Economy Slowed Drastically in 1st Quarter : Indicators: GDP grew at 2.7%, the slowest growth in 18 months. Rebound in factory orders eases recession fears.
The economy slowed drastically in the first three months of the year, but fears of a recession were eased by a rebound in factory orders in May.
The nation’s gross domestic product grew at a 2.7% annual rate in the first three months of 1995, the Commerce Department said Friday. That is slightly more than half the pace of expansion in the fourth quarter of last year and matches the slowest growth in 18 months.
The widespread signs of slowdown were blurred by a second report, which said that orders to U.S. factories climbed 1.4% in May after three straight declines, including a 2.2% plunge in April. The May advance was the strongest showing since a 2% gain in December.
The stock market initially rallied on the mixed economic reports but then gave back most of its gains. Bond yields fell moderately.
Analysts expect that economic growth in the second quarter, which ended Friday, was even slower than the January-March period, and they cited a new business survey as evidence of further weakness.
The Purchasing Management Assn. of Chicago said its index of area activity fell to 47.6% in June from 53.5% the previous month. A reading below 50% is a sign the region’s economy is shrinking.
But that contrasts with reports Thursday that show a healthy recovery for new-home sales nationwide in May and declining first-time claims for unemployment benefits last week.
Also, a recent survey on consumer sentiment conducted by the University of Michigan shows a slight increase in confidence.
Analysts said the flurry of ambiguous data may make it difficult for the Federal Reserve Board to agree on a cut in interest rates when it meets next week.
The reports “are not ringing any alarm bells,” said economist Robert Dederick of Northern Trust Co. in Chicago. “The economy is not falling on its face, but it’s been limping.”
Some said the economy still needs a shot in the arm and that the Fed should cut rates when the central bank’s policy-making Federal Open Market Committee meets Wednesday and Thursday.
“With no threat of inflation and several months of anemic growth, the FOMC should reduce short-term rates by” half a percentage point, said Jerry Jasinowski, president of the National Assn. of Manufacturers.
The economy may have barely expanded in the second quarter and possibly shrunk, analysts said. They also said the third quarter that has just begun may be only slightly better.
But most doubt that a recession, defined as two straight quarters of declining activity, is at hand. “The risk of a 1995 or 1996 recession remains low,” said Cheryl Katz of Merrill Lynch & Co. “We expect a moderate rebound late this year.”
The latest report on gross domestic product, the total output of goods and services produced in the nation, shows that consumer spending in the first quarter was a little weaker than previously estimated. But the downward revision was offset by higher net exports and business investment.
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Factory Orders
Total new orders, in billions of dollars, seasonally adjusted:
May 1995: $297
Source Commerce Department
