The U.S. economy showed solid gains in the second quarter, the Commerce Department said Friday, but a buildup of inventories and weaker consumer spending signaled that slower growth may be on the horizon.
The government said in its first look at gross domestic product from April through June that the economy expanded at a 3.7 percent annual rate. The gross domestic product measures the value of all goods and services produced within the U.S.
The increase was less than the 4 percent annual rate forecast by a number of economists, but it outpaced the government’s revised 3.3 percent rate, down from a previous estimate of 3.4 percent, for this year’s first three months.
The Commerce Department also revised downward the growth rate for the final three months of 1993, to 6.3 percent from 7 percent, still the most vigorous expansion in a decade.
The second-quarter figures showed that a cap remained on inflation. That helped boost stock and bond prices Friday and supported the battered dollar.
The report indicates “the U.S. economy continues to turn in a fine performance,” said Laura Tyson, chairman of the Council of Economic Advisers.
“If you look to the future, the fundamentals look sound,” she said. “So far, everything we’ve seen in 1994 confirms our forecast of a sustainable, investment-led expansion with low inflation.”
But the GDP figures reveal two stories, said Robert Dederick, chief economist for Northern Trust Co.
“The first is the second quarter was a real winner. The economy pushed well ahead of trend, while inflation was held in check,” he said.
The second story is that “the second quarter may be as good as it gets” in the current economic expansion, said Dederick.
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The buildup of unsold goods in the second quarter was bigger than expected. Inventories swelled at a $28.6 billion annual rate, nearly double the $14.6 billion rate of the first quarter and the biggest increase since the third quarter of 1991.
The growing stockpile was coupled with lower-than-expected spending by consumers.
Their spending grew at a $10.8 billion annual rate in the second quarter, down from $40.1 billion in the first quarter.
The Federal Reserve has raised short-term interest rates four times this year in an effort to hold inflation at bay. Rising interest rates increase the cost of borrowing for consumers, which typically slows buying of homes and other big-ticket items.
The Fed moves appear to have worked. But chances are good that inflation will begin “creeping up, because we are at full employment,” which could create “a wide band of uncertainty over growth in the third quarter,” said Dederick.
Others agreed.
“We produced a lot. We worked a lot of hours. But not a lot of it was consumed,” said economist Sung Won Sohn of Norwest Corp. in Minneapolis. “The implication for the rest of the year is we will see production slowing down to trim unwanted inventories.”
The apparent slowing of consumer spending growth, however, should ease pressure on the Federal Reserve to further raise interest rates. The central bank’s committee that sets monetary policy meets Aug. 16. Last week Fed Chairman Alan Greenspan told Congress it was “an open question” whether more rate increases were needed.