Surprise growth in quarterly GNP fails to ease fears

October 31, 1990|By New York Times News Service

WASHINGTON -- The government reported yesterday an increase in the gross national product that was hailed by the Bush administration but labeled by some economists as misleading or even masking an economy in recession.

The Commerce Department said the economy grew at a 1.8 percent annual rate during the July-September quarter, faster than most analysts had expected and well above the expansion rate of 0.4 percent posted during the spring.

With midterm elections a week away, the report was seized on by the Bush administration as evidence that the economy has not tipped into a recession.

But private economists widely believe that third-quarter strength was concentrated in the first few weeks and that sharply higher oil prices have been a drag on business activity since early August.

Among other things, yesterday's report showed a decline in disposable income and a full-point drop, to4 percent, in the personal savings rate.

"The forces pushing the economy down are stronger than those keeping it up," said Richard B. Berner, an economist at Salomon Brothers. He called the third-quarter gain in gross national product "the last hurrah for the consumer and the economy," predicting at least two negative quarters in the incipient downturn -- the current one and the first three months of 1991.

The rule of thumb for a recession is two consecutive quarters of decline in the GNP, but recessions can also occur in a single quarter and are best evaluated by their severity and scope as well as their duration.

President Bush put in a rare appearance in the White House briefing room to contend that the economy continues to forge ahead. "It's clear they were too pessimistic," he said of those who believe a recession began during the summer.

Michael J. Boskin, chairman of the president's Council of Economic Advisers, noted that personal spending advanced at a sizable 3.6 percent annual rate during the quarter and that business investment in plant and equipment climbed at a 7.4 percent pace, the fastest since the first quarter of 1989.

He acknowledged concern over oil prices, however, and said the administration's best guess was that "the next quarter or two will probably be somewhat weaker" than the one that ended in September.

Some private economists said the third-quarter GNP figures not only mask a downtrend but overstate overall growth.

"It's misleadingly strong," said Gary Ciminero, chief economist for the Fleet/Norstar Financial Group in Providence, R.I. He said he was puzzled, for example, at why business inventories during a time of slow sales were reported to have risen at a rate of only $7.8 billion, compared with $9.5 billion in the second quarter.

He also said the inflation figures associated with the GNP report appeared to be underestimated. The fixed-weight index, which measures prices of an unvarying basket of goods, edged up only to 4.1 percent from 3.9 percent in the second quarter, despite the surge in oil prices.

Robert P. Parker, associate director for national economics accounts at the Commerce Department, explained that yesterday's report was the natural result of a methodology in which the value of imported goods is adjusted to calculate the U.S. gross national product. If a barrel of oil, for example, is imported at $40 and sold for $45, the addition to GNP would be only $5. It would not matter for purposes of the U.S. price index that oil had been imported at $20 in the quarter before, since it is the margin, not the price, that governs changes.

One analyst, H. Erich Heinemann of Ladenburg, Thalmann & Co., said the methodology produces "illogical" results at times of big price gyration and that "the phony strength" in the third quarter -- one in which a half million jobs were lost -- implied additional weakness in the current one.

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