Robust Growth Closes Out Strong ’98 for Economy
Capping a year of sizzling economic growth that defied the financial turmoil overseas, the U.S. economy expanded by a surprisingly robust annual rate of 5.6% in the last three months of 1998, the government said Friday.
That quarterly gain in the gross domestic product, a comprehensive measure of the nation’s output of goods and services, was the best performance for any three-month period in 2 1/2 years.
It also closed out a year in which the GDP climbed 3.9%, matching 1997’s advance and up from 3.4% in 1996. Taken together, the 1996-98 economic track record is the nation’s best three-year run since the mid-1980s.
And many analysts who assessed Friday’s GDP report from the U.S. Commerce Department foresee continuing strong growth in 1999, albeit something short of last year’s sparkling results.
“The U.S. economy is cooking. We obviously ended last year with a bang, and we have tremendous momentum entering 1999. While the economy probably will moderate in ‘99, there’s really no evidence that it’s moderating yet,” said Bruce Steinberg, chief economist for Merrill Lynch & Co. in New York.
Andrew Hodge, an economist tracking the U.S. economy for WEFA Group, a consulting firm in Eddystone, Pa., added that “even though much of the rest of the world is in recession or depression or close to it, the U.S is still powering ahead.” He said it appears “inevitable” that, at least for the first half of the year, the U.S. economy will keep growing swiftly.
The strong growth, however, makes up just one key part of the nation’s remarkable economic picture. The other key element: extremely low inflation.
The GDP’s price index rose only 1% for all of 1998, the smallest increase since 1959. The government reported previously that its consumer price index, a more widely followed gauge of inflation, rose 1.6% in 1998, a 12-year low.
Amid the good news, however, some experts continued to caution that the U.S. economy is increasingly vulnerable to a slowdown. They noted that the expansion last year was aided by strong consumer spending that, in turn, was spurred by a buoyant stock market.
If stocks post a serious decline, these analysts said, it could do major damage. “The economy is more dependent on the behavior of the stock market now than at any time in the postwar period,” said Paul Kasriel, chief U.S. economist for Northern Trust Co. in Chicago.
Kasriel expressed concern that slowing profit growth lately will prompt U.S. companies to reduce investment spending and increase layoffs. As a result, he predicts a “soft landing” for the U.S. economy in 1999, with GDP growth of around 2.75%.
Other experts warned that if the financial crises that raced from Asia to Russia to Latin America last year remain unresolved, they too could derail this nation’s boom midway or so into 1999.
So far, though, the U.S. economy has been shrugging off weakness overseas. In fact, that weakness probably helped consumers and businesses in some respects by holding down prices.
Still, the latter part of 1998 provided some drama for the economy. Stocks plunged in August, prompting the Federal Reserve to cut interest rates three times between late September and mid-November to keep the economy on track.
Wall Street soon bounced back, pushing up the Dow Jones industrial average by 16.1% for the year and boosting the Standard & Poor’s 500 by 26.7%.
Most analysts said Friday that the nation’s strong economic performance recently means that the Fed, whose policymakers will meet Tuesday and Wednesday, is unlikely to either boost or cut interest rates again any time soon.
Along with strong consumer spending and a surge in home building, the fourth quarter was powered by heavy business investment in, among other things, computer systems. Analysts said consumer spending, which accounts for about two-thirds of the nation’s economic activity, was boosted by the strong job market and low costs for energy and other goods, along with the confidence boost provided by the stock market.
Among the handful of negative signs in 1998 was the biggest expansion of the U.S. trade deficit in 15 years. That gap between imports and exports narrowed by the fourth quarter, however, when the trade deficit was a modest $3.9 billion.
Analysts said that Friday’s fourth-quarter report was inflated somewhat by onetime factors and perhaps a statistical quirk. Auto production, for instance, showed a big jump largely because of the strike at General Motors Corp. at the end of the summer.
The narrowed trade deficit, many analysts said, appears to reflect a problem with the government’s seasonal adjustment. They explained that trade figures, for unexplained reasons, consistently improve in the fourth quarter and then weaken in the following first quarter.
The fourth-quarter figures released Friday are considered an advance estimate of economic performance in the last three months of the year. The government will refine the figures over the next two months before releasing its “final” GDP figure in late March.
But even if the final figure is lowered by as much as a full percentage point, Hodge said, it still “will be an extremely strong number.”
For the full year, consumer spending rose 4.8%, a 14-year high, while housing construction jumped 10.4%, also the best mark in 14 years.
But consumers reduced their savings rate from 2.1% in 1997 to 0.5% in 1998, the lowest since 1933. That decline, however, doesn’t mean that consumers were depleting their bank savings; rather, it likely means that they were financing their heavy consumer spending by using some of their stock market gains and by tapping some of their home equity.
In December, the nation’s economic expansion went into its 93rd month, becoming the longest peacetime expansion on record.
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* ASIAN CRISIS: Analysts say the world is better prepared now if China’s currency were devalued. C1
