Economy bursts into life

The United States economy sprang back to life in the first quarter of 1986, new government figures show. The rebound from lackluster growth at the end of 1985 is so pronounced that some experts say the first quarter gross national product (GNP) figures released Thursday exaggerate the economy's current strength.

The Commerce Department said GNP, the broadest measure of the economy's health, grew at a 3.2 percent annual rate from January to March. That pace is more than four times faster than the weak 0.7 percent growth pace in the final quarter of 1985.

While the economy's precise current condition is the subject of debate, most forecasters expect it to pick up speed as 1986 progresses and the effect of falling oil prices is more fully felt. Faster economic growth often means jobs for those who are not working and fatter paychecks for those who are.

The bright economic prospects do not extend to the US oil industry. But the falling oil prices which have devastated the southwestern US pushed inflation down to its lowest level since 1967.

Prices, as measured by the GNP price index (fixed weights) were rising at an annual rate of 2.5 percent in the first quarter. That was the slowest pace since prices posted no increase in the second quarter of 1967. At the end of last year prices were rising at a 3.9 percent rate.

All of the first quarter GNP figures are adjusted for seasonal fluctuations. The numbers are preliminary and subject to significant revision when more complete data become available.

Most analysts still expect the Federal Reserve Board to cut its key lending rate in the near future. Predictions that the Fed shortly would cut the discount rate to strengthen economic growth triggered an explosive rally in the stock and bond markets earlier this week.

The discount rate is the fee the Fed charges financial institutions for money they borrow from the central bank. It tends to signal the Fed's policy intentions and influence the course of other interest rates.

The Fed is still likely to cut its discount rate in the near term despite better-than-expected economic growth, says John Hagens, vice-president of Chase Econometrics. ``We are looking for another discount rate cut,'' he says. The discount rate currently is 7 percent.

A key reason the Fed will trim the rate, Mr. Hagens says, is that banks are lending money to each other in the so-called federal funds market at a lower rate than the Fed is charging. And that deprives the Fed of a key means of influencing interest rates.

The White House hailed the new figures. ``All the recent signs of an economy gathering steam began to be realized this morning,'' said White House spokesman Larry Speakes. ``Today's good news is even better when you consider the rebound in GNP growth was accompanied by decreasing inflation.''

Mr. Speakes added that the new figures ``tend to substantiate'' administration forecasts that the economy will grow 4 percent when the final quarter of 1986 is compared with the same period in 1985.

Some private economists share Speakes' optimism. ``This is really the first quarter of four consecutive quarters of growth we see for the year,'' says Douglas Handler of Wharton Econometric Forecasting Associates. Wharton is predicting 4.2 percent growth for the year on a fourth-quarter to fourth-quarter basis.

Other forecasters think the economy is somewhat weak now but will pick up strength in the second half as more of the positive effects of falling oil prices are felt.

``The tone of the data we are getting is one of weakness rather than strength,'' says Ben E. Laden, vice-president of T. Rowe Price Associates. For example, he notes that final sales, after adjustment for government purchases of farm products, rose only 2.6 percent. And business fixed investment actually fell by $17.4 billion.

Mr. Laden also notes that much of the economy's apparent strength in the first quarter comes from a buildup in business inventories and a swing in trade figures. Inventory building cannot continue indefinitely without clogging warehouses. The trade figures are based on incomplete data subject to major revisions.