Economy growing at brisk rate

October 29, 1994|By Los Angeles Times

WASHINGTON -- The U.S. economy expanded at a healthy annual rate of 3.4 percent during the third quarter of the year, the Commerce Department said yesterday, reporting a bigger-than-expected spurt that increases the likelihood of additional interest rate increases by the Federal Reserve Board.

While most analysts and economists believe that the Fed is likely to boost rates at its next policy-making meeting on Nov. 15, the financial markets greeted yesterday's report with enthusiasm.

The Dow Jones industrial average surged 55.51, to 3,930.66, enjoying its biggest daily rise since Oct. 11. The yield on the Treasury's key 30-year bond fell to 7.96 percent, another sign of confidence.

Investors and traders were reassured because the report on economic growth also contained a modest inflation figure, an annual rate of just 2.7 percent during the quarter, measuring prices paid by businesses as well as consumers.

The combination of moderate growth and mild inflation suggests the expansion can be sustained with only modest adjustments in interest rates to keep prices in check, analysts say. However, there are some price increases for commodities, and tightening of labor markets for several categories of skilled workers.

"The economy is not overheating," said Robert Barr, deputy chief economist for the U.S. Chamber of Commerce. "We think the Federal Reserve wants to err on the side of having less growth and less inflation -- that's why they are probably going to raise rates at the next meeting."

The issue now seems to be not whether the Fed will increase interest rates, but by how much. Since five increases haven't slowed the economy appreciably since February, the Fed is likely to feel it can keep squeezing without serious risk of tipping the country into a new recession. The 3.4 percent growth rate in the economy reported yesterday is substantially higher than the 2 percent to 3 percent figure predicted by many economists.

The expansion in the national economy is measured through the gross domestic product -- a statistical attempt to count everything from haircuts to movie ticket sales to the fabrication of a ton of steel. The GDP rise of 3.4 percent, or $45.1 billion, during the year's third quarter, compared with an advance of 4.1 percent in the prior period.

The economy's expansion was driven largely by enthusiastic consumer spending. Consumer outlays rose a hefty $26.1 billion during the quarter that ended Sept. 30, compared with a $11.5 billion increase in the prior quarter. There was a strong "rebound in purchases of motor vehicles from a sharp drop in the second quarter," said Lewis Alexander, the department's chief economist.

The brisk demand for products during the summer also generated a boost in business inventories, as companies expanded output to meet a surge in orders. For example, production of some popular car models and home computers has been unable to keep pace with demand.

Business investments in new equipment and machinery also continued growing at a rapid rate. Administration officials hope yesterday's news will translate into political gains for many beleaguered Democratic candidates. The GDP re port, combining strong growth with low inflation, "is the best of all possible worlds where economic facts and figures are concerned," Vice President Al Gore told reporters.

But the inflation-wary Federal Reserve is unlikely to take such a sanguine view.

The economy's production of goods and services has increased at a rate of 4 percent during the past four quarters, far above the 2.5 percent figure considered by Fed officials to produce growth without sending prices upward.

Michael Penzer, vice president and senior economist for the Bank of America, said that to reach the Fed's desired growth rate of 2.5 percent the central bank needs to drive up the federal funds rate, the interest rate banks charge each other for overnight loans. The figure, now 4.76 percent, is likely to go to 5.25 percent after the next meeting of the Fed's Open Market Committee, he predicted.

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