U.S. growth still strong 3.3 percent increase may help Democrats at polls Tuesday

Fears of recession ease

Numbers show nation holding up well against downturn overseas

October 31, 1998|By NEW YORK TIMES NEWS SERVICE

Despite months of financial turmoil and heightened anxiety about contagion from the rest of the world, the U.S. economy is holding up far better than most experts expected.

U.S. economic output grew at a surprisingly solid 3.3 percent pace this summer, the Commerce Department reported yesterday, as automakers scrambled to rebuild inventories after the General Motors strike and consumers spent money as fast as they earned it.

The increase in the nation's gross domestic product for the July-September quarter was nearly twice the 1.8 percent annual rate of the spring, when the Asian crisis first hit U.S. industry. And it was a lot faster than the 2 percent gain Wall Street forecasters had predicted.

News that the economy is performing better than anticipated was welcome news for Democrats running in Tuesday's midterm election.

President Clinton was quick to take credit for the low interest rates and a balanced budget that have contributed to the healthy economy. "In the face of worldwide economic turmoil, our economy remains the strongest in a generation," he said.

The latest evidence that the 7 1/2 -year-old expansion is continuing lessens the likelihood the Federal Reserve will cut interest rates again right away.

Along with the robust growth in the economy, now expected to deliver more than $8.5 trillion in goods and services this year, the inflation rate hit its lowest point since 1963.

The most comprehensive measure of inflation, the so-called GDP deflator, rose at a mere 0.8 percent annual rate.

Forecasters expressed surprise at the economy's continued vitality. "Reports of the expansion's demise are greatly exaggerated," said Stuart Hoffman, chief economist of PNC Bank in Pittsburgh.

Investors in the stock market, who have been worrying about the prospects for corporate profits, celebrated the brighter economic picture by sending the Dow Jones industrial average up 97 points to close above 8,592.

The Dow delivered its best performance for the month of October since 1982.

Although yesterday's report eased fears that a recession lay around the corner, most economists still expect growth to slow in the coming year.

The 50 forecasters in the Blue Chip Economic Indicators survey expect the economy to advance by just 2.1 percent in 1999.

Trade was the biggest drag on growth, though not as much as earlier in the year. In the summer, the widening trade deficit shaved three-fourths of a percentage point from GDP, compared with a sharp 2 percentage points in the spring. Exports fell at a 2.9 percent annual rate while imports rose at a 3.4 percent annual rate.

The trade gap is likely to widen further as growth in Latin America slows. But most Asian countries are now running large trade surpluses, which means they are no longer being pressed as much to slash imports from the United States.

Business investment in new plants and equipment, which powered growth during most of this expansion, is suddenly idling. Investment overall fell 1 percent in the summer after soaring at a 26 percent annual rate in the first half.

But cash flow is holding up well, despite weaker profits, giving business the wherewithal to spend more. And orders for everything from computers to heavy machinery were surprisingly strong in October.

In the main, America's consumer households are still the economy's stalwarts.

The growth of homebuilding slowed in the summer, partly because of a spate of tropical storms. Yet incomes are rising smartly, house prices have not moved up much, and mortgage '' rates are near a 30-year low. That suggests that housing will continue to be a plus for the economy.

Consumption remained at a very robust 3.9 percent annual rate, which is remarkable in light of the fact that the GM strike prevented consumers from buying all the cars they evidently wanted. Vehicle production and sales appeared to be rebounding this fall.

Pub Date: 10/31/98

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