NEW YORK — The economy has lost some of its pizazz. Business activity slowed in the summer months, while consumers seemed more interested in the beach than the mall.
As a result, the Commerce Department reports the production of goods and services, or the nation's gross domestic product, slowed to a 2.2 percent annual rate, down from a robust 4.7 percent rate in the spring.
Economists believe this moderate pace will continue through the end of the year. If this proves true, the Federal Reserve is not likely to change interest rates any time soon - a boon to homeowners whose mortgage rates will stay steady and to stockholders who will likely see the market rise in response.
Yesterday's report is almost certain to bring the economy back to the front burner in the election. "Both candidates can use it to their advantage," says economist Veronika White of First Union Corporation, a bank holding company based in Philadelphia.
"Bob Dole can say the economy is not as good as Mr. Clinton is touting it to be, and Mr. Clinton can say the economy grew at nearly 5 percent in the second quarter," says Ms. White.
With all this economic spin, how will the public interpret the news? Perhaps, with a shrug, says economist Robert Dederick of Northern Trust Company. "By now people have gathered their impressions and they have a favorable impression," he says.
Although the moderation in GDP was expected, economists were surprised to see that inventories - unsold goods - climbed by almost $40 billion last quarter. "This is likely to be a drag on fourth quarter growth," says Cheryl Katz, an economist at Merrill Lynch & Co. in New York.
The prospect of slower growth was viewed positively on Wall Street, where short-term interest rates fell and the stock market rose early yesterday.
Behind the economic moderation is a drop-off in consumer demand, especially for automobiles and household durables such as washing machines. It's not surprising sales of household goods fell on the quarter: A new government report shows new home sales slipped 0.5 percent in September compared with October.
But expectations are growing for a strong year-end retail season. Yesterday, the accounting firm of Deloitte & Touche LLP released a survey that found shoppers expect to spend 12 percent more on holiday gifts, the highest increase in the past four years. "Consumers are more confident in their jobs and boomers are spending strongly," says Irwin Cohen, co-head of the firm's consumer products group.
The third quarter GDP's 2.2. percent annual rate was the slowest advance since a rise of 0.3 percent in the fourth quarter of 1995. The economic pace then quickened in the first half of this year.
Economists will get another snapshot of the economy on Friday, when the Labor Department releases the October jobless report. Initial expectations are for a slight improvement from September's 5.2 percent rate. "President Clinton is likely to seize on that news," says Mr. Dederick.
Even with a tight labor market, there is no sign of a significant rise in employment costs. Over the past three years, the Employment Cost Index (ECI), watched closely by Federal Reserve chief Alan Greenspan for signs of inflationary pressure, has shown a modest year-on-year rise. On Tuesday, the Labor Department reported third quarter ECI showed wages and salaries slowing.
"Despite on-going fears of wage acceleration, labor costs remain under control," says Bruce Steinberg, an economist at Merrill Lynch.
In the latest GDP report, the government says inflation remains in check. In a broad measure of inflation, the government reports prices rose by 1.6 percent in the quarter. This is a reduction from 2.2 percent in the first quarter. "Clearly inflationary pressures are not a threat," says White of First Union Corp.
With modest wage pressures and moderate economic growth, many economists expect the Federal Reserve to keep interest rates steady when the central bank meets on Nov. 13. Economist Robert Brusca of Nikko Securities Co. International, says the Fed remains in a reactive mode instead of anticipating economic events that might precipitate inflation.
"They will not wait to just before the last minute to raise rates, they will wait until just after the last minute to raise rates," quips Mr. Brusca. Ms. Katz says Merrill Lynch does not expect any interest rate moves through the first quarter of 1997.