U.S. Growth at End of 1998 Was Even Stronger Than Previously Reported (More details: growth primarily from increase in consumption and capital spending, not inventory buildup -- RR)
February 27, 1999
By SYLVIA NASAR
NEW YORK -- Wearing the rest of the world's woes as
lightly as a silk scarf, the U.S. economy waltzed
merrily into 1999 even faster than previously thought.
The nation's output of goods and services grew at an
annual rate of 6.1 percent in the fourth quarter of
1998, considerably more rapidly than the rate of 5.6
percent estimated last month by the Commerce
Department. Other than the spring quarter of 1996, when
growth also reached 6.1 percent, it was the most robust
three-month period of the 1990s.
At the same time, inflation dipped to an annual rate of
0.7 percent in the fourth quarter, the lowest since the
Soviet Union launched Sputnik more than 40 years ago.
For the year, the inflation rate was 1 percent.
All this added up to yet further evidence of the
extraordinary turnaround this decade in the largest
economy in the world. It was a particularly remarkable
performance considering that the economic expansion
that began in early 1991 is completing its eighth year,
with no end in sight. If growth continues for another
year, the U.S. economy will achieve its longest
uninterrupted advance on record, surpassing the
expansion of the 1960s.
"After three years of underestimating the U.S.
economy's ability to grow," said Robert Parry,
president of the San Francisco Federal Reserve Bank,
"it wouldn't surprise me to see it exceed expectations
for a fourth year."
Joel Naroff, an economist at First Union Bank in
Charlotte, N.C., summed it up, "We're growing as fast
as we can."
The extra year-end production reported by the Commerce
Department wound up not in warehouses, but in stronger
sales to customers. Consumers bought cars and other big
ticket items, home buyers snapped up new construction,
and there were signs that foreigners may have at least
temporarily stepped up purchases of American products
and services.
Meanwhile, although the government scaled back its
estimate of business investment a bit, spending by
business on new facilities and equipment, after running
out of steam at midyear, shot ahead at an annual rate
of 20 percent in the final three months of the year.
All in all, final sales -- everything but purchases
that went into inventory -- soared at an annual rate of
6.5 percent.
The greater strength in the economy was widely
anticipated by investors and failed to spook
bondholders, who often fear that a tight labor market
and robust growth will lead to higher inflation.
Long-term interest rates had risen sharply earlier this
week on reports of strong housing and consumer
confidence. The Federal Reserve chairman, Alan
Greenspan, and other members of the Fed's monetary
policy committee added to the anxiety about interest
rates by hinting that they regretted their final leg of
cuts last fall.
But on Friday, with no signs of inflation in the report
on gross domestic product, the yield on 30-year
Treasury bonds fell 0.09 percentage points, to 5.56
percent. The stock market retreated, with the Dow Jones
industrial average falling 59 points, to 9,306.58, and
the Nasdaq sliding 1.67 percent, to 2,288.
To be sure, some of last quarter's strength was
exaggerated, which means the current quarter should be
considerably slower. A flurry of year-end car buying,
which followed the end of last summer's strike at
General Motors Corp., will not be repeated. The
apparent improvement in the nation's trade balance may
be an artifact of the imperfect art of seasonal
adjustment. For the last half dozen years, like
clockwork, the trade figures have improved in the
fourth quarter only to deteriorate sharply in the
first.
Lofty prices in the stock market continue to pose the
biggest risk to the U.S. economy. A sustained drop in
the stock market could easily crack confidence and
encourage big spenders to go on a consumption diet.
Still, the economy's momentum continued to surprise --
and impress -- the experts. With the latest snapshots
this week, many forecasters are once again lifting
their estimates for the year. On average, they are now
looking for growth of nearly 3 percent for 1999.
As always, growth is bound to be uneven. Trade will
almost certainly resume its drag on the economy. "The
improvement was temporary," said William Dudley, chief
economist at Goldman Sachs. Mexico is being kept aloft
by the strong U.S. economy, but the rest of the Latin
American economy is sinking rapidly in the wake of
Brazil's devaluation. Korea is growing again and Japan
is showing some signs of life after a massive infusion
of fiscal stimulus, but Asia is likely to remain shaky
for a while to come. And Europe seems to be slowing
down sooner than most people had expected. The German
economy actually shrank slightly in the fourth quarter
of 1998.
That clearly has Washington policy makers worried. "The
leading economies have got a lot of work to do,"
President Clinton told an audience of political and
business leaders in San Francisco on Friday. "We have
to do everything we can -- not just the United States,
but Europe and Japan -- to spur economic growth."
Where the capital spending boom is heading is the
biggest mystery. Cash flow is no longer what it used to
be. Corporate profits have been roughly flat in the
past year. All the spending on new plant and equipment
means that many companies now have plenty of spare
capacity and little reason to build more.
Still, corporate America has not quenched its thirst
for high-technology gear, and continued investment to
overcome the year 2000 computer may keep capital
spending moving up this year. And with productivity
jumping at an annual rate of 3.7 percent in the fourth
quarter, the payoff seems obvious. "Companies keep
spending money on technology because that's where
they're getting the competitive edge," said Bruce
Steinberg, chief economist at Merrill Lynch.
Home buyers, who drove sales of both new and existing
houses right through the roof all last year, may be
starting to show a bit of fatigue. With the runup in
interest rates, mortgage applications have started to
decline; last week they were down to their lowest level
in a year. If applications continue to dwindle, housing
starts could slow as early as the spring.
But as long as jobs are plentiful and income gains are
healthy, American consumers are expected to keep
spending. Judging from reports from retailers so far
this year, there is no slowdown in sight.
Copyright 1999 The New York Times Company |
