U.S. Economy, State Jobs Set a Sizzling Pace
The U.S. economy grew in the closing months of 1999 at a much stronger pace than earlier estimated, the government reported Friday, underlining official warnings that growth is too fast and setting the stage for higher interest rates ahead.
The Commerce Department said gross domestic product grew at an annual rate of 6.9% in last year’s fourth quarter, the strongest rate in 3 1/2 years and far higher than the previously estimated 5.8%.
It was the hottest GDP performance since a matching 6.9% rate of growth in the second quarter of 1996 and has not been surpassed in 12 years, since a 7.2% growth rate in the closing quarter of 1987.
“It was pure and simply a boom in the fourth quarter, an old-fashioned, runaway boom,” said economist Allen Sinai of Primark Decision Economics Inc. in Boston.
It was built on vigorous consumer spending, rapid government spending and inventory building, both to meet demand and as a precaution against possible supply disruptions that were expected from year-end computer problems.
The strength of the quarterly advance caught even the White House by surprise. White House spokesman Joe Lockhart played down reporters’ questions about whether such fast growth might spur inflation risks.
“Economic growth is strong, stronger in this report than even previously anticipated in a somewhat favorable inflationary environment,” Lockhart said. But he added, “I don’t think there’s any new concern this morning based on this number.”
With the U.S. now in a record 107th month of expansion, analysts foresee some slowing ahead, if only because consumers, who fuel two-thirds of economic output, are nearly spent-out.
Federal Reserve Chairman Alan Greenspan has served notice that the U.S. central bank will ratchet credit costs up to prevent “imbalances” such as worker scarcities and the excessive use of credit from spinning into potential inflationary wage and price costs.
He told Congress on Wednesday that Fed policymakers, who set monetary policy by changing interest rates, want growth to slow to a rate “somewhat below” the final half last year. It was running at about 6% for the final six months before the latest fourth-quarter revision, which sent it even higher.
“That cannot be sustained,” Greenspan said. Analysts saw that as a signal of the Fed’s commitment to keep boosting rates, beginning at its next policy-setting session on March 21, by as much as needed to meet its goal of braking the expansion.
“I think we are staring at an unknown series of small rate rises, a minimum of two to three by the middle of the year, a maximum of five by the end of the year,” Sinai said.
The Fed already has raised its overnight federal funds bank lending rate four times since mid-1999--a full percentage point altogether to a current 5.75%.
The brisk fourth-quarter GDP performance left few doubts about the Fed’s plans.
The GDP report contained some evidence that price rises were starting to pick up. Personal consumption expenditures, a gauge that the Fed told Congress it was watching as it tries to judge inflation risks, increased at a 2.5% rate in the fourth quarter, compared with 1.8% in the third quarter.
For all of 1999, the price index for personal consumption expenditures rose 1.6%--still a modest increase but nearly twice the 0.9% advance posted in 1998.
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Upward Revision
Gross domestic product, percentage change from previous quarter:4th quarter 1999: 6.9%
