fourth quarter’s $31.4-billion rate of growth. The soft landing “is in jeopardy,” declared Robert D. Barr, deputy chief economist at the U.S. Chamber of Commerce.
Yet forecasters could find ammunition to back up an array of expectations for the recovery in the latest statistics, which showed that the economy grew at a $37.9-billion annual rate in January through March--down from $66.8 billion at the end of 1994.
Import growth also slowed, to a rate of $11.6 billion a year from $21.5 billion in the fourth quarter, a shift that could suggest a narrower trade deficit in the future.
The commitment by businesses to invest substantial sums of money in technology leaped out as a positive development. Such investments in plant and equipment by businesses rose at a brisk 19% annual rate, a slight increase from the end of last year. This statistic heartened analysts, who noted that it includes investments in computers and other equipment to enhance productivity.
“There isn’t any fundamental sign of weakness in the economy in these numbers,” said Lyle E. Gramley, consulting economist with the Mortgage Bankers Assn. and a former governor of the Federal Reserve Board.
Some economists still believe, despite signs of the slowdown, that the economy is likely to accelerate later in the year, bringing with it new possibilities of inflation.
