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Economy Grew by Just 0.5 Percent in Fourth Quarter

January 26, 1990

WASHINGTON (AP) _ The U.S. economy, hurt by slumping consumer demand, grew just 0.5 percent in the final three months of 1989 for the poorest showing in more than three years, the government said today.

The meager performance of the gross national product, the total output of goods and services, was certain to fan the debate over whether the country is in danger of toppling into a recession.

The GNP for all of 1989 rose a moderate 2.9 percent. This followed growth of 4.4 percent in 1988 and was the slowest annual increase since a 2.7 percent rise in 1986.

While most private economists say the United States will be able to avoid an outright downturn, a more pessimistic minority noted that the government statistics are subject to wide revisions and that today’s growth rate could be lowered in coming months, possibly to a negative number.

A recession usually is defined as two consecutive quarterly declines in the GNP.

″The GNP report shows the economy ground to a virtual halt in the fourth quarter with signs of weakness everywhere,″ said Allen Sinai, chief economist of the Boston Co. ″The economy is flirting with a recession.″

But the administration, which is counting on a rebound in growth to provide badly needed government revenues, was more upbeat in its assessment of the GNP report.

Michael Boskin, chairman of President Bush’s Council of Economic Advisers, blamed part of the fourth-quarter slowdown on one-time factors, such as the unusually cold December weather, the Boeing aircraft strike and the effects of Hurricane Hugo and the San Francisco Bay area earthquake.

Boskin predicted ″a period of slower growth″ in the months ahead, but he said the economy would rebound later in the year. And, while not ruling out a recession, the president’s chief economist said, ″I believe it’s unlikely.″

He said the low growth figures could have a ″modest″ impact on the fiscal 1991 budget that Bush unveils on Monday, making it harder to meet the goal of reducing the federal deficit to the $64 billion required under the Gramkm- Rudman budget balancing law.

But Boskin suggested that rebounding growth later in the year would cancel any negative impact on the budget.

The 0.5 percent growth in the fourth quarter marked the economy’s weakest showing since a decline of 1.8 percent in the second quarter of 1986.

However, after that one downturn, economic activity rebounded, helped in large part by a boom in U.S. export sales that lifted the fortunes of American manufacturers.

But with the improvement in trade deficit slowing dramatically this year, manufacturing unemployment has begun to rise again.

In a separate report showing further weakness, the government said that orders to U.S. factories for durable goods - items expected to last more than three years - rose just 5.9 percent for all of 1989, half of the 1988 increase.

On the inflation front, prices, as measured by an index tied to the GNP, rose 4.5 percent in 1989. That was the fastest increase since a 6.2 percent jump in 1982.

The biggest drag on economic activity in the fourth quarter was a huge swing in consumer spending, which posted a rare decline of 0.1 percent, reflecting a big drop in demand for new autos.

It was the first decline in consumer spending in two years and came after a giant 5.6 percent jump in the July-September quarter, when consumers had rushed to buy cars to take advantage of discount pricing.

Since consumer spending accounts for two-thirds of all economic activity, the big swing in this category had a major dampening effect on economic activity.

Other areas of weakness included the second consecutive quarter in which the trade deficit worsened, reflecting stronger growth in imports than exports.

Business investment for expansion and modernization, which had been a key source of strength, dropped by 3 percent in the fourth quarter for the first decline in a year. Military spending fell by $5.4 billion, the biggest setback since the first quarter of 1989.

In one of the few signs of strength, the GNP report showed that housing construction, which had fallen for three consecutive quarters, rose a modest 2.6 percent in the September-December period.

It was a sign that the credit easing engineered by the Federal Reserve Board are beginning to bolster the fortunes of the housing industry.

Economists who believe the nation’s seven-year economic expansion will continue are counting on the Fed to ride to the rescue with further moves to lower interest rates and bolster economic growth.

But even optimistic forecasters believe growth this year will be quite sluggish, with the GNP expected to rise by only 1.8 percent.

This is significantly lower than the projection of the Bush administration, which is counting on stronger growth to help the president keep his pledge of reducing the budget deficit without raising taxes.

The Congressional Budget Office, siding with the more pessimistic private forecasters, projected a 1991 deficit of $138 billion, far above the $64 billion deficit limit set by the Gramm-Rudman balanced-budget law.

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