January 31, 1998 in Nation/World

Strong Growth, Low Inflation Spell Economic Strength National Economy Expands At Full Throttle During Fourth Quarter Of 1997

Associated Press
 

The U.S. economy expanded at full throttle during the last three months of 1997, ending a remarkable year that saw the strongest growth in nearly a decade and the mildest inflation since the mid-1960s.

Americans produced an inflation-adjusted $7.19 trillion in goods and services within the nation’s borders last year, a 3.8 percent increase over 1996, the Commerce Department said Friday.

That’s the fastest growth in the gross domestic product since an identical rate in 1988, when the Federal Reserve stimulated the economy to cushion the impact of the 1987 stock market crash.

The performance hasn’t been exceeded since 1984, when the continuing recovery from the deep 1981-82 downturn and the Reagan administration’s tax cuts helped stimulate 7 percent growth.

Unlike the 1980s, last year’s growth was accomplished with extremely modest inflation. A price measure linked to the GDP rose 2 percent, the smallest increase since 1965.

The economy finished the year by growing at a brisk 4.3 percent pace in the October-December quarter, significantly better than economists anticipated. Inflation, as measured in the GDP report, ran at a scant 1.5 percent rate during the quarter, slightly lower than forecast.

In fact, the economy all year consistently defied their predictions for accelerating inflation and slowing growth, based on the length of the expansion, which will finish its seventh year in March.

“This is a remarkable quarter that closes a remarkable year,” said economist Everett M. Ehrlich of ESC Co. in Washington. “To have growth this strong and price behavior this moderate this late into an expansion changes the gerontology of the business cycle.”

Analysts, in retrospect, attribute the growth to rapidly increasing productivity spurred by the advance of computers and other high-technology equipment, the delayed impact of the business restructurings of the late 1980s and early 1990s and the near-elimination of the federal budget deficit as a drain on private capital.

This year, with Asian financial turmoil threatening to slash U.S. export sales and send a wave of cheap imports across U.S. borders, economists expect growth to slow to a moderate 2.5 percent.

But that could be a blessing in disguise. Otherwise, the Federal Reserve might feel compelled to dampen growth with higher interest rates in order to prevent accelerating wages from translating into faster consumer price increases.

“Even for an economist, it’s hard to be dismal right now. Average is not bad,” said economist David Wyss of DRI-McGraw Hill in Lexington, Mass.

The inflation-sensitive bond market liked the report. A continuation of Thursday’s rally pushed the interest rate on the benchmark 30-year Treasury bond to 5.81 percent from 5.84 percent Thursday and 5.94 percent Wednesday. Stocks, however, retreated from their end-of-the-month rebound. The Dow Jones industrial average lost 67 points, closing at 7,906.50.

Economic growth last year was led by a technology-driven business investment boom. It soared 12.2 percent, the most in 13 years, despite a decline in the fourth quarter, which analysts said was a fluke.

Consumer spending advanced 3.3 percent, the best in three years but in line with the long-term trend. Consumers decreased their saving to just 3.8 percent of their after-tax income, the lowest rate since 1939. American export sales jumped 12.5 percent, the biggest gain in nine years. But imports climbed 13.9 percent, the most in 13 years. So, overall, the nation’s trade balance slightly detracted from growth.

Housing construction grew 2.8 percent last year. It was helped by a late-year boomlet produced by a drop in mortgage rates linked to the Asian crisis.

© Copyright 1998 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


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