Economy Skids To Slowest Gain In Four Years But Little Likelihood Of Recession Seen, And Further Rate Cuts Are Unlikely
Slowing abruptly, the economy posted its weakest advance in nearly four years during the spring. Home building was down sharply and so was output at the nation’s factories.
Still, the Clinton administration and private economists see little risk of recession. In fact, a modest recovery already is under way, they said, and the analysts suggested that means the Federal Reserve probably will postpone further interest-rate cuts for a while.
Gross domestic product, the government’s broadest measure of economic activity, grew a mere 0.5 percent at an annual rate in the second quarter, the Commerce Department said Friday.
The slowdown - from a rate of 2.7 percent the previous three months - was due mainly to a plunge in home building and lower factory production, particularly for autos, as manufacturers trimmed excess inventories. Reduced exports to an economically strapped Mexico also hurt.
But consumer spending, boosted by clearance sales, was surprisingly strong and was seen as just one omen of recovery ahead.
“How much wind does the economy have left in its sails? Enough to reach port but not enough to break any speed records,” said economist David Orr of First Union Corp. in Charlotte, N.C.
Analysts said the Federal Reserve may not cut short-term interest rates as it sorts out third-quarter trends.
“They understand there are limits to their ability to fine tune the economy and they may step aside for many months,” said Eugene Sherman of M.A. Schapiro & Co. Inc., a New York City investment firm.
Wall Street was mostly lower, but was said to be reacting to factors other than the expected weak GDP growth.
The Dow Jones industrial average closed down 17.26 points, recovering somewhat from a steeper drop earlier in the session. Bond prices slipped, pushing up the yield on the Treasury’s 30-year bond to 6.90 percent.
“We had a slow second quarter. But the general thrust of the economy looks strong again.” President Clinton said. He also lamented the fact that while 7 million jobs have been created since he took office “most Americans haven’t gotten a raise.”
Economist David Wyss of DRIMcGraw Hill, a forecasting firm in Lexington, Mass., said, “It looks pretty good for Mr. Clinton. We’re getting the slowdown now. There probably will be a pickup next year. There’ll be no big wave of layoffs that people will be mad about.”
The economy has slowed dramatically since 1994 when it grew more robustly that it had in a decade. GDP increased at a 2.7 percent annual rate in the first three months of 1995 after a booming 5.1 percent pace in the fourth quarter of 1994.
The Federal Reserve, after a string of seven interest rate increases since early last year, reversed course this month and cut a key rate for the first time in nearly three years. That sent banks’ benchmark prime lending rate down accordingly.
The Commerce Department said consumer spending, which accounts for about two-thirds of GDP, increased at a $22.6 billion rate in the second quarter compared with $14.3 billion the previous three months.
Final sales, including consumer spending, net exports and government purchases, climbed at a 2.1 percent rate.