Share this story
Close X
Switch to Desktop Site

US economy gets mixed reviews

The United States economy is enjoying faster growth and slower inflation than most forecasters expected, new government data show. But the Commerce Department's estimate of the current quarter's gross national product (GNP), the value of goods and services produced in the economy, ''is a double-edged sword,'' says Allen Sinai, chief economist of Shearson Lehman/American Express Inc.

''On bread and butter issues - job production, growth, and inflation - it is a superb report,'' Mr. Sinai says.

About these ads

Shortly after they were released Wednesday, President Reagan hailed the numbers as ''remarkable good news.''

But ''the other side is that the economy is growing too strongly for its own good,'' Sinai notes, igniting concerns of higher inflation, rising interest rates, slowing economic growth, and added pressure on third-world debtor nations and the US banks that lent them billions of dollars.

Propelled by personal spending and business investment, the economy is expected to grow a strong 5.7 percent (after adjustment for inflation) in the second quarter, according to the Commerce Department's ''flash'' GNP estimate. These estimates are based on incomplete data for the quarter and are subject to significant revisions.

Along with the flash estimate, the government boosted its estimate for first-quarter growth a sizable 0.9 percent to 9.7 percent. That tied with the second quarter of 1983 as the most vigorous three-month period since the April to June period in 1978.

Due to stablizing food prices, inflation in the second quarter is expected to come in at 2.8 percent, using the implicit price deflator, a GNP-related measure. First-quarter inflation was put at 3.9 percent.

Economic forecasters say the sharp upward revision in first-quarter GNP and the robust estimate of second-quarter growth pushes the economy ever closer to full use of its factories - a condition that would cause production bottlenecks and upward pressure on prices.

''Capacity utilization rates are at 82 percent and rising,'' says David Hale, chief economist for Kemper Financial Services Inc. A utilization rate of 85 to 86 percent is normally regarded as the inflation danger zone, he notes.

About these ads

To keep inflation in check, some analysts expect the Federal Reserve Board to tighten credit conditions in the near term.

''These growth rates are clearly much higher than the Fed would like to see, so we clearly will see some additional tightening,'' says Steven Wood, senior economist with Chase Econometrics, a forecasting firm.

Such tightening is especially likely in view of recent rapid growth of the money supply, says Donald Ratajczak, director of the Georgia State University Forecasting Project. Such growth also puts upward pressure on prices. ''All the evidence says we will reach the upper end of the (Fed's) M-1 targets this week, '' he says.

Tighter credit conditions were on the minds of both bond and stock market participants Wednesday. Both the credit and equity markets plunged in early trading after the GNP figures were released.

Most experts are not expecting a sharp rise in rates in the near future. Even if the Fed wanted to significantly tighten the money supply, its freedom to act is constrained by the fact that this is an election year and the tenuous condition of many third-world debtor nations.

The Fed also is likely to bear in mind the risks a debtor-nation default would pose for the US banking system. Bank stocks already have been beaten down due to worries about the potential effects of a debtor nation walking away from its commercial bank loans.

''Our expectation is that we will see rates move upward over the rest of the year. One hundred basis points (full percentage point) would be a realistic expectation,'' says Donald Straszheim, senior vice-president of Wharton Econometric Forecasting Associates. That would take banks' prime, or benchmark, lending rate from the current 12.5 percent to 13.5 percent.

After the election, some analysts expect the Fed will tighten up on credit a bit more. Substantial further rate hikes are likely in 1985, says Wharton economist Straszheim. ''A 15 percent prime is in our forceast,'' he says. Kemper economist Hale says he thinks rates could rise two or three percentage points during 1985.

With interest rates rising, most forecasters expect US economic growth will slow in 1985. After inflation-adjusted growth of between 6.3 and 6.6 percent in 1984, the economy may expand only about 2.7 percent in 1985, Straszheim says.

Despite the predicted slowing of the US economy next year, inflation is expected to accelerate over the balance of 1984 and into 1985. As measured by the GNP deflator, inflation will run about 3.8 percent in 1984 and 5.4 next year , says Chase economist Wood.

The flash inflation estimate of 2.8 percent understates the real rate of price hikes, economists say. The inflation numbers are low in the second quarter flash becase vegetable and other food prices have stablized after posting sharp weather-related increases in the first quarter. The economy can not count on a similar downturn in prices between the second and third quarter, Georgia State forecaster Ratajczak says.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.