Economy Slows, but Signs Point to Solid Growth

The nation’s economy slowed sharply during the second three months of this year, the government reported Friday, but analysts said that the economy was beginning a period of slower, more stable growth rather than entering a recession.

The Commerce Department said that the gross domestic product--the total value of the goods and services that the nation produces--grew at an annual rate of 1.4% from April to June, off substantially from a torrid revised 5.5% pace in the previous quarter.

But the slowdown stemmed mostly from an abrupt and presumably temporary halt in inventory building by businesses--designed to work off the frenetic stockpiling of the previous quarter--and by the effect of the eight-week General Motors strike, which ended Wednesday.

While the Asian economic slump continued to depress U.S. exports, the effect was not as severe as some analysts had expected. Although American exports to Asia fell sharply over the quarter, imports from the region grew more slowly than in the previous quarter.

The slow-but-respectable performance came as a surprise to many economists, some of whom had predicted that Friday’s growth figures would show that the U.S. economy had come to a standstill or possibly even contracted.

Barry P. Bosworth, a Brookings Institution economist, said the figures show that the economy has downshifted to “just the sort of growth path that policymakers have been seeking”: solid but sustainable economic growth without the overheating that could intensify inflation pressures.

“Although we’re getting hit pretty strongly by the slump in Asia, there just isn’t any basis for concern that the economy is slipping into any kind of significant slump,” Bosworth said. “It’s still an incredibly strong economy, and it will pick up next quarter.”

Bruce Steinberg, chief economist for Merrill Lynch & Co. and one of the most pessimistic about the effect of the Asian economic slump, conceded Friday that the optimists appear to be correct. “The economy is now in the middle of a soft landing that should persist for the rest of 1998.”

Despite the favorable economic news, stocks plunged on Wall Street Friday, with the Dow Jones industrial average sliding 143.66 points, or 1.6%, to 8,883.29. Analysts said that the latest sell-off reflects investors’ rising worries that the slowing economy will sharply depress U.S. corporate earnings for some time. The stock market has been in a steep decline over the last two weeks.

Commerce Department statisticians said the halt in inventory-building sapped 2.3 percentage points from second-quarter growth. The GM strike claimed another half a percentage point.

Virtually all of the remaining drain came from the effects of the Asian economic slump, which pared orders for U.S. exports to the region and pushed Asian currency values lower, making Asian goods still more competitive in American markets. U.S. imports rose sharply.

But economists said that inventory-building is almost certain to resume again this quarter as retailers struggle to meet continuing strong demand. They also predicted a “bounce-back” effect from the settlement of the GM strike. And they said that export orders from Asia may be near bottom.

Moreover, Lee Price, the Commerce Department’s chief economist, pointed out that consumer spending and business investment were both continuing to grow at an unusually rapid pace and that construction of new homes is rising sharply.

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David A. Wyss, economist for Standard & Poor’s DRI, an economic forecasting firm, predicted that the economy will grow somewhat more rapidly during the third and fourth quarters of 1998 and into early 1999. “It will be a sort of Twinkie year--soft in the middle.”

Nevertheless, both government and private analysts cautioned that, if the Asian economies remain in recession through the middle of next year, the effect on the U.S. economy is certain to become more severe, possibly pushing the United States into a mild recession.

Allen Sinai, economist at Primark Decision Economics, predicted that, if exports continue to dent earnings, profit margins of U.S. companies will shrink, possibly setting off a plunge in stock prices that ultimately could dampen business and consumer spending.

Besides the figures on growth, Friday’s statistics show that inflation remains in check. The department’s major GDP price index rose at a modest 0.8% annual rate, down from 0.9% during the January-March period.

President Clinton rushed to take credit for the growing economy, calling a press conference to proclaim that while the second-quarter growth rate was “more moderate” than that of the first, “our economy continues to enjoy steady growth.”

Even with the slowdown, the economy has grown at an average 3.5% annual rate so far this year, sustaining what is approaching almost eight years of continuous expansion. Inflation is at its lowest level in a generation, while the nation’s unemployment rate is at a low 4.5% of the work force.

Commerce Department statisticians said part of the reason that the second-quarter growth rate exceeded expectations was that they had overestimated the size of the inventory-building in the previous quarter and had to revise it downward, making the second-quarter’s change smaller as well.

The department also announced annual revisions in the GDP statistics, based on a broadening of its database, showing that the economy actually grew at a 3.3% annual rate from 1995 to 1997, rather than the 2.9% pace that it had estimated as late as three months ago.

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It also revised its estimates of the nation’s personal savings rate to show Americans saving even less than previously estimated. The new figures showed the overall savings rate at 2.1% in 1997, instead of the 3.9% reported before; 2.9% in 1996, instead of 4.3%, and 3.4% in 1995, instead of 4.8%.

The second-quarter growth rate of 1.4% that the department reported on Friday was the lowest since the second quarter of 1995, when the economy’s growth slowed to a 0.4% annual pace. That quarter was followed by a 3.3% growth rate in the third quarter of 1995.

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Slowing Economy

The economy slowed abruptly in the second quarter as a result of the Asia crisis, the General Motors strike and business inventory problems.

Percent change in the quarterly gross domestic product since 1996:

1998

2nd qtr.: 1.4%

Source: Department of Commerce, Bureau of Economic Analysis