U.S. Economy Rides the Brakes, Advancing 0.9% in 4th Quarter
The U.S. economy, hammered by two government shutdowns, almost screeched to a halt at the end of last year, eking out its weakest economic growth rate since the last recession, the government reported Friday.
The Commerce Department report, which adds fuel to the debate over the nation’s growth potential and federal policies to promote it, shows the economy creeping forward at a 0.9% rate in the last three months of 1995.
That performance--measured as gross domestic product--is just half the level many forecasters had expected, and it does not reflect the punishing winter weather that hit much of the country in January.
For all of 1995, the economy grew by just 2.1%. By contrast, growth galloped ahead by 3.5% in 1994.
Separately Friday, the Commerce Department said that construction of homes and apartments did increase 4.4% in January, after suffering a 5% dip in December. Over the last year, housing starts plunged 7.3%.
Overall, the economy last year registered its weakest performance since the recession year of 1991, when it contracted by 1%.
“The overall pattern of growth last year was clearly lower than what we wanted, and the patient is not out of the woods yet,” said Nancy J. Kimelman, chief economist at Technical Data, a Boston financial advisory firm.
Analysts said Friday that the latest economic news reinforces expectations that the Federal Reserve Board will make further cuts in interest rates over the next several months. The Fed cuts rates in December and January.
The overall report did not change government forecasts that the economy will expand about 2% this year.
“For the downward trend in interest rates to be meaningful, the Fed would have to go one or two steps more,” said Joseph W. Duncan, vice president and chief economist with Dun & Bradstreet in New York. “The weakness,” he added, “would encourage them to move sooner rather than later.”
In light of workers’ anxieties and the relentless downsizing trend among employers, President Clinton called recently for a national debate on how fast the economy can expand in an era of advancing technology.
Recent vacancies on the Fed, which Clinton moved to fill on Thursday, have further focused attention on the issue of growth.
“U.S. industry is fully capable of producing more growth and jobs--if only the Fed will reduce interest rates further,” said Jerry Jasinowski, president of the National Assn. of Manufacturers.
According to Friday’s report, slower consumer spending, efforts by business to slash inventories and the partial government shutdowns that hurt many federal workers and contractors combined to restrain growth late last year. The shutdowns alone trimmed one-fourth of a percentage point off the growth rate, officials said.
Nonetheless, only the most pessimistic analysts foresee a recession emerging.
The report also offers hints of vitality, and forecasters generally expect expansion to stabilize at moderate levels this year.
Export levels remain brisk, and businesses have continued to pour money into new technology, the Commerce Department report shows.
The report on economic growth “includes several kernels of good news for 1996,” Joseph E. Stiglitz, chairman of the White House Council of Economic Advisers, said in a briefing for reporters.
Stiglitz predicted that a stock market rally, combined with an increase in savings rates, will lead to renewed consumer spending. Consumer spending rose at a paltry 0.8% pace in the fourth quarter, up just 1.9% from a year earlier.
Exports continued their brisk performance, rising at a 10.9% rate in the last three months of ‘95, while imports inched up at a 0.1% rate--thereby improving the trade balance. At the same time, investment in business equipment and materials, notably computers, rose at a 6.8% rate.
“They are the driving forces of economic growth--expanding markets abroad and expanding investments domestically,” Stiglitz said enthusiastically.
The report also highlighted the low rate of inflation, which was running at a pace near 2% at year’s end, according to different gauges.
New Dun & Bradstreet surveys from manufacturers and construction firms also provide evidence of modest continued growth this year. “Both areas are up, and manufacturing is up virtually across the board,” Duncan said.
Economists also said that business has substantially completed the job of unloading its excess inventories, a problem that emerged last year when a mountain of goods was accumulating in warehouses. That surplus was an economic albatross, weighing down growth, despite a third-quarter surge of 3.6%, according to revised figures.
Unloading the stockpiles “will pave the way for a rebound some time this year,” said Theodore H. Tung, chief economist at National City Bank in Cleveland.
The current national economic recovery is nearing its fifth birthday and has already survived nine months longer than is typical. Given such figures, a growing number of analysts are questioning whether the inevitable demise is approaching.
Optimists pointed out, however, that the economy is not displaying some of the classic warning signs of the past, such as rising inflation and increasingly burdensome inventories. Other experts said they fear that the government has few tools to deal with them. Kimelman said there is some evidence that lower interest rates will provide diminishing returns given the relatively low level of rates right now.
On top of that, the federal budget deficit rules out any spending initiatives should the economy need some sort of stimulus this year.
“The current malady is a combination of old age and very little help from the normal remedies,” she said.
But Stiglitz maintained that, in and of itself, the passage of time does not sabotage a recovery, leaving open the possibility that the expansion has much life left. “The fact is that economic expansions do not die of old age,” he said.
* JOB GROWTH: California added 285,000 jobs last year. A1
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Gross Domestic Product
Real (adjusted for inflation) annualized percentage change by quarter: (see newspaper for full chart)
1965: Fourth-quarter growth 0.9%
* Source: Commerce Department
