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GDP up, inflation at bay
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July 31, 1998: 9:26 a.m. ET
But growth rate in the 2Q belied forecasts for flat growth after 1Q surge
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NEW YORK (CNNfn) - The American economy grew by a stronger-than-expected 1.4 percent in the second quarter as strong consumer spending offset the corrosive effects of the General Motors strike, a scaling-back of inventories and continuing economic turmoil in Asia, the Commerce Department said Friday.
Real gross-domestic product, or the total value of goods and services produced by the U.S. economy, expanded at a 1.4 percent annual rate from April through June, down sharply from a revised 5.5 percent growth spurt in the first quarter.
Inflation, meanwhile, appeared to be held in check. The implicit price deflator, a key inflation measure, rose only 0.9 percent in the second quarter. Economists were expecting a rise of 1.5 percent.
Philip Braverman, senior vice president and chief economist at DKB Securities Corp., said: "The widely anticipated increase (in the implicit deflator) didn't materialize. We got further disinflation and I think that is going to be the dominant factor."
The 1.4 percent figure is the weakest growth rate since the second quarter of 1995, when GDP rose a paltry 0.4 percent.
But that was almost irrelevant to economists, who had projected flat to no growth amid concerns that the American economy may be on the brink of reversing an expansion streak that began in March 1991.
The 30-year benchmark Treasury ticked up 2/32 in price to yield 5.72 percent as traders cheered what appeared to an inflation-free landscape.
Analysts embraced the GDP numbers as a sign that the inflationary worries of recent weeks may be premature.
"The domestic economy, the consumer side of this economy remains very strong and that's what's pushing everything forward," said Ron Hill, an economist at Brown Brothers Harriman.
The nearly eight-week strike at General Motors shaved a full percentage point off GDP growth, the Commerce report said. But experts said they expected GM output to rebound in the wake of this week's strike settlement, shoring up growth in the second half.
The report blamed the steep decline in the nation's output on a recent downturn in inventory additions, slowing purchases of heavy equipment by manufacturers and decreases in exports to the floundering Asian economies.
Exports fell at a record annual rate of $54.4 billion in the second quarter, after sinking $49.5 billion in the first quarter.
Some experts, however, cautioned against interpreting the latest numbers as an all's clear sign for the U.S. economy and the markets.
"This is the greatest stock-buying mania of all-time, people are buying stocks, they're buying blue chips, with no regard to value," said Jim Melcher of Balestra Capital. "In this respect, it's similar to 1929. People believe that as long as you're buying, everything's fine. This is a dangerous market, you should make no mistake about that."
-- from staff and wire reports
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