Friday, June 26, 1998

Torrid economic growth in first quarter sets up slowdown

By DAVE SKIDMORE / Associated Press

WASHINGTON -- The economy increased its production of goods and services during the first three months of the year at one of the fastest rates in 15 years.

But many of the goods are winding up unsold, the Commerce Department said Thursday. That inventory buildup already is braking the economy's rapid expansion. Separate reports showed home sales booming last month, but a spurt of joblessness last week reflected the General Motors strike.

"The 100-yard dash of the first quarter is settling into a long, steady-paced run," said economist Gordon Richards of the National Association of Manufacturers. "It's clear that inventories are going to be worked off over the rest of the year, and in the recent numbers, we're already seeing signs of a slowdown."

These have included a broad-based drop in May of orders for big-ticket durable goods such as airplanes and appliances and declines in manufacturing employment in both April and May.

In the first quarter, the gross domestic product -- the sum of all goods and services produced within U.S. borders -- grew at an extremely rapid 5.4 percent seasonally adjusted annual rate.

That's better than last month's estimate of 4.8 percent and considerably faster than the department's initial estimate, released in April, of 4.2 percent.

The first quarter now ranks among just a handful of quarters with such rapid growth during the past 15 years. The economy grew at a 6 percent rate in April-June 1996 and October-December 1987 and at a 6.4 percent rate in April-June 1984.

The department partly attributed the latest revision to the fact that the nation's trade deficit, hurt by Asian financial turmoil, didn't deteriorate as much as first thought.

Also, the stockpile of unsold goods in inventory increased by a record $105.7 billion, considerably more than first estimated.

Without the huge addition to inventories, total economic output in the first quarter would have grown at a 3.7 percent annual rate. That's still respectable, but not torrid.

Many analysts expect the government to report a modest growth rate of around 2 percent for the current quarter. Economist Bruce Steinberg of Merrill Lynch, who predicts a report showing just 1 percent growth, said reduced production reflecting the inventory buildup should cut 1.5 percentage points from the growth rate, with the GM strike accounting for a third of that.

In other reports Thursday, the Labor Department said first-time applications for unemployment benefits jumped by 34,000 last week to 364,000, the highest level in nearly a year. Many of the new claims came in Michigan, Wisconsin, Indiana, New York and Ohio, states where GM operates.

Also, the National Association of Realtors said sales of existing single-family homes rose 1 percent in May to a seasonally adjusted annual rate of 4.82 million. That's just short of March's record pace of 4.89 million homes and leaves sales on a pace to set a record for the full year.

Among the factors supporting sales were low unemployment, healthy income growth, large stock gains accumulated over the past several years and low mortgage rates. Freddie Mac, the mortgage company, said 30-year, fixed-rate mortgages averaged just 6.96 percent this week, the second consecutive week below 7 percent.

"Mortgage interest rates remain incredibly affordable," Freddie Mac economist Robert Van Order said. "This has been a boon to the housing industry.:

In the first quarter, growth was driven by consumer spending, up at a 6 percent annual rate, the most in six years; business investment in new equipment, up at a 26.4 percent rate, the best in more than 14 years; and housing construction, up at a 16.9 percent rate, the most in nearly two years.

In addition to trade, the other negative was federal defense spending.

The first-quarter growth was accomplished with minimal inflation. A price gauge tied to the GDP advanced at a 1.2 percent rate. That's up from an initial estimate of 0.9 percent but still the best in 35 years.

However, companies' inability to raise prices in the face of foreign competition is causing a profit squeeze. After-tax corporate profits fell 1.2 percent in the first quarter. That came on top of a 2.3 percent drop in the final three months of 1997, the worst in four years.