U.S. economy shows signs of a recovery GDP rose at 2% rate in first quarter

confidence higher

April 29, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- The economy grew at a restrained but reassuring 2 percent annual rate during the first quarter, the government said yesterday, supporting the view of most economists that a moderate recovery is under way.

The economic growth was accompanied by a surge in consumer confidence, further brightening economic prospects.

Those two factors led most economists yesterday to shrug off the day's single negative indicator -- a dramatic dip in new-home sales in March -- as a temporary reversal produced by rising mortgage interest rates and unfavorable weather.

"I think we are further along toward a celebration," said Rudolph Penner, director of economic studies with KPMG Peat Marwick in Washington.

"I expect growth to accelerate a bit from here on out, but I don't think you will see a boom recovery," Mr. Penner said. "In my view, there will be a sufficient growth rate to start to

take down the unemployment rate pretty soon, which I think is important psychologically, but it will not be robust."

Sustained though moderate growth could help President Bush withstand campaign criticism of his handling of the economy, which is emerging from its longest slowdown since World War II but still poses the major threat to his re-election.

Mr. Bush welcomed yesterday's figures, saying, "There are some areas that are still hurting. But clearly this is a good sign, and there are a lot of other good signs. Most people that I talk to . . . feel that things are getting better. I just hope it continues."

The Bush administration, aware that any recovery in the United States is likely to be anemic, has been pushing Japan and Germany, with little success, to adopt economic growth packages to lessen the risk of a global downturn that could further dim prospects here.

The administration also has been campaigning for freer world trade to give U.S. exporters better access to foreign markets. Exports added $3.5 billion to U.S. economic growth in the first quarter, but economists doubted that overseas sales would lead to further recovery as demand weakens in such major markets as Europe, Japan and the United States' major trading partner, Canada, which remains mired in a deep recession.

The first quarter's 2 percent annual growth rate in gross domestic product -- the total of goods and services produced in the United States -- was the highest since the economy expanded at a 2.5 percent rate in Mr. Bush's first three months in office. But it was well below the 6 percent growth rate associated with previous recoveries, leading some to question the depth of this recovery.

"The economy still can't seem to get that surge of momentum that we have seen often in the past after recessions," said Paul Boltz, chief economist with T. Rowe Price in Baltimore.

"Consumers may be feeling better, but they still have a lot of debt. Businesses have rebalanced their balance sheets, but they still have a lot of debt, too," he said. "Consumer confidence, while it has recovered, is at nothing like the euphoric heights of the 1980s."

Economists were particularly impressed by a first-quarter 4.8 percent rate of increase in real final demand, the point at which the customer takes delivery. That created what Mr. Boltz called "a huge disgorging" of inventories, surprising businessmen and retailers. Inventories fell $33.7 billion and will have to be rebuilt, promising a boost to manufacturing and production activity.

"What we did was empty the warehouses," said Donald Ratajczak, director of the Economic Forecasting Center at Georgia State University. Mr. Ratajczak predicted an annual GDP growth rate of about 2.5 percent in the second quarter and about 3 percent in the final two quarters of this year. That should be strong enough to start reducing the unemployment rate, which stood at a six-year high of 7.3 percent in March and is expected to remain around 7 percent for most of the year.

Diane Swonk of First Chicago Corp. predicted that the decline in pTC inventories would immediately boost production.

"It is especially important when you look at what is going to happen next quarter. You don't need any more pickup in consumption to get a pickup in production," she said, adding that the consumer spending spree appeared to stem from a surge in mortgage refinancing that lowered homeowners' payments.

"The bad news is consumers spent everything they made in the first quarter," she said.

Nevertheless, the public appears to be growing more optimistic. The monthly Index of Consumer Confidence was 8 points higher in April than in March, rising to 64.8. The index, set at 100 in 1985, is issued by the Conference Board, a business research organization, and is widely accepted as a reliable measure of consumer feelings.

Although consumers remained concerned about the state of the economy, the index recorded a general increase in confidence that the next six months will bring improvement. Consumer confidence is vital for economic recovery, since consumer spending accounts for about two-thirds of all economic activity.

A 5.4 percent increase in consumer spending was a major component of the GDP growth in the first quarter, when sales of durable goods, such as washing machines and dryers, jumped 18.3 percent.

One major reversal in consumer spending was a 14.8 percent drop in new-home sales in March, the steepest decline in 10 years and a contrast with the January mini-boom.

Economists attributed the decline to rising mortgage rates and cold weather. Generally, they were not alarmed by the figure. Housing sales are 25 percent higher than they were a year ago, and interest rates have declined slightly this month.

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