Economy Surges 4.2%, Biggest Gain in 2 Years

In a burst of growth that echoed on the presidential campaign trail, the U.S. economy surged at a 4.2% annualized pace between April and June, the government reported Thursday, prompting enthusiastic words from the White House but a dismissive response from Republican Bob Dole.

The gain in economic activity was the largest in two years, and it delighted investors who noted a conspicuous lack of inflation in the Commerce Department report. Inflation fears were cooled further by a new survey of factory executives that suggested the economy may have slowed down in July after its springtime gallop.

Cheered by signs of slower growth, the bond market staged its biggest one-day rally in nearly four months, as long-term yields tumbled to their levels of late May. That in turn boosted stocks, with the Dow industrial average surging 65.84 points to 5,594.75.

“This is good news for America,” President Clinton told reporters in the White House Rose Garden. He said the report provided “more evidence that our economy continues to surge ahead and our economic strategy is working.”

The timing of the news was less than ideal for Dole, who is readying his own long-awaited prescription for stimulating economic growth. The former Republican senator hopes to exploit public dissatisfaction over gains in income and overall living standards as a way to narrow his gap with Clinton in the polls.

Clinton is “reigning over the first recovery since World War II to leave the American worker behind,” said Christina Martin, a Dole spokeswoman.

Indeed, some economists cautioned Thursday that the new growth statistics mask signs of weakness, just now becoming evident, and that the 5-year-old expansion might be more vulnerable than is commonly recognized.

Yet the report on the nation’s gross domestic product underlined that, at least by a few measures, the U.S. economy was performing at a near-feverish pace in the spring: Consumer purchases of big-ticket items such as cars and appliances rocketed forward at a 14.1% pace, and construction of new homes shot up 15.2%.

Many companies poured money into building up their inventories, reflecting confidence in the economy, analysts said.

The overall growth pace of 4.2% exceeded economists’ general prediction of growth of about 3.9% and represented the strongest advance since the 4.9% gain recorded in the spring of 1994.

“The simple fact is that we had very, very robust growth,” said Joel L. Naroff, chief bank economist with First Union Corp. in Philadelphia. “It was kind of the best of all worlds--solid growth without inflationary pressure.”

Wall Street was especially comforted by fine print within the growth report suggesting that inflation actually might be moderating, despite the pickup in economic activity. The GDP deflator, a measure of inflation, rose just 2.1% in the April-June period, compared with a 2.3% pace between January and March.

“Financial markets have been obsessed with the idea that the Federal Reserve [Board] is about to raise interest rates because of inflation,” said Raymond A. Worseck, chief economist at the A.G. Edwards & Sons investment firm in St. Louis. “This was clear evidence that we didn’t have a surge of inflation in the second quarter.”

Not every statistic in the growth report was upbeat. Business construction slipped by a 6.6% rate, and the growth in business investment in equipment slowed sharply from earlier in the year.

But the political flap Thursday centered on the broader meaning of the report and what it did--or did not--reveal about the U.S. economy as experienced by average working Americans.

Clinton said that economic growth “is touching the lives of all our people, with 10 million new jobs, low unemployment and inflation in check. . . .”

Dole’s advisors have cited subpar growth in wages and--for part of Clinton’s term--the economy overall as somber realities for which the president should be held accountable.

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Gross Domestic Product

The GDP, which measures all goods and services produced in the U.S., increased in the second quarter. A look at GDP, measured in percent change from previous quater:

1996: 4.2%

Source: Commerce Department

* MARKETS REACT: Stocks rallied strongly; bond yields fell. D3