'Flash' GNP up 6.6%; US recovery stronger than expected
Consumers have helped fuel the recovery. But the US is edging toward tax reforms that would encourage saving money, not spending it The United States economy is staging a stronger recovery than many experts expected.Skip to next paragraph
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The value of goods and services produced in the US is expected to grow at a 6 .6 percent annual rate in the April-to-June quarter after adjustment for inflation, according to the Commerce Department's ''flash'' estimate of gross national product. If that forecast holds, it will represent the strongest quarterly growth rate since real GNP rose 7.9 percent in the first three months of 1981.
''All signs point to a strong recovery,'' President Reagan said during a meeting with Republican congressional leaders.
''This figure should support a healthy increase in the number of job holders, '' asserts Alan Murray, a Citibank vice-president and economist.
Ironically, forecasters caution that good economic news may boost the unemployment rate (currently 10.1 percent) by encouraging more jobless individuals to look for work. The unemployment rate is based on the number of people looking for work; it doesn't include the so-called discouraged workers who have stopped searching for employment.
Still, high interest rates caused by large federal deficits could choke the recovery in 1984, warns Martin Feldstein, chairman of the Council of Economic Advisers. But he adds that the new GNP estimate ''makes it all the more likely'' that real GNP growth in 1983 will exceed the administration's forecast of 4.7 percent.
Other forecasters already have raised their growth estimates. For example, Wharton Econometric Forecasting Associates now expects the nation's output to be 5.6 percent higher in the final three months of 1983 than during the same period in 1982. In January the firm predicted a 4.1 percent gain.
Other nations will enjoy less rapid growth than the US, a new report from the International Monetary Fund suggests. In 1983 and '84, prospects for the world economy ''are for a modest but significant improvement in the international economic climate,'' according to the study. The economies of industrialized nations will grow roughly 3 percent in 1983, while oil-importing developing countries will grow 2 to 2.5 percent, the IMF says.
The faster-than-expected pace of economic growth in the US will help boost after-tax corporate profits, which dipped 4.4 percent in the first quarter of 1983, according to newly revised Commerce Department figures.
Having trimmed costs to the bone during the recession, companies are positioned to profit mightily as sales pick up. Compared with the same quarter in 1982, profits should climb ''about 11 percent this quarter, 20 percent in the third quarter, and 29 percent in the fourth quarter,'' says Otto Eckstein, chairman of Data Resources Inc., a forecasting firm.
The bulk of these profits are coming from operations rather than from holding inventory while inflation pushes up its value. Earnings quality ''is improving quite dramatically,'' says Ben Laden, vice-president and chief economist of T. Rowe Price Associates, Inc., a mutual fund company.
In fact, Treasury Secretary Donald T. Regan claims that while in the past 60 to 75 percent of corporate profits came from holding inventories, now 90 to 95 percent are earned from operations.
The shift from reducing stocks to stable or modestly increasing inventories accounts for almost half of the 6.6 percent flash forecast, says Mr. Murray at Citibank.
The improving profit picture is important even for Americans who don't own stock. Higher profits lead to ''more business expansion and more job opportunities,'' argues Ronald Utt, deputy chief economist of the US Chamber of Commerce.
Higher earnings also support investment in capital equipment, which plays a key role in boosting US productivity, notes Albert Sommers, senior vice-president and chief economist of the Conference Board, a business research group.
The economic growth also is being fueled by consumer spending, economists say.
Consumer income rose 1.2 percent in May and shoppers responded by increasing spending 1.4 percent, the largest monthly hike in more than 21/2 years. Moreover , more moderate mortgage rates and increased demand for homes are stimulating the housing industry. Last month, single-family housing starts surged 15 percent , to a 1.5 million unit pace. Last year only 662,000 new single-family homes were started. The boom in housing triggers demand for a wide range of products, including lumber, appliances, and furniture.