Revised GDP Portends Growth

The government cut its estimate of economic growth in the final three months of last year, but many economists said that is good news for growth in the first part of this year.

That’s because the substantial downward revision by the Commerce Department on Friday--from a steamy 4.7% annual rate to a still-robust 3.9% rate--came almost entirely because of a slower buildup in inventories of unsold goods.

And that means any pickup in consumer demand will more quickly translate into production increases at the nation’s factories.

“The implications for present and future growth actually are quite favorable,” said economist Lynn Reaser of Barnett Banks Inc. in Jacksonville, Fla. “The inventory change . . . indicates the potential for more production activity going forward.”

However, fear of the inflationary pressures and higher interest rates that could follow better growth roiled an already chastened stock market.

The Dow Jones industrial average closed lower for a third straight day, losing 47 points Friday. Stocks have been in decline since Wednesday, when Federal Reserve Board Chairman Alan Greenspan warned of possibly raising interests rates to nip signs of inflation in the bud.

“The Fed is in a difficult position,” said economist Bill Cheney of John Hancock Financial Services. “They must worry about what will happen six months from now, and this report may be a harbinger.”

However, other analysts pointed out that fourth-quarter growth in gross domestic product--the economy’s total output of goods and services--was supported by a surge in export sales that is unlikely to continue this year.

They said the smaller inventory overhang does not alter their belief that growth this year will hold in a moderate range of 2% to 2.5%.

“I think the inflation climate remains pretty good . . . and the economy is going to slow to a rate the Fed can live with,” said economist Bruce Steinberg of Merrill Lynch in New York.

He said it is still possible that the Fed will raise interest rates by late May, but he sees that as less certain than do many other analysts.

In a separate report, the National Assn. of Realtors said sales of existing single-family homes edged up 2.1% to a 3.94 million annual rate in January. In 1996, 4.08 million homes sold, the most since 1978.

Economist Reaser predicted sales will dip slightly this year but remain at high enough levels to stimulate sales of furniture, appliances and other home goods.

The revision in fourth-quarter GDP produced a change in the growth estimate for all of 1996. That is now pegged at 2.4%, instead of 2.5%. GDP grew 2% in 1995 and 3.5% in 1994.

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Gross Domestic Product

Quarterly percentage change from previous quarter, at annual rate:

4th quarter 1996: +3.9%

Source: Commerce Department