ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Saturday, February 1, 1997 TAG: 9702030035
SECTION: BUSINESS PAGE: A-6 EDITION: METRO
SOURCE: Associated Press WASHINGTON
The economy ended 1996 with a roar but little sign of inflation - a package that sent stock and bond prices higher Friday as worries about higher interest rates eased.
Both the economy and inflation in 1996 warrant ``gold medals,'' said Robert Dederick, economic consultant for Northern Trust Co. in Chicago. ``We continue to have the best of both worlds.''
The Commerce Department said Friday the gross domestic product grew an annualized 4.7 percent from October through December, matching the year's second quarter, which was the strongest since a 4.9 percent rate in the spring of 1994.
As a result, the GDP posted a 2.5 percent gain for all of 1996, topping the 2 percent advance in 1995 that had been the slowest since a 1 percent drop in 1991 when the last recession ended. Analysts had expected a fourth-quarter rate of just 3.8 percent.
At the same time, a measure of inflation in the GDP report showed prices rose 2.1 percent last year, down from 2.4 percent in 1995. While the index rose at a 2.5 percent annual rate in the final three months, the advance was attributed to volatile energy prices. Both stocks and bonds rose as inflation fears waned. By 2 p.m., the Dow Jones industrial average had risen 35.02 to 6,858.88. Broad-market indexes were higher as well.
Vice President Al Gore told reporters the report was ``further evidence that the American economy is growing at a strong and steady pace with inflation remaining at historic low levels.''
Analysts said the data will permit Federal Reserve officials to keep interests rates steady when they meet next week. Signs of accelerating prices could have argued for higher rates.
``The Federal Reserve will remain on hold at the upcoming (Federal Open Market Committee) meeting next week, given that inflation remains in check and that the pop in fourth quarter growth was most likely temporary,'' said economist Bruce Steinberg of Merrill Lynch & Co.
Indeed, many analysts believe the economy will slow to a growth rate between 2 percent and 2.5 percent this year, a pace they believe is the economy's noninflationary growth potential.
Although consumer spending, two-thirds of the nation's economic activity, rebounded strongly in the fourth quarter, half of the improvement from the 2.1 percent July-September quarter was due to strong foreign demand for U.S. products.
Exports shot up at a 25.5 percent rate after falling 0.9 percent in the third quarter. At the same time, import growth slowed to a 4.7 percent rate from its 9.3 percent July-September pace.
The trade performance added $36.7 billion to the fourth-quarter GDP after subtracting $22.7 billion during the third quarter.
But many analysts said the trade performance was unlikely to be repeated during the current quarter because of weak overseas economies and a strong dollar that makes U.S. goods more expensive.
Consumer spending shot up at a 3.4 percent rate, matching the second-quarter pace. Spending had inched up at an anemic 0.5 percent rate during the third quarter, the weakest performance in nearly five years.
But analysts said the fourth-quarter spending spree also is likely to be a temporary performance, given the heavy debt burdens carried by many consumers.
``Clearly, consumers cannot spend at the rate they have been,'' said Sung Won Sohn, an economist at the Norwest Corp. in Minneapolis. ``I worry that if the trend continued, consumers would get into deeper trouble, leading to more debt problems, bankruptcies and rising loan delinquencies.''
Business investment in new plants and equipment, a major source of strength during the current expansion, stalled during the October-December quarter, growing at just a 2.7 percent rate compared with 10.6 percent three months earlier.
Residential construction, which also had fueled growth during the six-year recovery, fell for a second straight quarter, down 1.3 percent at an annual rate after dropping 5.2 percent during the previous three months.
The various changes meant the economy was growing at an $80.3 billion annual rate during the fourth quarter, more than double the $35.8 billion pace three months earlier.
After adjusting for inflation, the GDP totaled $6.9 trillion at year's end.
LENGTH: Medium: 82 lines ILLUSTRATION: GRAPHIC: Chart by AP: Economic Indicator.by CNB