Personal spending drop cools US economic growth
The growth of the United States economy has slowed in the July-to-September period more than most forecasters had predicted, new government figures indicate.
The slowdown, in this the third quarter, is expected to have positive consequences for the economy, including a potential reduction in interest rates.
But the less robust growth brings with it mixed political implications. The outlook is for lower inflation in this quarter, but slower gains against unemployment.
Inflation-adjusted gross national product, the value of goods and services produced in the economy, will grow at a 3.6 percent seasonally adjusted annual rate this quarter, the Commerce Department predicted Thursday.
A slowing in personal spending by consumers will be the largest cause of the expected cooling in the economy in the third quarter. Although the slowdown is expected to affect most areas of the economy, the decline will be partly offset by an expected increase in business inventory building. Business investment and government purchases will slow from their second-quarter levels but are expected to remain strong.
Growth in this current quarter is expected to run at about half the 7.1 percent pace the department reported, after a 0.5-percentage point downward revision, for the April-to-June period.
The major forecasters surveyed by the Blue Chip Economic Indicators newsletter expected a 4.7 percent rise in GNP this quarter.
The slower economic growth will be accompanied by very well-behaved inflation , and prices will rise only 2.9 percent in this quarter, measured by the GNP implicit price deflator, government economists say. Revised figures show prices rose 3.3 percent in the second quarter.
The figures have contradictory political implications. On the one hand, growth continues and inflation appears to be running at a very low level, a development that will presumably help the incumbent President.
''The most important economic development for the election is the dramatic improvement in inflation,'' said Sam Nakagama, managing director of Nakagama & Wallace, an economic consulting firm. ''It has stabilized people's lives.''
Commerce Secretary Malcolm Baldrige said the GNP figures show that the economy ''has shifted down to a more moderate and sustainable growth rate.'' He added that even with slower growth and a major trade deficit, real GNP during 1984 should be up by more than 6 percent for the year. As a result, he said, ''the 1983-84 gain would be the ''best two-year performance in over 30 years.''
On the other hand, the economy has to grow between 3.0 and 3.5 percent just to keep unemployment from getting worse, notes Steven Wood, senior economist at Chase Econometrics, a forecasting firm. With growth slowing to that level, ''We are not likely to see a major improvement in unemployment'' as a result, he said.
The unemployment rate has been stuck at 7.5 percent for three of the last four months. The jobless rate is the same as when President Reagan took office but the number of people looking for work, 8.5 million, is up by 500,000. Given the volatility of the unemployment numbers, however, the October jobless figures , slated for release on Nov. 2 just before the election, could move either up or down.
But for the economy as a whole, the Commerce Department's ''flash,'' or preliminary, estimates of third-quarter GNP are upbeat, nongovernment economists agree.
The slowdown in growth, from 8.8 percent pace in the first half of 1984, is ''great news,'' for the economy, said Robert Gough, senior vice-president of Data Resources Inc., a forecasting firm. The decline in growth makes the economic recovery more sustainable.
''There are only two ways to slow down a fast-growing economy,'' he said. ''Either you slow down (gradually) or you crash.''
It now appears the US economy is coming in for a ''soft landing,'' where the growth rate slows but does not stop and inflation stays under control.
Slower gowth has other positive implications as well, experts say.
Slower growth and well-controlled inflation may prompt the Federal Reserve Board to adjust policy in an effort to bring down interest rates slightly, some economists say. Others expect no change in Fed policy.
The economy's performance is ''good enough'' that the Fed ''would like to see rates lower,'' says Ben E. Laden, chief economist at T. Rowe Price Associates Inc., a mutual fund firm. He adds that investors ''should not expect a collapse of interest rates.''
Mr. Laden says the federal funds rate, the rate banks charge each other for overnight loans, which is influenced by the Fed, could ''go a bit lower than 11 percent'' in the near term. Fed funds traded as low as 111/4 on Wednesday. But Laden cautions that investors ''should not expect a collapse of interest rates.''
Down the road, slower growth and lower inflation could let the dollar fall from its current lofty levels, thus helping US exporters but perhaps pushing up US inflaton rates a bit.
A falling dollar can feed inflation by making imported goods more expensive for US buyers and by cutting imports thus taking some competitive pressure off the prices US companies charge.
Like all economic projections, the government's flash GNP figures should be viewed with caution. When issuing the estimate, government economists have only one month's actual data for the quarter and must project the two other months.
So the 3.6 percent growth rate projected for the third quarter could end up as low as 2.7 percent or as high as 6.4 percent based on past experience, the department said.
The 3.6 percent growth forecast also does not factor in the effect of the current strike by members of the United Automobile Workers against General Motors Corporation.
At the moment, 17 GM facilities have been struck, affecting 91,300 workers. If the work stoppage continued at its current level until the end of September, GNP would be reduced 0.3 percentage points, the Commerce Department said.
Corporate profits would also be affected if the strike went into the fourth quarter. The government reported second-quarter profits were $13.7 billion, down
A spate of recent economic statistics seems to confirm the Commerce Department's prediction that the economy will slow sharply in this quarter. The government reported Wednesday that initial construction of new homes dropped 12. 8 percent in August to 1.54 million units, the lowest level since December 1982.