US economic growth rate drops abruptly

With economic growth slowing faster than expected, the United States economy could slip into a recession if consumers do not go on a Christmas buying spree, forecasters say.

The federal government reported Tuesday that, in inflation-adjusted figures, real gross national product - the value of the nation's output of goods and services - increased at a 1.9 percent seasonally adjusted annual rate in the third quarter of the year. By contrast, the economy grew at a 10.1 percent rate during the first quarter and a 7.1 percent rate the second quarter.

A rough government estimate had put third-quarter GNP growth at 3.6 percent. But that ''flash'' figure was later lowered to 2.7 percent in a preliminary estimate as more data for the month of September became available.

The recent deterioration in GNP estimates means that ''we can conclude September was a down month for GNP,'' says Donald Ratajczak, director of the Georgia State University Forecasting Project. ''The third quarter continued to deteriorate and (the economy) now has fallen into negative territory.''

The recent sluggish pace of economic growth is expected to make it even harder for the Reagan administration to rely heavily on growth to balance the federal budget. It also is expected to make gains against unemployment harder to achieve. And the slower growth rate may put additional pressure on the Federal Reserve Board to loosen its grip on the nation's money supply, economists say.

Slower growth affects the federal budget by cutting government tax revenues while increasing spending for unemployment and other social programs.

Treasury Secretary Donald T. Regan has already criticized the Fed for keeping too tight a grip on the money supply, thus increasing the danger of a recession. Although the narrowly defined money-supply category M-1 grew in the week ending Nov. 5, it remains only $3.3 billion above the bottom of the Fed's target range.

''These kinds of (GNP) numbers have got to make the Fed worry,'' says Robert Wescott, senior economist at Wharton Econometric Forecasting Associates. The government said the smaller increase in third-quarter GNP was largely the result of a slowdown in consumer spending and a widening foreign-trade deficit. Most private forecasters still say shoppers will return after a buying pause and that at least over the next six months the nation can avoid a recession. One reason sales are expected to grow is that consumer confidence, asmeasured by the University of Michigan Survey Research Center, remains near its highest point in a decade.

Another reason is that personal income continues to grow. It rose 0.6 percent in October, after increasing 0.7 percent in September, the government said Monday. Analysts note that during the consumer buying pause, this money has been going into savings. So consumers have the wherewithal to spend strongly at Christmas.

''We might end up calling this a growth recession,'' adds Ben E. Laden, chief economist at T. Rowe Price Associates. In a growth recession the economy grows less than the 3 to 3.5 percent needed to keep unemployment from rising.

''If we don't have a good Christmas, we probably will have a recession,'' says David Wyss, senior vice-president at Data Resources Inc. (DRI), another forecasting firm. ''We expect a good November and December'' for retail sales, he says, with purchases up 4 to 5 percent over year-earlier levels after adjustment for inflation. In three of the last four months, including October, retail sales fell. A rebound is considered essential because consumers buy roughly two-thirds of the goods and services produced in the economy.

While consumers are expected to return to the stores for holiday shopping, the sales gain for retailers will be less than last year's 6 percent gain in inflation-adjusted sales in the October-to-December period, says Sandra Shaber, senior economist at Chase Econometrics. And consumers are particularly sensitive to prices, so retailers are already offering promotional discounts. These discounts will be especially prevalent on apparel items, she says. As a result, retail profits ''may not be as strong as they hoped,'' she says.

Profits also suffered in the July-to-September period, the government said. Corporate profits from current production fell 3.3 percent at a seasonally adjusted annual rate. In the second-quarter profits rose 4.9 percent.

The economic rebound forecasters are predicting for early next year is expected to be fueled, in part, by the Fed. ''If the economy slows as much as we think, the Fed will ease. That sets the stage for a revival in housing and (corporate) investment next spring,'' says DRI economist Wyss. The government reported Tuesday that housing starts fell 10 percent in October to a seasonally adjusted annual rate of 1.515 million units.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.