Experts see strong 1st-quarter growth for US economy
Washington — Knoll International broke ground for a new furniture manufacturing plant in late 1982, but high interest rates prompted the firm to wait until November 1983 to begin construction.
''We are building it now because we need it so badly'' to meet strong sales demand, says Knoll co-chairman Stephen C. Swid.
Meanwhile, in Greensville, Tenn., Farley Industries is completing a doubling of the capacity at its auto-parts plant there.
''We are taking a very aggressive position - our capital spending will be up 100 percent this year'' to about $40 million, says company chairman William F. Farley.
Fueled in part by this kind of powerful rebound in business investment, as well as by stimulative government budget policies, the United States economy has been surging in the first three months of 1984.
Signs of strength have been evident in a host of recent government statistics , including those on car sales, housing starts, capital investment, industrial production, and plant capacity utilization. And the Commerce Department's ''flash'' estimate of gross national product (GNP) for the first quarter, due out today, is expected to confirm this robust growth.
''We are going to have a very strong first quarter,'' says Harold Nathan, senior economist at Wells Fargo Bank in San Francisco. He says he expects inflation-adjusted first-quarter economic growth to be between 6 and 7 percent, an assessment shared by most forecasters. By comparison, in the final quarter of 1983 real GNP rose 4.9 percent.
The strong growth is welcome because it creates new jobs. And the economic gains are a major plus for Republicans, since they help blunt the economy as a political issue for the Democratic presidential candidates.
But the rapid growth rate also raises questions of whether the economy is overheating and is about to slip back into a period of rising inflation and even higher interest rates.
The rapid economic growth may prompt the Federal Reserve Board to tighten credit conditions slightly to keep inflation under control, forecasters say. The Fed's Open Market Committee, which sets monetary strategy, will meet here next week.
''With the Fed willing to lean against the wind, today's (economic) strength could translate later into higher rates and a little slower demand later in the year,'' says Roger Brinner, vice-president of Data Resources Inc., a forecasting firm.
And late last week, Martin S. Feldstein, chairman of the President's Council of Economic Advisers, said, ''If you asked me whether short-term rates are more likely to go up or down in the next few weeks, I would say they are more likely to go up a bit.''
Yesterday, one key interest-rate measure rose when several large banks, including First National Bank of Chicago, Citibank, and Continental Illinois, raised their prime rate to 11.5 percent. An 11 percent prime had been in effect since August 1983. The prime rate is a benchmark rate used in setting the actual interest rate a bank charges its customers.
The outlook for interest rates has not been changed significantly by the recent agreement between President Reagan and Senate Republicans on proposed budget reductions, bond-market experts say. The credit markets are worried that increased corporate borrowing for capital spending will collide with heavy federal borrowing to cover the deficit.
The Republican leaders' plan would trim only $11 billion off the projected deficit for budget year 1985. On Friday, the first full day of trading after the package was announced, bond prices fell, which pushes up the effective interest rate a bond pays.
While many economists say they expect interest rates to rise even more than they have in the last several weeks, they are less willing to say with certainty that the economy is overheating.
If current growth rates continued, ''then we would be getting very quickly back into extreme levels of capacity utilization and the expectation that interest rates and inflation would be rising,'' says Ben E. Laden, vice-president of T. Rowe Price Associates Inc. ''But I don't think you should expect it to continue.
''I think there will be a fall-off'' in growth, Mr. Brinner adds.
There are several reasons why economists expect growth to slow as the year progresses. For one thing, the expected rise in interest rates should dampen demand for goods purchased with credit, like cars, houses, and large appliances. Then too, the growing imbalance between what the US buys from foreigners and what it is able to sell abroad is expected to act as an increasingly powerful drag on economic growth, economists say.
Finally, consumer spending is expected to slow in the April-to-June period because individuals have dipped into savings to fuel the spending seen so far.
''Consumers are spending at an unsustainable pace,'' Brinner says. One sign of this spending slowdown came Monday when the Commerce Department reported that personal spending dropped 0.7 percent in February, the first drop since August. Meanwhile, personal income grew 0.7 percent in February, the smallest increase in seven months.
The expected slowdown in the pace of growth should temper inflation. This quarter's implicit price deflator, a GNP-related inflation measure, will show prices rising at a 5.1 percent rate, Mr. Nathan predicts. In the final three months of 1983 the deflator rose 4.2 percent.
''I think we are going to have a hot (first) quarter - high real GNP and high indicators of price increases for a quarter,'' says Preston Martin, vice-chairman of the Federal Reserve Board in an interview. ''I don't think we should have such a hot second quarter.''
As a result, he says, ''I don't think we should get carried away by what is happening in the first quarter with inflation.''