Lag in 1st-quarter GNP:a blip, or a signal the recovery is flagging?
IF one can believe the numbers, the slowing of the US economy, evident for almost a year now, has become even more pronounced. The first-quarter gross national product, estimated before the quarter was over to have grown at just a 2.1 percent annual rate, came in at only 1.3 percent. Even this announcement, made last week, is in a sense premature. First official announcements of a quarter's data are made basically on two months' information. Many analysts of the economy, however, had expected the Commerce Department's flash estimate, made in March, would be revised upward when the numbers became available.
What's going on? Simply put, two things seem to be hurting the economy. High interest rates are putting a crimp in some spending plans, and the overvalued dollar is pulling too many foreign goods into the country and making it harder to sell US goods abroad. (There is also some speculation that slower-than-usual processing of federal tax returns by the IRS has delayed big-ticket spending, which is often associated with the receipt of a large refund.)
Carol Brock Kenney, an economist with Wertheim & Co., in setting forth her current forecast (done before last week's figures were announced), wrote:
``The recovery has already matured to a point where the cyclical forces are spent and growth is more difficult to sustain. In fact, several leading indicators suggest that the economy has already entered a declining phase. Capital spending . . . is already losing its vigor. Except for defense, and to a lesser degree the consumer, it is difficult to find sectors that can be relied upon to support growth this year.''
Now, the consumer accounts for close to two-thirds of GNP, and consumer spending did hold up well in the first quarter; it grew at a 4.7 percent annual rate. The problem with this figure is that much of this spending went for imports. And the growth in the net export deficit acts as a negative in the GNP accounts.
Every analysis one finds of the current outlook tries to come to grips with the same set of related factors: a budget deficit as yet untamed; the nation's financial markets depending too heavily on foreign financing to meet both private and governmental borrowing needs; and a high exchange rate for the dollar, hurting domestic business. Even though almost everyone agrees that these factors cannot continue indefinitely, no one can predict when or even how the present situation will evolve into some new set of factors.
Just two weeks ago, The Economist (London) commented in its lead article:
``. . . a sliding dollar brings the risk of pushing up American interest rates because the United States will lose its convenient supply of foreign savings. This can be avoided by cutting American loan demand, either (happily) soon and politically -- through a smaller budget deficit -- or (sadly) later and commercially. The commercial way to lower borrowing is otherwise known as a slump. . . .''
Now with the news that the economy has slowed to a crawl, it will be even harder to get Congress to engage in budget cutting. The economic effect of cutting spending is very close to the same as increasing taxes; they're both hard steps to take if an economy is close to recession. Fortunately, the judgment call so far is that the first quarter is something of an aberration and that growth will be stronger in the spring quarter. It is less likely, though, that the economy can grow at the 3.9 percent rate the administration had been predicting before last week.