GNP declines 2.1%, less than expected

January 26, 1991|By Stephen E. Nordlinger | Stephen E. Nordlinger,Washington Bureau of The Sun

WASHINGTON -- The nation's economy shrank sharply in the final three months of 1990, apparently ending nearly eight years of almost steady growth.

Reflecting a steep drop in consumer spending in the midst of the Persian Gulf crisis, the gross national product, the broadest measure of economic activity, declined at an annual rate of 2.1 percent in the October-to-December quarter, the Commerce Department reported yesterday.

Administration and private economists forecast a further economic decline in the early months of this year. The formal definition of a recession is two consecutive quarters of GNP decline, so that would mean the first recession since 1981-82.

With unemployment rising, industrial output declining rapidly and retail sales sluggish, yesterday's report of a drop in the GNP was expected.

The only surprise was that the decline, though substantial, was milder than widely forecast. Most economists had predicted a drop ranging from 2.5 percent to 4 percent.

Spending for the Persian Gulf buildup apparently masked the underlining weakness in the economy. Military spending rose 15 percent in the fourth quarter, which improved the GNP figure by almost a full percentage point, said Robert Brusca, chief economist of Nikko Securities Co. International Inc.

The stock market took yesterday's report in stride, as traders focused most of their attention on the gulf war, which Wall Street apparently thinks is going reasonably well. The Dow Jones average of 30 industrials rose 16.34 points to close at 2,659.41.

The Bush administration and many private economists said yesterday's report confirmed their forecasts that the recession will be brief, ending about the middle of 1991, although there was some disagreement over whether it will be shallow or severe.

"The current economic downturn is likely to be relatively brief and mild," Commerce Secretary Robert A. Mosbacher Sr. said in a statement. He based his outlook in part on continuing efforts by the Federal Reserve Board to lower interest rates.

Michael R. Darby, undersecretary of commerce, said at a news briefing that the GNP decline in the current quarter will be "less LTC severe" than the one in the final three months of 1990.

But John M. Albertine, a Washington-based economic consultant, predicted another "steep decline" in the current quarter before the economy pulls out of the recession by the spring quarter.

"Business is now reacting across the board to the slowdown in consumer spending," he said. "We see no reason for optimism in the current quarter." The last quarterly decline in the GNP was a 1.8 percent drop in the second quarter of 1986, but that contraction was not the precursor of a full-fledged recession.

The expansion of the 1980s was the second-longest since World War II, exceeded only by the 106 months of growth during the Vietnam War buildup of the 1960s.

For all of 1990, the GNP rose 0.9 percent, about a third of the moderate increase of 2.5 percent in 1989 and the worst showing since 1982, when the GNP fell 2.5 percent.

Much of the decline from October to December resulted from sharp cuts in auto production as consumers and businesses held back on car and truck purchases in the wake of the sharp rise in gasoline prices and lower public confidence in the economy.

Personal consumption dropped $21 billion in the fourth quarter after rising $18 billion in the third quarter.

Aside from defense spending, the only other source of strength in the fourth quarter was a narrowing of the trade deficit by $22.9 billion.

But that improvement, which was based only on October and November trade figures, could be erased in subsequent GNP revisions. Yesterday's report showed a gain in exports of $11.9 billion in the fourth quarter, but weakening economies in Japan and Europe could cut into December foreign sales, which have been a mainstay of the economy.

Inflation as measured by the "fixed weight" yardstick, which keeps the composition of the gross national product constant, rose 4.1 percent in the fourth quarter, compared with 4.2 percent in the third quarter.

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