Economy Expands at Surprising 4.2% Rate : Report: Clinton says GDP figures prove his policies are working, but some economists expect slower growth ahead.
The U.S. economy charged forward at a brisk 4.2% annual rate this summer, the Commerce Department reported Friday, startling most experts and reducing chances that the Federal Reserve Board might cut interest rates any time soon.
The unexpected jump in the nation’s gross domestic product, which came with only faint signs of inflation, was immediately hailed by the Clinton Administration as evidence that its economic approach is working.
“We’re on the right track,” President Clinton declared. “We do not need to reverse our economic course.”
The growth rate followed a much weaker 1.3% pace for the previous three months and reflects the economy’s most ebullient performance since the end of 1994.
The news apparently bewildered the nation’s financial markets, which initially sank amid signs that the Fed would not ease interest rates next month but then rose at the prospect of stable prices and sustained growth. The Dow Jones industrial average, after falling 26 points, closed up almost 38 points.
“We’ve got some very unambiguous evidence that the economy is performing spectacularly,” said Nancy J. Kimelman, chief economist with Technical Data, a financial advisory firm in Boston. “My impression is that many economists are trying to dismiss the strength in this report because they didn’t forecast it.”
Indeed, other analysts greeted the news more warily, arguing that the July-September growth spurt might exaggerate the economy’s vibrancy and that growth is likely to moderate in coming months.
“We like to call it a head fake,” said Alan Levenson, an economist at UBS Securities in New York. “We don’t think a 4.2% pace is sustainable, and that spells weaker growth ahead.”
Still, the report seemed to highlight an unusually broad base of economic vitality, featuring healthy rates of consumer spending on homes and autos, strong investment by business in new technology, growing exports and other gains.
Consumer purchases of big-ticket items, such as refrigerators and lawn mowers, expanded at an 11.7% rate between July and September. Business investment in new equipment rose at a 9.7% rate and residential construction at 10.9%.
For the White House, engaged in a fierce duel with Congress over the budget, the Commerce Department’s report came as the second upbeat economic news for the week, following word that the federal deficit had plunged to $164 billion for fiscal 1995.
Clearly, the GDP analysis showed little danger of inflation, a continuing concern of financial markets and the Fed, with key price gauges registering below 2%.
In a statement, Joseph E. Stiglitz, chairman of the White House Council of Economic Advisers, said the report “confirms” that the economy is on a path of sustained growth with low inflation and he sought to tie the news to White House priorities in its budget battle with Congress.
For all the upbeat signs, however, analysts also said that Friday’s report contained hints that the economic tempo could ease in the future.
As an example, spending by state and local government was among the sources of the recent expansion--a development that flies in the face of the larger trend toward fiscal belt-tightening and is not likely to be repeated.
Similarly, business inventories continued to expand over the summer, much to the surprise of analysts. Such growth contributes to the economy in the short term but also can spell trouble ahead, if rising stocks of goods lie unused in warehouses and stockrooms.
Even though most observers now doubt that the Fed will cut rates when its policy-making committee meets next month, some maintained that the economy’s vulnerabilities still make lower rates possible by early next year. An eventual budget deal between Congress and the White House would make such a move even more likely, goes the argument.
By the end of this year, “the softness of the U.S. economy in the final quarter of the year should be evident,” economists from the Merrill Lynch investment firm said Friday.
Others said that a near-term Fed easing of rates seemed like fantasy in the wake of Friday’s report. “The Fed was willing to jump through the window when the window was open,” Kimelman said. “But numbers like today just slam that window shut.”
Until Friday, analysts and government officials generally had settled on the view that the Fed had engineered a “soft landing” for the economy, maneuvering it onto a path of low inflation and modest, sustainable growth.
In light of the new growth statistics, however, such wisdom has shifted from being conventional to controversial.
Rather than a soft landing, said Robert G. Dederick, chief economist at the Northern Trust Co. in Chicago, “the basic message is a stronger-than-expected takeoff. That’s what these numbers are telling us.”
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Gross Domestic Product
Percent change from previous quarter: (see newspaper for full chart)
1995: 4.2%
Source: Commerce Department
* DOW GAINS 37
U.S. stocks rally on signs of stronger economic growth. D2
