Economic Growth Throttles Back to Calmer 2.2% Rate

WASHINGTON — The nation’s economy slowed sharply during the second quarter of this year as consumers took a breather from their earlier spending spree, the government reported Thursday, but analysts said they expect the growth rate to pick up again soon.

Preliminary figures released by the Commerce Department showed that the gross domestic product--the value of the goods and services the nation produces, after adjustment for inflation--grew at a modest annual rate of 2.2% during the April-June period, down from a revised 4.9% pace in the previous quarter.

The report also showed that inflation continued to abate, despite the previous quarter’s rapid growth rate. The government’s broadest inflation index showed prices up at a 1.4% annual rate in the April-June period--down from 2.4% in the previous quarter and the lowest rate in 34 years.

Financial markets cheered the report, which bolstered previous signs that the Federal Reserve Board is unlikely to raise interest rates any time soon, as it might have if the first-quarter surge had continued. Earlier this year, the Fed had worried that the economy was overheating.

In a related development, the Labor Department said the number of American workers filing first-time claims for unemployment benefits--another closely watched indicator of the economy’s pace--fell by 22,000 last week to a seasonally adjusted 227,000--its best performance in more than 23 years.

Robert G. Dederick, economist for the Northern Trust Co. in Chicago, called the economy’s second-quarter slowdown “a welcome respite” from the first quarter’s frenetic pace, and “not . . . a weak quarter.” The economy “is just the way it ought to be,” Dederick said.

Moreover, many analysts are predicting that the economy will speed up slightly during the second half of this year--possibly to a 2.5% to 3% pace, which most economists believe is the fastest the nation’s economic output can grow without reviving inflation pressures.

Fed Chairman Alan Greenspan effectively gave the central bank’s blessing to that kind of growth rate, signaling during testimony before Congress last week that it was unlikely to boost interest rates imminently if the economy settled down to that sort of range.

The report on the GDP sent the financial markets surging initially--although the Dow Jones industrial average eventually fell, dropping by 32.28 points to 8,222.62 as investors pulled back in anticipation of a report on unemployment due out today.

The inflation-sensitive Treasury market responded well to the report, with the bellwether 30-year bond rising 12/32, or $3.75 per $1,000 in face value. The yield, which moves in the opposite direction, fell to 6.30% from Wednesday’s 6.32%.

Thursday’s report in itself will mean relatively little for the financial markets, however, except to confirm what analysts already had been expecting--that the surge of the two previous quarters had abated and the economy had begun to settle down to a more sustainable pace.

By far the biggest factor in the second-quarter slowdown was a falloff in consumer spending, which rose at a scant 0.8% annual rate last quarter, compared to 5.3% in the January-March period. The consumer spending spree had been a major cause of the economy’s surge during the past six months.

Although analysts are predicting that the continued nationwide prosperity--combining increases in personal income with relatively stable prices--will prompt consumers to loosen their pocketbooks again, they are not sure how strong such a rebound may be.

Consumers began spending freely in late 1996 and early 1997 after they apparently became convinced that the economy was performing well and that their previous gloom--which many analysts had thought unfounded--had been unjustified. With incomes rising--and inflation low--many Americans felt more flush with cash.

To contain consumer enthusiasm, the Fed nudged interest rates up by a quarter of a percentage point in March when the economy seemed to be on a tear. But the central bank has held off on any increases since then, citing earlier indications that the growth rate would slow significantly during the second quarter.

The 4.9% growth rate that the Commerce Department cited for the first quarter of 1997 reflected a revision from earlier data, which had output rising 5.9%. Officials said the error came because they previously had overestimated business spending on new equipment, such as computers.

At the same time, however, the department said late-breaking data had shown that the economy probably grew more rapidly during the final three months of last year than they had estimated previously, with real output rising at a 4.3% annual rate instead of 3.8%.

Officials said that when the two quarters were taken together, the statistics showed little real change in the thrust of the economy’s performance during the period. A 4.9% growth rate for the first quarter of this year, for example, is still considered to be unusually strong.

As it does every July, the department also announced its annual revisions in GDP figures for previous quarters, but the changes were minuscule. The annual growth rate for 1996 turned out to be 2.8%, rather than the 2.4% estimated before. Those for previous years were unchanged.

Besides the falloff in consumer spending, the second-quarter slowdown also reflected a slowdown in net exports, partly the result of the fact that the U.S. economy has been so much more buoyant than those of its trading partners, prompting Americans to buy imports at a faster pace.

Another drag on the economy last quarter was the pace of inventory-building by business, as companies slowed their efforts to replenish their own stockpiles, reflecting the cutback in that period’s consumer-spending spree.

Nevertheless, business investment in new plants and equipment accelerated sharply during the second quarter, rising at a 15.1% annual rate, or more than triple the 4.1% pace recorded during the first quarter of the year.

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