Economic Growth Slows; Orders Turn Around Conflicting Indicators May Make Fed’s Decision On Rate Cut More Difficult

The economy slowed drastically in the first three months of the year, but fears of a recession were eased by a rebound in factory orders in May.

The nation’s gross domestic product grew at a 2.7 percent annual rate in the first three months of 1995, the Commerce Department said Friday. That was slightly more than half the pace of expansion in the fourth quarter of last year and matched the slowest growth in 18 months.

The widespread signs of slowdown were blurred by a second report, which showed orders to U.S. factories climbed 1.4 percent in May after three straight declines that included a 2.2 percent plunge in April. The May advance was the strongest showing since a 2 percent gain in December.

The stock market rallied on the mixed economic reports. The Dow Jones industrial average was up more than 26 points by midafternoon and bond prices were mixed in a narrow range.

Analysts expect economic growth in the second quarter, which ended Friday, was slower than the January-March period and cited a new business survey as evidence of further weakness.

The Purchasing Management Association of Chicago said its index of area activity fell to 47.6 percent in June from 53.5 percent the previous month. A reading below 50 percent is a signal the region’s economy is shrinking.

But that contrasted with reports Thursday that showed a healthy recovery for new-home sales nationwide in May and declining first-time claims for jobless benefits last week. Also, a new report on consumer sentiment conducted by the University of Michigan was up slightly.

Analysts said the flurry of ambiguous data may make it difficult for the Federal Reserve to agree on a cut in interest rates next week.

The reports “are not ringing any alarm bells,” said economist Robert Dederick of Northern Trust Co. in Chicago. “The economy is not falling on its face, but it’s been limping.”

Some said the economy still needs a shot in the arm, and that the Fed should cut rates when the central bank’s policy-making Federal Open Market Committee meets Wednesday and Thursday.

“With no threat of inflation and several months of anemic growth, the FOMC should reduce short-term rates by 50 basis points,” said Jerry Jasinowski, president of the National Association of Manufacturers.

During a one-year stretch ending Feb. 1, the Fed doubled the rate banks charge each other for overnight loans to 6 percent. Jasinowski suggested lowering it to 5.5 percent.

The economy may have barely expanded in the second quarter and possibly shrunk, analysts said. And they said the third quarter that has just begun may only be slightly better.

But most doubted a recession, defined as two straight quarters of declining activity, is at hand.

“The risk of a 1995 or 1996 recession remains low,” said Cheryl Katz of Merrill Lynch & Co. “We expect a moderate rebound late this year.”

The latest report on GDP, the total output of goods and services produced in the nation, showed that consumer spending in the first quarter was a little weaker than previously estimated. But the downward revision was offset by higher net exports and business investment.

The Commerce Department said GDP increased $36.3 billion at an annual rate in January through March, compared with a booming $66.8 billion in the last three months of 1994.

Inflation during the first quarter rose slightly but remained in the moderate range.