Economic growth picks up speed. GNP `flash' shows 3.1% gain in 2nd quarter; inflation remains low
The United States economy appears to be picking up speed after a very sluggish start in 1985, and inflation seems to be under control. That is the economic snapshot provided by new government figures.
If the picture holds after additional details are filled in, the revised economic outlook could slow the decline in interest rates, ruin congressional estimates of the federal deficit, leave unemployment relatively unchanged, and add some luster to the dollar's value in foreign currency markets.
The economy's output, when adjusted for inflation and seasonal factors, is expected to grow at a 3.1 percent annual rate in the April-to-June period, according to new but preliminary Commerce Department projections.
That compares to a barely perceptible 0.3 percent pace that newly revised figures for gross national product (GNP) show for the first quarter of 1985.
Last quarter's performance was the weakest since the third quarter of 1982, when the economy was still in a recession.
As measured by the consumer price index (CPI), prices rose a seasonally adjusted 0.2 percent in May, new Labor Department figures show. For the first five months of 1985, inflation is running at a 3.9 percent seasonally adjusted annual rate, about the same as the 4 percent pace for all of 1984.
A GNP-related price measure, the implict price deflator, shows prices are rising at a 3.2 percent pace in the second quarter.
The second-quarter GNP data are a preliminary estimate based on incomplete data and are subject to substantial revision. For example, the ``flash'' estimate for the first quarter was 2.1 percent, revised on Thursday to 0.3 percent. The economy would grow 1.7 percent for all of 1985 if it were to continue expanding at its average pace for the first half of the year. The consensus forecast among the 50 economists surveyed by the newsletter Blue Chip Economic Indicators is that the economy will grow 2.9 percent during 1985.
``There will be some pick-up in the second half of the year,'' says Alice Rivlin, former Congressional Budget Office director.
The outlook is for ``no boom but a better looking economy than in the last two months as a delayed reaction to lower interest rates,'' she says.
``We are not talking about a return to anything like the strength in 1983-84. We are talking about growth in the 2 to3 percent range,'' says Robert F. Wescott of Wharton Econometric Forecasting Associates.
Forecasters say the second quarter flash GNP estimate could:
Ease pressure on the Federal Reserve Board to lower interest rates in a bid to keep the economy moving. Rates have come down recently as a result of Fed action and the weakening economy.
Many analysts had expected the Fed to lower its discount rate, the fee qualified insitutions pay to borrow from regional Federal Reserve banks, from the current 7.5 percent to 7.0 percent.
``This [GNP] number is right in the middle as far as the Fed is concerned,'' says Alan Murray, vice-president of Citicorp Information Service. ``It isn't weak enough to say you've got to ease further. It isn't strong enough to think about restraint.'' He says the Fed may postpone a discount-rate decision, while Wharton's Mr. Wescott says he thinks the Fed will cut the rate.
Mean the federal deficit will still be higher than either the House or Senate budget plans now estimate. Those plans assume continuing economic growth of 4 percent. If the Blue Chip consensus is correct, Office of Management and Budget Director David A. Stockman has said the fiscal 1988 deficit will be $50 billion to $70 billion higher than congressional budget estimates.
Indicate the unemployment rate is likely to remain virtually unchanged. Three percent growth ``is seen as the trip wire,'' says Steven Wood of Chase Econometrics. ``Faster than that should be fast enough to bring unemployment down, slower than that will let unemployment rise.''
Signal that the deterioration of the economy's manufacturing sector may be slowing. The erosion of manufacturing sales and jobs due to surging imports has been a key reason for the recent period of sluggish growth. But the new GNP figures indicate the erosion may be easing.
Net exports, which fell sharply in the first quarter, are expected to decrease moderately in the second quarter, the government said.
Other reasons for the upturn in the second quarter, the government said, include substantial increases in personal consumption expenditures and business fixed investment, as well as moderate increases in residential investment and government purchases.
Remove a drag from the dollar's value in currency markets. The stronger a nation's economy, all other things being equal, the more attractive it is as a place to invest and the greater the demand for its currency.