Economic Growth Raises Anxiety Surge In Gross Domestic Product Rocks Financial Markets
The economy grew more rapidly at the close of 1994 than it had in a year, reigniting inflation fears and helping to send the stock market tumbling Friday.
Stocks later recovered some lost ground, and most analysts insisted the growth figures are old news and that the economy is slowing to a speed limit the Federal Reserve is trying to enforce.
The Commerce Department said the gross domestic product surged at a 5.1 percent annual rate in the fourth quarter last year, the fastest growth since it advanced at a 6.3 percent clip in the final three months of 1993.
The economy grew 4.1 percent for all of 1994. That’s the strongest performance since 1984, when it expanded 6.2 percent during the final year of President Reagan’s first term.
Investors already troubled by the sinking U.S. dollar went on a selling spree, but the losses were trimmed later in the day. By closing, the Dow Jones industrial average was off nearly 15 points while the yield on long-term bonds climbed to 7.44 percent. The dollar fell to a record low against the Japanese yen and sank nearly 3 percent against the German mark.
Private analysts said there is little reason to fear inflation or that the Federal Reserve will resume raising interest rates because the signs point to slower consumer spending this year.
“I think the market is mistaken,” said Roger Brinner, chief economist for DRI-McGraw Hill, a Lexington, Mass., forecasting firm. “This is not news. This is a revised record of the economy three to six months ago. This economy already has shifted to a lower gear.”
In a possible sign of slowing, the Commerce Department also reported Friday that orders to U.S. factories fell 0.2 percent in February, the first decline in four months. Demand for big-ticket durable goods was off 0.8 percent, also the first decrease since October.
The GDP figures were revised upward from the government’s month-old estimate that showed a 4.6 percent annual rate gain for the fourth quarter of 1994. Increased business spending on aircraft and heavy duty trucks and higher net exports due to smaller imports were big contributors to the change.
Analysts said the latest revisions do not mean consumer spending, the main engine of economic growth, will rise.
“The basic message is that the economy went out of 1994 with a whoosh,” said economist Robert Dederick of the Northern Trust Co. in Chicago. “That, of course, is behind us. The economy seems to have slid out of the fast lane as soon as the page was turned, with a rather dramatic downshifting.”
He and others pointed to recent evidence of slowing in the interest-sensitive housing market and in car sales. The peso crisis in Mexico is also expected to be a drag on the U.S. economy, cutting into exports.
Consumer spending accounted for about two-thirds of the fourth-quarter growth in GDP, led by purchases of durable goods such as cars, computers and home appliances.
The revision in GDP, which measures the output of all goods and services produced in the United States, caught analysts by surprise. Most had predicted that the rate of growth would be unchanged from the earlier estimate.
The Federal Reserve over the last 14 months has raised short-term interest rates seven times to try to stifle inflation by lowering economic growth. But the central bank’s policy-making Federal Open Market Committee left rates unchanged Tuesday. The panel next meets May 23, and private economists are divided about what the Fed will do next.
Despite the potent fourth-quarter expansion, inflation remained well under control. One measure of inflation tied to GDP was revised upward slightly to show a gain of 2.6 percent, instead of a previous 2.5 percent estimate for the October-December quarter. The same index rose 3.5 percent in the third quarter.
The Commerce Department also reported that after-tax corporate profits of U.S. corporations rose 2.5 percent in the fourth quarter, same as in the third quarter. Profits jumped 7.3 percent in the second quarter.