Economists thought the economy was good in the first quarter. They didn't expect awesome.
The gross domestic product -- the United States' total output of goods and services -- grew at an astonishing 5.6 percent annual rate in the January-March quarter, the government said yesterday in its initial estimate for the period.
That's light years past the robust, 4 percent rate that most economists expected. It leaves the October-December quarter's healthy, 3.8 percent growth rate eating dust.
And if it holds up under revisions, it gives the country its best quarterly economic sprint since the October-December 1987 quarter, when Reagan administration defense spending was still coursing through factories and stores and output expanded at a 6.0 percent annual rate.
"Not to belabor the obvious, but, boy, it was a great performance," said Joel Naroff, chief bank economist with First Union Corp. in Philadelphia. "The strength was everywhere, except in the federal government, which is exactly where you don't want to see a lot of spending.
"It was an incredibly strong report."
Analysts agreed on that much yesterday.
They differed, however, about how much the economy is slowing down now. And they clashed like plaid and stripes on how much the report will compel the Federal Reserve to press the economic brake of higher interest rates.
The fine print of yesterday's dispatch "points to much slower growth in the future," said Bruce Steinberg, chief economist for Merrill Lynch, a New York investment banking house. "Despite the strength of first-quarter GDP, we don't believe that the U.S. economy will overheat."
For instance: Almost a third of the quarter's growth came from higher inventories, as the country's factories, warehouses and stores cranked out goods and stocked their shelves. Inventory- building accounted for a fat 1.7 percentage points out of the quarter's 5.6 percent growth rate.
But whether consumers will actually walk into those stores, purchase those goods and keep the economy in overdrive is another question. Many economists see signs that they won't.
"The economy could be slowing quite quickly now, despite this number," said Lacy H. Hunt, economist with Hoisington Investment Management, a Boston bond house.
Consumer spending helped drive the first-quarter performance, and expectations that it would continue sparked the inventory buildup. Consumer purchases, representing two-thirds of the economy, rose at a 6.4 percent rate in the first quarter, far above the 3.4 percent rate the previous three months.
'April is softer'
But the spending "was concentrated in January and February," Hunt said. "The indications are that April is softer. We've seen a decline in consumer confidence. Motor vehicle sales have fallen back considerably in April. Durable goods were down sharply in March."
Other business sectors are expected to decelerate, too. Higher long-term interest rates recently have slowed construction, and a strong dollar is expected to hurt U.S. exporters.
James Annable, chief economist for First Chicago Corp. and former Federal Reserve staffer, is a respected Fed watcher. Annable believes yesterday's report won't necessarily spook Fed policy-makers into raising interest rates when they meet later this month.
"Everybody should ask the question: Is this a shocking surprise to the Federal Reserve? The answer is no," Annable said.
The Fed's main immediate worries are consumer demand and spending, not production output that shows signs of getting stuck in the pipeline, Annable said.
When the Fed raised short-term interest rates by a quarter-percentage point March 25, "they said it was because of overly robust growth in demand," Annable said. "Basically what they were telling us is, they weren't going to move on an inventory accumulation."
Financial investors apparently agreed yesterday. Both the stock and bond markets soared, with the Dow Jones industrial average reaching 7,008.99, its first close above 7,000 since early March. Higher interest rates hurt stocks' and bonds' values, and securities markets typically rally when the prospect for higher rates wanes.
In the bond market, where yields typically rise on inflation fears, the yield on the government's 30-year bond fell from 6.98 Tuesday to 6.95 percent yesterday in New York trading. Bonds and stocks were also helped by news that a balanced budget deal was near in Washington.
Other analysts see no chance of a calm response from the Fed to the GDP report.
As the nation's central bank, the Fed generally raises rates to try to douse a charging economy and the bubbling price inflation that often accompanies it. If left unchallenged, many economists believe, inflation gets out of control, sends misleading economic signals and hurts growth over the long term.
"The Fed knew what it was doing when it raised interest rates March 25," Naroff said. "We have tremendous momentum built up in the economy, and the Fed has every reason to be concerned. They're not going to stop with just one [interest-rate] move. That doesn't slow the freight train. The markets are beginning to realize they will more than likely tighten on May 20, and we may get another one in July."
Naroff buys the argument that the economy is decelerating now. In fact, his forecast of a 1 percent annual growth rate for the second quarter is low compared with other analysts'.
It doesn't matter, he said.
Take away all inventory accumulation, and the economy still grew at a strapping 3.9 percent rate for the first quarter, he said. Nobody expects it to shrink this quarter. Even with a 1 percent rate for April through June, the economy in the year's first half will still have grown at well over a 2.5 percent rate, the point at which some economists think inflation begins to become a problem.
Inflation was not a problem in the GDP results disclosed yesterday, although the report's price component increased at a 2.7 percent annual rate, the fastest in two years.
Hoisington's Hunt attributed the pop to technical factors involving oil and import prices and to an annual adjustment in government wages, "which is really not a markets thing."
Over the four quarters ending in March, he said, the GDP inflation component has risen only 1.8 percent, a tad less than the increase of 1.9 percent for the four quarters ending in December.
The Fed, however, isn't worried about inflation history, other analysts said. It's focused on inflation's future.
"The Fed is not looking at current inflation," Naroff said. "They're looking at inflation later this year and into next year. Good inflation numbers in the first quarter may be very nice, but it doesn't change their thinking."
Pub Date: 5/01/97