Economy Shows Weakest Quarterly Growth in Years

The U.S. economy slowed to a crawl this spring, posting the weakest quarterly growth figures in nearly four years, with big downturns in auto production, home building and exports to Mexico, the Commerce Department reported Friday.

Gross domestic product--the broadest measure of economic activity--grew at an annual rate of only 0.5% in the second quarter after solid growth at the start of the year and an explosive expansion at the end of 1994.

The latest number--the worst showing since the economy grew at a 0.1% rate in the fourth quarter of 1991--helps explain why the Federal Reserve finally cut interest rates three weeks ago after having raised them seven times in the previous year. The GDP figure is subject to revision.

The Fed is expected to closely monitor economic signals in coming weeks, particularly the jobless rate, to determine whether another rate cut is needed to keep the country from slipping into recession.

However, many analysts anticipated the weak numbers for April through June and are looking for a modest pickup in the rest of the year. Some aspects of the Commerce Department report--showing strong consumer spending and commercial construction, for instance--indicate that a rebound has already begun, they said.

“The economy should improve decently in the second half, but there’s little prospect for a renewed boom,” said David Orr, chief economist at First Union Corp. in Charlotte, N.C.

The downbeat GDP number--measuring all goods and services produced in the United States--mainly reflected a curb on factory production, particularly in the auto industry, while companies sold off their fattened inventories.

“We have seen the worst in automobile production and residential construction,” Commerce Secretary Ronald H. Brown said Friday. “The stage has been set for faster growth the remainder of this year.”

Consumers apparently are unfazed by the slowdown. The University of Michigan’s final consumer sentiment index for July rose to 94.4 from 92.7 in June. Michigan’s separate index of consumer expectations also bounced upward, to 87.4 from 84.1, indicating more positive feelings about the future.

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In an example of the good-news-is-bad-news kind of thinking that sometimes rules Wall Street, bond traders blamed that blush of optimism for a mild selloff on Friday. The idea is that if consumers get too bubbly, their spending might fuel inflation--enemy No. 1 to the skittish bond market.

But government officials contend that inflation is under control. In fact, President Clinton remarked to reporters in Washington on Friday that the real problem with the economy is that “we have created 7 million jobs and most Americans haven’t gotten a raise.”

The expectation that growth will snap back through the summer and fall may have eased the pressure on the Federal Reserve to cut interest rates further.

“Nothing [in Friday’s Commerce report] suggests they have to start ringing the emergency bell,” said Robert Dederick, an economic consultant to Northern Trust in Chicago.

The next meeting of the Fed’s policy-making Open Market Committee is Aug. 22.

Before making a decision, the Fed will focus on some economic reports due next week, particularly the purchasing managers index, showing the strength of manufacturing activity, and the monthly unemployment rate for July, said economist Lynn Reaser of First Interstate Bank in Los Angeles.

Reaser believes that the federal funds rate--the interest rate that the Fed cut by 0.25 of a percentage point to 5.75% earlier this month--needs to be brought down to 5% “to keep the economy on a steady growth path.” She added: “The question is how soon we get there.”

The biggest negatives in Friday’s GDP report were motor vehicle production, which plunged at a 31% annual rate; home construction, down 14%, and exports to Mexico, off 40%.

On the plus side, consumer spending increased at a $22.6-billion rate, compared to a $14.3-billion increase from January through March. Spending on business equipment was up 12.7%, and commercial construction was up 8.5%.

Analysts said consumers may have been responding to price-cutting by businesses that were trying to slash inventories.

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The economy has been in a dramatic slowdown since late last year, when it grew at the fastest rate in a decade. GDP increased at a 2.7% annual rate in the first three months of 1995 after a booming 5.1% pace in the fourth quarter of 1994.

Lately, though, the economy has been reviving. Sales of previously owned homes in June rose a stronger-than-expected 6.5% to the highest level in eight months, according to the National Assn. of Realtors.

“It would appear that the housing sector probably turned positive before the quarter was out,” Northern Trust’s Dederick said.

Auto makers have cut inventory to the point where production should start picking up again, “but it looks as if more needs to be done in the non-auto sector,” he added.