Economy signals continuing growth
Christmas cheer is spreading among economic forecasters and investors as the outlook for the US economy in 1985 appears to be brightening. The latest flurry of upbeat news came Wednesday, when the Commerce Department released a slightly stronger-than-expected ''flash'' estimate of economic growth in the final quarter of 1984.
The government said that gross national product (GNP), the value of goods and services produced in the economy, is expected to grow at a 2.8 percent annual rate in the fourth quarter vs. a revised 1.6 percent rate in the third quarter. Both figures are adjusted for inflation and seasonal factors.
The government's fourth-quarter GNP forecast is sharply lower than the torrid 8.6 percent average growth rate posted in the first half of the year. Moreover, the flash estimate is very preliminary and is subject to revision when more complete information becomes available.
But the improvement over the very sluggish performance in the third quarter signals that ''the risk of a near-term recession is gone,'' says Donald Straszheim, vice-president of Wharton Econometric Forecasting Associates.
The projected upturn in the GNP growth rate was attributed to stronger final sales, a decrease in inventory building by business, and the expectation that imports would not increase as rapidly in the fourth quarter as they did in the third.
The GNP figure ''indicates the worst of the economic slowdown is over and that the economy is poised for stronger economic growth in 1985,'' adds Jerry Jasinowski, chief economist at the National Association of Manufacturers.
The GNP figure follows on the heels of new signs that the Federal Reserve Board has loosened its grip on the money supply, thus triggering a decline in market interest rates. Declining rates are expected to spur economic growth.
Further positive signals could be on the horizon. Some analysts expect the Fed to lower its influential discount rate soon. This is the rate the Fed charges member banks for funds they borrow from it.
Reacting to the more favorable interest-rate and profit climate, the Dow Jones industrial average rose 34.78 points Tuesday, its biggest gain in more than four months, while running up the sixth-heaviest volume on record. At press time Wednesday, the Dow industrials had fallen 4.19 points below Tuesday's closing of 1211.57.
Lower interest rates ''open a window for people who have been potential buyers of homes, autos, and capital equipment,'' notes Robert Gough, senior vice-president of Data Resources Inc., a forecasting company. The result could be a boost in the pace of economic activity as well as in the size of corporate profits.
But DRI and most private analysts still do not expect 1985's economic growth rate to approach the Commerce Department's estimate of 6.7 percent growth for all of 1984. DRI sees the GNP growing by an inflation-adjusted 2.5 to 2.75 percent next year, while Wharton, among the most optimistic, projects a 3.5 percent rate.
The economy has to grow about 3.5 percent a year to absorb new workers and keep the unemployment rate from rising, economists say.
As the recovery continues to mature in 1985, businesses and consumers will keep spending, but ''not at as robust a level'' as earlier in the recovery, explains Bernard Markstein III of Chase Econometrics.
The slowdown in economic growth is one reason the Fed has eased its grip on the money supply, analysts say. Another contributing factor, they add, is pressure from Treasury Secretary Donald T. Regan, who last week said that monetary policy had been ''remarkably tight.''
Analysts point to a number of signs that the Fed has recently eased its stance. The federal funds rate, the fee that banks charge each other for overnight loans to maintain required reserves, has dropped dramatically. By varying the amount of money in the economy, the Fed influences but does not set this rate. The federal funds rate averaged 6.65 percent Tuesday, down from 8.26 percent last Friday. In mid-September it cost banks 11.5 percent to borrow from each other.
With its own cost of money falling, Manufacturers Hanover Trust Company in New York cut its prime, or benchmark, lending rate from 11.25 to 10.75 percent Monday. The move was followed on Tuesday by Bankers Trust Company and on Wednesday by Citibank and Wells Fargo & Co. Analysts expect other banks to follow suit, although reluctantly.
As the spread between a bank's cost of funds and the interest it charges for loans widens, profits increase. This allows banks to build up reserves against future losses, as regulators have recently urged.
Analysts note that some of the recent dip in the federal funds rate is the result of temporary technical factors. Still, the apparent easing in Fed policy has caused forecasters to revise their interest-rate projections.
Ben E. Laden, chief economist at T. Rowe Price Associates Inc., says he sees the federal funds rate settling at about 8 percent in the first quarter of 1985. He says the Fed's discount rate, currently 8.5 percent, should drop to 8 percent in the same period. And he says he expects the prime rate to decline to 10 percent. But by the second quarter of 1985, he says he expects rates to rise again as the economy and inflation pick up steam.
The Fed has been free to ease credit conditions because inflation has been relatively well controlled up to now, analysts say. Inflation, as measured by the GNP implicit price deflator, is projected to rise at a sluggish 2.9 percent annual rate in the fourth quarter, vs. a revised 3.9 percent pace in the third quarter, according to Commerce Department data.
The economy still faces a number of major challenges, economists note, including a massive federal deficit and a record trade deficit. The trade deficit could be helped, forecasters say, if lower US interest rates continued to reduce the dollar's value on world currency markets.