Report Indicates Strong Growth Ahead
In a report showing the nation’s economy poised for strong growth in coming months, the Commerce Department on Thursday reported that businesses shrank their inventories for the first time in four years, while demand for goods and services grew at its fastest pace since 1994.
The nation’s gross domestic product--the total value of goods and services produced in the U.S.--grew at a revised 2.3% in the first quarter, the department reported. That was down from an earlier estimate of 2.8% because of higher-than-expected usage of the nation’s stockpiles of goods in the quarter.
But real final sales--total spending by consumers and investment by businesses--grew faster than initially thought, by 3.7%, the largest gain since the third quarter of 1994. That was revised from an earlier estimate of 3.3%.
“The shift towards higher final demand suggests that there is some momentum that will contribute to growth going forward,” said Lewis Alexander, the Commerce Department’s chief economist. “The fact that the stock of inventories actually declined also suggests that we’re facing considerable momentum” as business replenishes depleted stores.
The strength of the nation’s economy was further confirmed by a raft of other economic reports Thursday:
* New-home sales grew 6.7% in April, the fourth consecutive month in which the sales rate exceeded 700,000 units and the largest monthly increase since January, the Commerce Department reported. The strong sales growth was particularly good news given the rise in mortgage interest rates in recent months, economists said.
Sales growth was particularly strong in the Northeast. Sales increased 2.8% in the West.
* Claims for unemployment insurance increased 1,000 to 346,000 in the week ended May 25, but the four-week average of such claims was at its lowest level since last summer, the Labor Department reported.
California had the largest decrease in initial claims among the 50 states for the week ended May 18.
The combined reports led economists to project a 2.5% annual growth rate for the economy in 1996, well above the Commerce Department’s official 2% projection.
The GDP report “clears the deck for stronger gains in output in this quarter and perhaps in the second half of the year,” said David Hensley, an economist at Salomon Bros. in New York.
The economy’s strength renewed fears that the Federal Reserve Board, fearful of inflation heating up, might take action in July to raise interest rates. The Fed’s policy-making Open Market Committee took no action on interest rates at its May meeting.
Fed Gov. Susan Phillips on Wednesday roiled financial markets when she told a Washington meeting that there is no end in sight to U.S. economic expansion; other governors have made similar remarks in recent days.
On Thursday, the bond market reacted to the GDP news by initially selling off and raising yields on the benchmark 30-year Treasury bond to nearly 7% before rallying in the afternoon.
“I think the economy may slow in the second half, either on its own or because the Fed steps in and makes sure it does,” said Scott Brown, senior economist at Raymond James & Associates in St. Petersburg, Fla.
But other economists doubted the Fed would take action before the November election.
It’s “the last thing the Fed wants to do, unless the economy falls out of bed or runs off track,” said economist Ken Goldstein at the Conference Board in New York.
The Commerce Department officially forecast a 2.8% inflation rate for 1996; economists say it will be more like 3%.
One positive sign: Pressures on employers to raise wages are not yet out of hand. The Conference Board reported Thursday that its help-wanted advertising index fell slightly in April, to 82 from 84 in March and 86 a year ago.
“Although some businesses are beginning to worry that strong job growth could lead to labor shortages and upward pressure on wage costs, the public remains concerned about a drop in labor demand,” Goldstein said.
Times Wire Services contributed to this report.
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New-Home Sales
Seasonally adjusted annual rate, thousands of units:
April 1996: 776
Source: Commerce Department
Gross Domestic Product
Percent change, quarterly:
1st Quarter 1996: 2.3%
Source: Commerce Department
